International Foundation Programme
Business
Management
Etain Casey
FP0010
This guide was prepared for the University of London by:
Etain Casey, EAP and subject support teacher for Development Studies and Business
Management at the Foundation College at SOAS University of London, and a Fellow of the
Higher Education Academy
This is one of a series of subject guides published by the University. We regret that due to pressure
of work the author is unable to enter into any correspondence relating to, or arising from, the
guide. If you have any comments on this subject guide, please use the online form found on the
virtual learning environment.
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Business Management
i
Contents
Unit 1: What is business management?..................................................1
Introduction to Unit 1............................................................................................................1
Section 1.1: Types of business............................................................................................ 2
Section 1.2: Business aims and objectives: profit and break-even ................. 11
Section 1.3: Management planning and stakeholders........................................ 16
Unit 2: The external business................................................................. 23
Introduction to Unit 2........................................................................................................ 23
Section 2.1: The national and global environment...............................................24
Section 2.2: Evaluating the external environment ..............................................28
Section 2.3: Business ethics and corporate social responsibility................... 33
Unit 3: Strategy and strategic analysis................................................. 36
Introduction to Unit 3........................................................................................................36
Section 3.1: Managing strategy...................................................................................... 37
Section 3.2: Mergers and acquisitions........................................................................42
Section 3.3: Leadership and strategy...........................................................................45
Unit 4: The internal business environment.........................................51
Introduction to Unit 4.........................................................................................................51
Section 4.1: Organisational control and management by objectives........... 52
Section 4.2: The supply chain and improving product quality.......................58
Section 4.3: The HR function and recruitment.......................................................63
Unit 5: Making effective marketing decisions................................... 67
Introduction to Unit 5........................................................................................................67
Section 5.1: Customer segmentation, the marketing mix and the
product lifecycle.................................................................................................................. 68
Section 5.2: Information technology and building customer
relationships...........................................................................................................................74
© University of London 2022
Unit 1: What is business management?
1
Introduction to Unit 1
Overview of the unit
In this unit you will be looking at the basic components of business in order to understand the
nature and purpose of business activities. Companies, firms and enterprises are all organisations,
whether they are for-profit or not-for-profit. Businesses may be individual, small, family-based
settings or employ many people, for example, multinational companies. All businesses have
similar problems and many similarities in their structure and management which you will be able
to identify and discuss as you study this subject.
Week
1
2
3
Unit
1 What is business management?
Section
1.1 Types of business
1.2 Business aims and objectives
1.3 Management planning and stakeholders
Learning outcomes
By the end of this unit, and having completed the background reading and activities, you should
be able to:
identify common business activities
understand and discuss the role of management in business.
Background reading
Boddy, D. Management: an introduction. (Harlow: Pearson, 2016) 7th edition
[ISBN 9781292088594] pp.320–30.
Buchanan, D. and A. Huczynski Organisational behaviour. (Harlow: Pearson, 2019) 10th edition
[ISBN 9781292251578] pp.558–60.
Cole, G. and P. Kelly Management theory and practice. (Boston, MA: Cengage, 2020) ninth edition
[ISBN 9781473769724] Part One: Management Theory, Section 1, part 2.
Surridge, M. and A. Gillespie AQA A-level business. (London: Hodder Education, 2019)
[ISBN 9781510453340] Unit 1, pp.1–13.
Unit 1: What is business management?
2
Section 1.1: Types of business
Introduction
A business is an organised effort by individuals to supply or produce goods and services to
meet the needs of society. These businesses may set up to make profit (e.g. primary resource
production, manufacturers, retailers, transport providers, banks and so on) or non-profit making
(e.g. hospitals, charities and schools). Some organisations include profit-making activities but are
not-for-profit in their aims (e.g. fundraising to invest in local education or social development). The
income generated from profit can also be used to develop a business further. In this course you
will be taking a theoretical approach to business and analysing why businesses behave as they do.
Businesses are made up of a range of activities which include:
manufacturing goods
selling goods to customers
distributing products to wholesalers
marketing, advertising and promoting products
maintaining financial records
recruiting and managing the workforce
communicating with customers and responding to issues
creating and developing new products.
A sole trader business gives the owner complete control and direction in the operation of the
business and is a simple structure to start up. However, it provides little personal protection
against debt and loss, and means that the owner has to fulfil all the obligations of finance, sales
and marketing themselves. As a business grows, it may be advisable for the trader to move to a
limited company structure. This will provide some protection against losses as a company is a
legal entity separate from its owners.
There are two types of limited company: public (PLC) and private companies. Public companies
offer shares to the public and provide public accounts whereas private companies may have
restrictions as to how shares are owned or transferred. The smaller the company, the more
difficult it may be to borrow money or expand.
Sometimes a partnership is an appropriate way of organising the business: this is when the
owners share the profits as partners. This organisation is common in professional activities such
as doctors and other medical professionals, lawyers, accountants and other specialisations where
a personal relationship with clients is important. Advantages include efficiencies of management
and profit sharing, but there may be disadvantages as each partner is responsible for the debts of
all and if personal relationships break down, there will be consequences for the business.
International companies (IC) and multinational companies (MNCs) have grown up as
a response to globalisation and changes in trading conditions, the free movement of finance
and capital, and the work of trading blocks, for example, the European Union. There has been a
rapid growth in companies that sell their products overseas, many of them in Asia, and which
have negotiated favourable trading terms, for example, Nissan, Honda, Samsung, Panasonic and
Toyota. These corporations are not immune to risk or to the requirements of governance and
their complex operations require strong leadership and management.
Section 1.1: Types of business
The board of directors is the most senior group of managers and they are accountable for the
company’s management and for setting strategic aims and objectives. The most senior manager
of this group is the chief executive officer (CEO). Directors must act in a way that benefits
shareholders but their interests are not the only ones that the directors must take into account.
The way in which directors run a company is known as governance. This extends to legal, ethical
and strategic behaviours, the relationship with shareholders and the remuneration of directors.
The UK Corporate Governance Code sets out the principles which PLCs are expected to observe.
ACTIVITY 1.1
From your knowledge of local and national business:
1. Find examples of profit-oriented businesses.
2. Find examples of not-for-profit businesses and state involvement in the supply of
goods and services.
Look at:
sole traders
partnerships
limited companies
international businesses and global multinational companies (MNCs).
3. Then decide which sectors these businesses are operating in. (For example,
primary production: agriculture, fishing, mining, oil and gas extraction; secondary:
manufacturing, construction and the supply of water, gas and oil; tertiary: the supply
of services such as hotels, catering, transport, education, law and professional services
and health.)
Present your findings to your group.
Collecting examples of business activities worldwide will help you in Sections B and C of
your exam where we ask you to use your own knowledge to answer the questions.
Now is a good time to plan where and how you will store your notes.
How are businesses structured and why are structures important?
Organisational structures define how a business’s various divisions and departments are linked.
In this section we will examine the primary types of organisational structures and their role and
importance in the management of organisations, and assess their strengths and weaknesses. For
example, do organisational structures remain stable over time? What might be the challenges
that the contemporary business environment poses for organisations?
Organisational structures refer to the ways in which managers divide, supervise, monitor and
coordinate work. They comprise the formal and informal arrangement of tasks, responsibilities,
lines of authority and reporting relationships. Organisational structures determine how different
departments and people are linked. They also define the lines of authority and how information
flows from one organisational division to another. Without an appropriate structure, managers
will find it difficult to execute their tasks within the organisation. It will also be challenging to
identify who is responsible for what in the organisation and how their own tasks may be linked
to the activities in other departments.
The absence of appropriate organisational structures can cause a number of serious problems for
an organisation, including in the implementation of its strategies and administrative confusion
for managers. Conversely, an appropriate organisational structure can allow a firm to reduce its
3
Section 1.1: Types of business
costs and achieve better operational efficiency. All this can greatly help with an organisation’s
ability to create value for its customers and realise profits.
Types of organisational structures
From the various types of organisational structures that are available today, organisations may
choose to combine elements from more than one type. It is also important to note that there
is no one structure that is suitable for every organisation. This is because the effectiveness of
organisational structures differs according to the size of the organisation, its geographical spread,
the range of its activities and the complexity of its operations.
Some of the most common organisational structures are:
Functional: This is one of the most common types of organisational structure. As the name
indicates, functional structures are based around the key tasks or functions of the organisation.
These range from basic functions such as accounting and marketing to finance, operations and
information management. Due to its simplicity, this type of organisational structure is used by
smaller firms and those that have narrow product ranges. One of the major benefits of this type
of organisational structure is that it leads to greater control of operations at the managerial
level, which in turn leads to better alignment of roles and responsibilities. However, this type of
organisational structure may not be suitable for big organisations with diverse product ranges as
it can increase the burden on managers and even increase everyday operational issues.
The functional areas of business management in a larger organisation may include:
finance and accounting
production
marketing
sales
public relations (PR) and communications
research and development (R&D)
IT support
human resource management
logistics and supply chain management.
Product: This type of organisational structure is based around the production of the various
types of products or services the organisation delivers. The primary organisational functions
such as marketing, operations, finance and accounting are organised around each product or
service group. The organisation considers each product or service group as a profit centre. The
main advantage of this organisational structure is that it allows managers to base their work
activities around products (or services), and also to evaluate the performance of these products
(or services). The primary disadvantage of this type of organisational structure is related to the
duplication (or even multiplication) of the organisation’s various functions.
Divisional: A divisional structure, as the name indicates, is a type of organisational structure
where an organisation is made up of separate business units or divisions. In other words, a
divisional structure consists of various divisions organised along business, product, customer
group or geographic lines. The central corporate headquarters will monitor the activities of the
various divisions, allocate resources and provide support functions. A significant strength of this
type of structure is that it can allow an organisation to arrange its different products within a
specific division and reduce the functional duplication. Additionally, this type of organisational
structure can also ease cross-product as well as cross-regional coordination and cooperation. It
is most suitable for large organisations with diversified products or product families. The primary
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Section 1.1: Types of business
disadvantage of this type of structure is that it sometimes inhibits cross-division coordination
and can even lead to conflict between the division’s objectives and those of the organisation.
Matrix: A matrix structure organises itself along two or more dimensions in an effort to enhance
collaboration, coordination and cross-unit communication. In this type of organisational
structure, the managers assign specialists from different departments to work together
on projects that are led by a project manager. It is also known as a composite structure or
combination structure and is most common in organisations that work on projects with a
limited duration. One of the biggest advantages of this type of organisational structure is that it
greatly facilitates the sharing of specialised knowledge, key resources and equipment which are
necessary to complete complex interdependent projects. This results in a reduction of costs and
allows an organisation to achieve economies of scope. Since supervision is provided in different
forms, it also results in better flexibility and greater oversight. However, this type of organisational
structure has been criticised for increasing the layers of management and bureaucratic costs, for
example. Additionally, because of its dual reporting relationships, the matrix structure has also
been criticised for creating confusion among employees.
Regional: Here, the organisational structures are constructed around different geographical
areas. Organisations with this type of structure often consider a specific region as a profit centre
and measure the profitability of each region based on revenues and expenses This type of
structure allows the organisation to gain an in-depth understanding of the customers, products,
governments – and even competitors – to be found in a particular geographical region.
Furthermore, regional managers are accountable for the performance of the organisation in their
own regions and therefore the lines of authority are particularly clear. The primary issue with this
type of structure is that regional differences may often inhibit coordination and communication
across the different regional units. Another problem is that regional units frequently develop
their own way of doing business which may conflict with the approaches and strategies of the
corporate office.
Hybrid: A hybrid organisational structure consists of a combination of basic organisational
structures. Organisations, especially large ones, will frequently combine elements of functional
and divisional structures (or other types of structures too) to reap the benefits of each of these.
This type of structure is used in order to utilise the strengths of each of the chosen organisational
structures. It can lead to increased efficiency, help an organisation’s employees to develop crossfunctional skills and offer high levels of flexibility. However, such an organisational structure
comes with no clear line of authority, which in turn can create confusion about the roles and
responsibilities of employees and managers, and even increase conflict among project managers.
Team-based: This type of organisational structure relies on project teams that work
collaboratively and communicate directly with partners and customers.
Outsourcing: In this structure the organisation enters into contracts with external providers
who will supply products and services which were previously supplied internally, for example,
cleaning, IT and customer service.
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Section 1.1: Types of business
Management roles
Earlier definitions of management adopted a particular view on organisational activities that saw
management as the process of forecasting, planning, organising, coordinating and controlling
resources. There was an alternative focus, however, on the social nature of management which
emphasised the need to coordinate peoples’ resources and efforts to achieve common goals
and objectives. The idea that started to emerge was that, while the various management
functions and processes are important, the role played by people is the most crucial aspect of
management.
While management is about processes, such as planning, organising, controlling and utilising
resources, to achieve particular goals (see below), most importantly, however, management is
about people.
Management functions
Management functions can be summed up as ‘what managers do’. While it is not possible to
summarise everything that managers do, there are some core functions that underpin what
management is about which include planning, organising, leading and controlling (see Boddy
(2016) pp.22–24 for more detail).
Planning
Organisations exist to achieve goals, and someone needs to define what these goals are and the
best ways to achieve them. The function of planning is to define goals for future organisational
performance as well as the tasks and resources that are needed to attain them. The planning
process sets out the overall direction of the work. Within this framework, managers need
to undertake tasks such as forecasting future trends, assessing resources and developing
performance objectives. As part of the planning function, managers must also make decisions
regarding the scope of the business, the areas of work in which to engage and how to allocate
resources between different projects or activities.
Organising
The organising function of managers typically follows the planning process and reflects how the
organisation will accomplish particular plans of action. It involves assigning tasks, grouping tasks
into departments, delegating authority as well as allocating resources across the organisation.
Organising is frequently described as the process that moves abstract plans closer to reality by
deciding how to allocate time and effort. As part of the organising function, managers perform tasks
such as creating a structure for the enterprise, developing policies for HR and coordinating resources.
Leading
Every organisation involves people, and it is part of a manager’s job to direct and coordinate the
activities of these people. This is the leadership function of management. It can be described as
the use of influence to motivate people to achieve organisational goals. Leading is frequently
associated with the creation of a shared culture and system of values. As part of the leadership
function, managers will also need to communicate goals to employees and inspire them to
perform at the highest level.
Controlling
Organisational objectives and plans need to be examined and evaluated on an ongoing basis.
The controlling function is concerned with regularly monitoring employees’ activities, and it also
determines whether the organisation is on target to reach its goals and to make adjustments
as required. As part of this function, managers perform tasks such as monitoring progress,
comparing it with planning that has taken place and taking corrective action if necessary.
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Section 1.1: Types of business
Management skills
A manager’s job is multidimensional and requires a range of skills. Managerial skills emerge
through a combination of aptitude, education and training, but also experience. There are many
skills that managers are asked to cultivate; these can be summarised in four categories.
Conceptual skills
Conceptual skills can be defined as the cognitive abilities that are needed to see the organisation
as a whole and how its parts relate to one another. These involve the manager’s thinking,
information processing and planning abilities. Logical reasoning, judgement and analytical
ability are the main features of the conceptual skills that every successful manager should have.
This definition assumes a well-developed cognitive ability that enables one to see relationships
between the organisation and its fundamental constituents.
Human skills
Human skills refer to the manager’s ability to work with and through other people and to work
effectively as a member of a group. These skills are demonstrated in the way a manager relates
to other people, including the ability to motivate, facilitate, coordinate, lead, communicate and
resolve conflicts. Today’s managers need to be genuinely concerned with the emotional needs
of their employees, not just their needs related to their job tasks. Human skills are also known as
interpersonal skills. Examples of such skills include sensitivity, persuasiveness and empathy. They
are important at all levels of management, particularly at the lower and middle levels.
Technical skills
Technical skills refer to the understanding of and proficiency in the performance of specific tasks.
They include mastery of the methods, techniques and equipment involved in specific functions
of the organisation, for example, engineering, manufacturing or finance. Technical skills also
include specialised knowledge, analytical ability and the competent use of tools and techniques
to solve problems in that specific discipline.
Political skills
Apart from the previously listed main skills, political skills are important part of a manager’s
skillset. Managers use these skills to establish a power base and build important connections.
Examples of such skills include negotiating and bargaining skills. Organisations are political
arenas in which people compete for resources. Managers who have mastered these skills are
usually better at obtaining resources for their groups.
What is it like to be a manager?
An important determinant of the nature of a manager’s job is hierarchical level. Top managers
are at the head of the hierarchy and are responsible for setting organisational goals, defining
strategies, monitoring and interpreting the external environment and making decisions that
affect the entire organisation. They have titles such as president, chairperson, executive director,
chief executive officer (CEO) and executive vice-president. Middle managers work at the middle
levels of an organisation and are responsible for business units and major departments. Examples
of middle managers are department head, division head, manager of quality control and
director of the research laboratory. They implement the overall strategies and policies defined
by top managers. First-line managers are directly responsible for the production of goods and
services. Examples of first-line managers include supervisor, line manager, section chief and office
manager. Their primary concern is applying the organisation’s rules and procedures to achieve
efficient production, provide technical assistance and motivate subordinates.
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Section 1.1: Types of business
The other major difference in management jobs occurs horizontally across the organisation.
Functional managers are responsible for departments that perform a single functional task and
have employees with similar training and skills. General managers are responsible for several
departments that perform different functions. Within this framework, a general manager is
responsible for a self-contained division and for all functional departments within it.
ACTIVITY 1.2
List at least five skills that you think a successful manager must have in order to be
effective. Compare your list with others in your group and work together to compile a list
of 10 essential management skills. Share this with the whole group.
Management roles
Management roles can be further be divided into three conceptual categories: informational,
interpersonal and decisional. These are explained below.
Informational roles
Managing depends on obtaining information about external and internal events, and passing
this on to others. The manager seeks, receives and screens information to understand the
organisation and its context, using research. As an example, a manager can conduct research
through market intelligence, reports, conversations or by utilising any source of data that
seems relevant. In the disseminator role, the manager shares information by forwarding reports,
documents, statistics or briefs to staff inside the organisation. The disseminator will make sure
that people within an organisation are constantly informed and receive up-to-date information.
As a spokesperson, the manager transmits information to people outside the organisation –
speaking at conferences, briefing the media or presenting at a company meeting.
Interpersonal roles
Interpersonal roles arise directly from a manager’s formal authority and status, and shape
relationships with people within and beyond the organisation. As a figurehead, the manager
is a symbol, representing the organisation in legal and ceremonial duties such as hosting
visitors, signing legal documents, presenting retirement gifts or receiving a quality award. The
role of leader defines the manager’s relationship with other people, including motivating,
communicating and developing their skills and confidence. A key part of their role is to develop
and maintain information sources both inside and outside the organisation.
Decisional roles
In the decisional role managers see opportunities and create projects in order to exploit these
opportunities. In this role, managers usually initiate change in their efforts to create a dynamic
and forward-looking organisation. A manager becomes the disturbance handler when they deal
with unexpected events, which draws their attention away from planned work. As a resource
allocator, a manager makes decisions concerning how to allocate people, time, budget and other
resources in order to achieve desired objectives. The negotiator role involves formal and informal
discussions or bargaining to attain outcomes. For example, a manager may negotiate the prices
of raw material with suppliers or the prices of final products with clients. Managers may also
need to negotiate internally for the allocation of resources or budgets to their organisational
divisions.
Henry Mintzberg, a Canadian academic, devised a theory that recognised that every
manager’s job combines elements of these roles, with their relative importance depending on
the manager’s own style and preferences, hierarchical position and the type of business they
are involved in. As mentioned, the nature of a manager’s work is fast-paced and very dynamic.
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Section 1.1: Types of business
Therefore, certain roles may become more prevalent at certain points in time when compared to
others. For example, right before an acquisition, a manager may spend a lot of time monitoring
the environment and negotiating. After completing a deal, a manager may spend more time
familiarising people with the new way of working, allocating resources and resolving any
conflicts or discrepancies.
Management: centralisation and decentralisation of power in a
business
In the early twentieth century, Henri Fayol, a mining engineer, was credited with inventing
management as an activity. He proposed six management roles: forecasting, planning,
commanding, coordinating and controlling. All of these, he stated, were interrelated. At around
the same time, Max Weber became interested in where power was based in an organisation and
he developed a theory of bureaucracy which was based on the legitimate authority of business
roles where work was divided, coordinated and controlled. There was a strong emphasis on rules,
regulations, procedures and hierarchical relationships. In the 1970s, Henry Mintzberg devised
another theory which identified ten management roles which he divided into interpersonal,
informational and decisional (see above and also Buchanan and Huczynski (2019) p.534). He
believed that this provided the best picture of how managers actually work in organisations. This
led to further discussions of managerial roles and their impacts.
Management occurs as a general set of tasks, but managers are often not just general managers
but specialist managers, placed at different levels in organisational hierarchies. Managers will take
on a variety of roles. Key management skills include the ability to plan, organise, control and lead
within a variety of external and internal organisational contexts.
Managers also need to make significant decisions not only about the type (or types) of structures
that will best serve their organisation, but also on how power will be distributed between the
various units, divisions and departments.
Centralisation and decentralisation of power within an organisation refers to the extent to which
decisions are made at the top or whether managers at lower levels of the organisation contribute
to decision-making.
Organisations in which power is centralised are known to restrict decision-making power to a
few individuals from top-level management. Decentralised organisations in contrast tend to
delegate decision-making authority to the lowest possible levels.
The major advantage of centralisation is that it gives high levels of control over the entire
company to the owners/managers. In a centralised organisation, there is also less chance
of having conflict between managers who may have differing perspectives regarding the
organisational growth strategy. A highly centralised organisation is also in a better position to
deal with crises as it can more easily create and implement uniform and swift responses than an
organisation with more decentralisation of power.
However, centralised organisations also face several challenges. First, a high concentration of
power among top-level management can lead to autocratic control over subordinates, which
may lead to a lack of flexibility in administration. It can also lead to unexpected delays in securing
action because of the increased time it may take to receive the approval for strategic decisions
from top-level management. This can make an organisation slow in responding to changes in
the business environment. Furthermore, high concentrations of power at the top may compel
managers to make decisions with whatever information is available to them. This can be
detrimental for the performance of the organisation, especially if the knowledge or information
rests at the lower levels of the management hierarchy.
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Section 1.1: Types of business
Decentralisation of power also has its own advantages and disadvantages. One of its major
advantage is that pushing decision-making to lower levels of management allows an
organisation to shorten its response time, fosters innovation as it encourages the creation of
new ideas among managers and also leads to higher involvement of people from different
departments of the organisation. Additionally, as decentralisation gives power to people at
lower levels of management, it leads to increased morale and the increased productivity among
employees, which in turn also enhances business performance.
However, decentralisation also has its own problems. For example, it can make communication
between various levels of management difficult, resulting in miscommunication and
mismanagement. It can also lead to a loss of control over decision-making and can therefore
put an organisation at an increased risk of problems that may result from incorrect or
unwise decisions being taken by people at the lower levels of management. In addition, as
decentralisation of power gives more authority to people at different levels to act and make
decisions independently, it creates the risk of having too little collaboration and coordination
across different parts of the organisation. Finally, emergency or crisis situations usually call for
more centralised power and authority in order to increase response time and enhance the
decision-making process.
ACTIVITY 1.3
Read the GlaxoSmithKline (GSK) case study in Boddy (2016) pp.313–15. Make two slides to
share with the group that answer the following questions:
1. Name two reasons why GSK moved away from a functional structure.
2. What kind of structure does GSK need to encourage creativity and research?
ACTIVITY 1.4
Why might Max Weber and Henri Fayol be surprised by the modern developments in
business structure and management? After discussing this question in groups; each
student should write an individual short explanation.
Conclusion
In this section you examined a range of organisational structures that are used in business and
how this affects risk. You investigated and discussed important management skills and the
theory which accompanies management roles as well as the different functions which will affect
the performance of a business.
10
Unit 1: What is business management?
11
Section 1.2: Business aims and objectives:
profit and break-even
Learning outcomes
By the end of this section, and having completed the background reading and activities, you
should be able to:
analyse how vision, mission statements and aims are used to set objectives
understand and discuss how profit and break-even calculations help in decision-making by
management.
Background reading
Cole and Kelly (2020) Skill Sheet 7: Managing strategy.
Surridge and Gillespie (2019) pp.4–6 and 214–27.
Introduction
In this section, you will be analysing the background to business management and how strategy
describes the basic steps that management take to reach and achieve the business objectives.
First, there is the requirement for a vision or picture of where the company wants to be. This is
followed by a mission statement that specifies the business in which the firm intends to compete
and the customers it intends to serve. Managers will establish aims for the business, for example,
the overall aim may simply be to increase profitability, or to improve the efficiency of the
operations and lower costs. Another aim may be to capture a larger market share or to improve
customer service. From these general aims, managers will set objectives or specific actions to
take over a specific time frame, many of which may be quantified or measured in financial terms.
Calculating the break-even position of a company and the point at which it moves into profit
is another important part of management planning. Break-even analysis is a calculation that
will show the manager the point at which total costs are exactly equal to revenue from sales.
Although no profit has been made, no loss has been made either. Managers can calculate what
adjustments need to be made in terms of production; they can use the calculation in their
planning for loans and they can assess whether the business has a secure future.
Setting objectives: vision and mission statements
The vision of how a company may perform in the future is one of the concerns of senior
management. This includes business owners, the CEO and the company’s board of directors.
A vision is a long-term objective rather than a short-term operational concern and may
include ideas for the next five to ten years. This includes the aspirations of the top executive
management for the future and defines the organisation’s strategic course of action and longterm direction. It provides a comprehensive view of the company’s direction and a compelling
reason why a business opportunity would be beneficial for the company. A strategic vision needs
to be clearly articulated both inside and outside an organisation. It can motivate employees,
provide them with guidance and also direct their energy towards a shared course of action. At
the same time, a strategic vision informs external stakeholders, customers and investors about
the organisation’s business and operations.
Section 1.2: Business aims and objectives: profit and break-even
Organisational mission
A mission statement sets out the business’s current purpose in clear terms and states its
goals, principles and values. It is usually short and designed to motivate the employees in an
organisation and send a message to customers about the nature of the business. Organisational
mission defines the core purpose of an organisation’s existence. It contains the description of the
organisation’s values and aspirations, as well as an overview of its business. Within the frame of
an organisation’s mission, its mission statement will be developed. This will provide information
on the organisation’s current business and purpose, answering questions such as: Who are we?
What we do? Why are we here? Mission statements distinguish an organisation from others in
the same or a similar sector.
Mission statements differ from strategic visions. The former represents the organisation’s present
business and purpose, whereas the latter expresses the organisation’s plans for the future.
Mission statements help stakeholders, suppliers and customers to understand the organisation’s
philosophy, values and purpose.
Sometimes businesses frame their mission statements in terms of their profit-making aspirations
or potential. This is not a good approach to take when representing what an organisation
does and what lies at the core of its existence. While profit is the result and objective of the
company’s business operations, it does not reveal the company’s identity and what it does. It
probably shows a lot about the organisation’s values, but not necessarily in the best manner.
Ideally, the mission statement of an organisation sufficiently describes the following:
its identity
its philosophy, aspirations and values
the scope of its markets
customer needs that it must aim to satisfy
the approach it uses to satisfy its customers.
ACTIVITY 1.5
Most larger companies, especially PLCs, will have a mission statement in their advertising,
on their website or in other material. Schools, colleges and universities will also have a
similar statement that answers the question of why the organisation exists and how it
intends to achieve its purpose.
Find examples of three mission statements and analyse them to find out:
Who is the target customer of the business?
What product or service is provided to that customer?
What is the distinct nature of the business (i.e. why should a client choose this
organisation)?
How persuasive do you think these statements are?
Objectives
George T. Doran developed an acronym – SMART – in the 1980s to help managers succeed in
setting objectives. He argued they should be:
Specific
Measurable
Achievable
12
Section 1.2: Business aims and objectives: profit and break-even
Relevant (every individual goal is connected to the organisational goal)
Time bound (achievable within deadlines).
Criticisms of SMART objectives
SMART is still a popular method but common criticisms are that not every action can be
measured in financial terms and not every activity in a company is measurable at all. In fastmoving businesses, objectives can shift very quickly and managers may be encouraged to write
very limited objectives as they are afraid of failing. Deadlines may be missed and thus they have
limited value.
Specific. Whether they are devised for subordinates, companies or units, goals need to be
specific. Specific goals are more likely to help companies to achieve progress and growth, but
also enable them to assess whether particular goals have been fulfilled or not. Frequently,
organisations put effort into expressing their goals in quantitative terms, whenever possible, in
order to make these goals explicit and accurate (i.e. reduce costs by 2 per cent, increase teacher
effectiveness ratings from 4 to 4.2 and so on). However, organisations will often set qualitative
goals as well (something that happens very often at the strategic level). The crucial point is that
goals are precisely defined and that it is possible for organisations to measure progress towards
their attainment.
Measurable. It is important that organisations develop goals that are not only specific, but are
also measurable. Organisations need to measure their performance or the extent to which they
are moving in the right direction to achieve particular goals. Accurately measured goals also
help to establish a clear corporate vision. Making progress towards reaching a goal has to be
measured often, and this is when goal setting is most effective.
Achievable. To fulfil goals, it is important that they are agreed on and supported by the
people who are directly or indirectly affected by accomplishing these goals. When it comes
to companies, this means that a significant percentage of employees must agree on them.
For example, individual subordinate goals must be accepted by subordinate individuals. Also,
managers need to ask the employees to express their honest opinion about a goal. A vital
objective of SMART goal setting is not superficial agreement to achieve a goal but a strong
commitment to doing so.
Relevant. Goals should be realistic and not unreasonably difficult. Setting challenging
goals encourages company members to attain them, but they should not be overly difficult.
Unrealistic goals sap employees’ morale and lead to failures. On the other hand, easy goals are
not motivating. Goals that are fairly ambitious, yet realistic, and encourage employees meet
high standards are called stretch goals. The key to achieving such goals is that they are set
in accordance with existing company resources and are not beyond its financial resources,
equipment and departments’ time.
Time-bound. Finally, goals should have a specific time period in which they should be achieved
in order to be effective. Specific milestones help organisations to measure their performance and
evaluate their progress towards the achievement of particular goals.
ACTIVITY 1.6
In this activity, we will look at case studies and applied theory. Work in small groups and
complete either:
Business in focus: Starbucks’ mission statement from Surridge and Gillespie (2019) p.6
or
Business in focus: Me and the Bees Lemonade from Surridge and Gillespie (2019) p.9.
13
Section 1.2: Business aims and objectives: profit and break-even
Calculating profitability
Once management has set objectives, they have provided some direction for employees who
will then all be able to work towards the same targets. Individuals and department managers
can measure their performance and progress more easily and this will help with motivation. In
addition, the objectives can be kept under review and discussed in order to adjust planning. In a
for-profit business, the key objective must be to increase profitability; to calculate this requires
an understanding of the relationship between costs and revenue (i.e. the expenditure of a
company which must be deducted from the income it receives over time). The balance left over
can be expressed as a percentage or profit margin. Profits are increased when more income is
received. A profitable business is much more likely to have the following advantages:
to be of interest to investors
to have an enhanced reputation
to gain or retain a good credit score among lenders and suppliers.
A profit margin is a ratio that expresses a business’s profit as a percentage of its revenue over a
trading period.
The uses and importance of break-even analysis
This analysis is often made in the early days of a business start-up to ensure that the business
will grow over time. The analysis will also reveal how much more must be produced or sold to
make a profit. When a business approaches a bank or financial institution for a loan or credit,
then the break-even analysis will be crucial in reassuring the lender. From time to time the costs
of operating the business may change and the manager needs to ensure that these changes
are not driving the business below the break-even point. A break-even analysis is also helpful in
informing managers of the expected profit or loss at various stages of output (i.e. whether it is
worthwhile expanding capacity or whether it should be reduced). For example, if a restaurant
owner who has calculated that she needs to serve 3,000 customers per week to break even
suddenly finds that she has only 1,000 customers, this is a warning that at that point, the fixed
costs of running the restaurant will not be covered.
The key terms are:
Revenue – this is the income the business receives.
Fixed costs – these are costs that do not change over a period of time, for example, lease or
rental, insurance, interests on loans, tax, salaries.
Variable costs – these are expenses that change in proportion to business activity so include
wages, cost of fuel, etc.
Contribution – this is the income that is used to pay variable costs.
Profit – this is the surplus revenue earned once fixed and variable costs are met.
The break-even calculation is made first by comparing the price of the product, the variable costs
of producing this product and the fixed costs associated with the product. Break-even can be
calculated by dividing fixed costs by contribution per unit.
Using break-even calculations helps businesses to estimate the effects on profitability of
increasing production, changing prices or reducing costs. In its most simple form it is an easy,
basic calculation to help managers who don’t have financial training to make decisions or to
present applications for loans. However, in a complex business, there may be too many products
to estimate and average figures may not be accurate enough. All business forecasting is subject
to unforeseen events. However, financial data has a key role in planning.
14
Section 1.2: Business aims and objectives: profit and break-even
Conclusion
In this section, you analysed how a company’s vision, mission statement and aims are created
and how they can be used to set objectives. These objectives can be developed using the SMART
technique. You have identified how profit and break-even calculations can be used in a variety of
circumstances related to production and sales, which assist in management decision-making.
15
Unit 1: What is business management?
16
Section 1.3: Management planning and
stakeholders
Learning outcomes
By the end of this section, and having completed the background reading and activities, you
should be able to:
demonstrate the significance of planning for the successful attainment of organisational
outcomes
explain the role of stakeholders in a business.
Background reading
Boddy (2016) Chapter 6.
Johnson, G. et al. Exploring strategy. (Harlow: Pearson, 2017) 11th edition [ISBN 9781292145129]
Chapter 5 ‘Stakeholders and governance’, pp.134–36.
Surridge and Gillespie (2019) pp.71–72.
Introduction
Management is about processes, such as utilising resources to achieve particular goals. Most
importantly, however, management is about people. Management functions can be summed up
as ‘what managers do’. While it is not possible to summarise everything that managers do, there
are some core functions that underpin what management is about. These functions include:
planning, organising, leading and controlling.
In this section, we will focus on one of these functions, namely, the function of planning. We
will introduce the concept of ‘organisational mission’ as a key element in representing the core
existence and philosophy of an organisation. We will demonstrate the different types of plans
as well as the significance of organisational planning in management. Planning is very a formal
procedure and, as such, it requires methods and processes to be in place. Although formal
planning has a value, there are also pitfalls in these procedures. We will further discuss the
characteristics of effective goals, as a key element in successful organisational planning. Planning
is essential not only for organisations, but is an integral part of human activity. This realisation
will help you to start working on your own planning and goal-setting techniques and to take
the first steps into cultivating your own management skills, which will be extremely useful in the
workplace.
Managers do not take their decisions without regard to the stakeholders in a business, and you
will investigate the role of those individuals or groups who depend on an organisation to fulfil
their own goals but on whom the organisation also depends.
Planning
Planning represents a decision-making process that is focused on the organisation’s future goals
and how to achieve them. In particular, planning includes defining the business’s aims and
objectives, designing a strategy to fulfil them and establishing a complex planning hierarchy to
implement and coordinate its activities. Businesses conduct planning and goal setting in order
Section 1.3: Management planning and stakeholders
to achieve a high-quality performance. Organisational plans are the means by which an
organisation will reach a certain target, whereas its objectives are the targets.
Planning begins with a formal mission statement that outlines the main purpose of the company
for its external audience (as you saw in section 1.2). It is important to note that organisational
objectives come before plans, because plans do not make much sense without objectives. That is
why planning is regarded as a fundamental managerial function, since it forms the basis for other
managerial activities, including organisation, control and leadership.
A crucial part of the planning process is developing a strategic vision. Traditionally, planning
was carried out entirely by top executives, consulting firms and central planning departments.
The latter includes groups of planning specialists who report directly to the chief executive
officer (CEO) or president of the company. This top-down approach was very popular during
the 1970s. Goals and plans were assigned to departments and divisions from the planning
department, after approval by the CEO or president.
Although this approach to planning is still being used, a common problem with it is that central
planning departments may be out of touch with the fast-paced realities faced by front-line
employees. Furthermore, because planning takes place at higher levels of the organisation, frontline employees are not given the space or the incentive to think creatively and generate their
own ideas.
A newer approach to planning has been to involve everyone in the organisation – sometimes
even outside stakeholders (such as clients or suppliers) – in the planning process. In this more
decentralised approach to planning, planning experts work with managers in major divisions,
but also with line managers and front-line employees. The challenge behind the decentralised
approach to planning is that often a massive amount of information is generated, and an
organisation will need to devote time and effort to filter and analyse this information when
making plans. Nevertheless, in a complex and competitive business environment, organisations
constantly need to be looking for hidden sources of ideas and innovation. For this reason,
involving not only senior or middle levels of management, but also their front-line employees in
the planning process, becomes crucial.
Types of plans
Today companies that offer a single product or service are quite rare. Therefore, organisations
must devise more than one plan to cover all their business activities. That is why managers often
differentiate between three basic types of plans: strategic, tactical and operational.
Strategic plans are usually projected to cover three to five years. They define a course of
action an organisation needs to follow in order to fulfil its strategic goals. Their scope is broad
as these plans cover the entire organisation. They tend to be quite general and complex
because they encompass various industries and businesses. Strategic plans represent the
blueprint that outlines resource allocation (personnel, cash, activities, space) and the activities
of the organisation. The success of strategic plans defines the potential for an organisation to
achieve growth, expansion and prosperity. On the other hand, the lack of success or failure of
strategic plans may impact on the organisation’s survival.
Tactical plans often project an organisation’s activity for the following one or two years. Their
aim is to facilitate key strategic plans and contribute to particular aspects of the company’s
strategy. Tactical plans define what the organisation’s sub-units and major departments
must do in order to implement the company’s strategic plan. These plans can have an effect
on certain businesses, but rarely on the survival of the whole organisation. Tactical plans
are moderately interdependent and those drawing them up must take into account the
capabilities and resources of several business units. Tactical plans are usually identified by a
17
Section 1.3: Management planning and stakeholders
middle manager who has an overview of the company’s broad strategic plan.
Operational plans project future plans for no more than a year. They are developed at
the lower levels of the organisation and outline actions that will support tactical plans.
In comparison to the other two types of plans, operational plans are much narrower in
scope and usually focus on the organisation’s smaller units and departments. Department
managers use these plans as a means to conduct operations on a daily and weekly basis,
and to coordinate activities. Operational plans outline objectives for individual employees,
department managers and supervisors. These plans are the least complex as they generally
centre around small homogenous units or business departments.
ACTIVITY 1.7
In pairs or groups of three, look at the Crossrail case study in Boddy (2016) pp.187–89.
Using Table 6.1 – a planning hierarchy – create three slides: one on those parts of the
Crossrail plans that are at the strategic level, one slide for the tactical and another one for
the operational levels.
Why should managers formally plan?
Formal plans are fundamental for contemporary organisations. In this section we are going to
discuss four primary reasons why managers should undertake formal planning.
First and foremost, planning provides direction for both employees and managers. In any
corporate environment, teamwork and cooperation are crucially important. Formal planning
is a complex activity that involves different levels of the organisation. In order to foster such an
environment, all members of the organisation need to understand where the organisation is
heading. In contrast, without formal planning, employees and managers may follow individual
routes and objectives, engage in courses of action that divert from each other and therefore
hinder a corporation from achieving its goals.
Secondly, formal planning reduces uncertainty. Managers are forced to look ahead and examine
the impact of various forces. Organisations that engage in formal planning procedures will be
monitoring their environment on an ongoing basis and therefore be more prepared to tackle
change. Very often managers are able to plan their responses to certain changes in advance.
The third reason is to reduce redundant activities and overlapping. You may be surprised to find
that at some point or another most organisations (especially the larger ones) engage in activities
that are not necessarily useful or become less relevant in time. Wasteful or redundant activities
are likely to be discovered through formal planning procedures. In addition, during formal
planning, the ends and means of certain procedures are clearly articulated, which further helps
to identify redundancies and inefficiencies.
The fourth reason is that formal planning sets standards and objectives that facilitate control.
Remember that control is another crucial management function. You will now have begun to
realise that there is high level of interdependency between the different management functions
that you were introduced to in section 1.1. Through formal planning, therefore, employees
become aware of what they need to achieve and managers are better able to keep track of
employee performance and whether the organisation as a whole is moving in the right direction.
Without formal planning, there would not be explicit objectives or benchmarking criteria against
which to compare, or coordinate, organisational efforts.
18
Section 1.3: Management planning and stakeholders
Pitfalls in formal planning
Formal planning can create rigidity. There is no doubt that organisations need to carefully
plan their activities and make sure that they coordinate them with their operational, tactical
and strategic plans. It is important, however, that managers are aware of the pitfalls of formal
planning procedures. Investing effort in formal planning may force an organisation towards a
particular course of action, which must be fulfilled within the set schedule. Some plans, however,
may have been established under some potentially misleading assumptions. It is important
therefore that managers evaluate the relevance of their plans on an ongoing basis. Furthermore,
organisations operate in highly dynamic environments and so some plans may quickly become
obsolete. Therefore, managers must be flexible and not insist on established courses of action
merely because these were parts of a formally approved plan.
Creativity and intuition cannot be replaced by formal plans. Similar to the idea of rigidity,
formal plans tend to limit organisations to particular courses of action, therefore constraining
the space for intuition and experimentation. While formal planning is crucial in setting some
boundaries for organisational activities and coordinating effort, it should not discourage
intuition and creative thinking. Successful organisations maintain a very fine balance between
materialising formal plans, but at the same time, being open to change and creative ideas.
Formal planning is focused on today’s competition and not on future survival. Formal
strategic planning often focuses on capitalising on current business opportunities, thus
discouraging managers (or diverting their attention) from searching for ways to reinvent or
reconfigure their business model.
Goal setting
The purpose of goal setting is to convert the mission and vision of an organisation into
achieve particular performance targets. The achievement (or not) of particular goals can have
a substantial beneficial effect on a company’s performance. Goal setting enables organisations
to focus their efforts on particular courses of action, guide peoples’ behaviour and evaluate the
progress that has been made towards the accomplishment of objectives. Goal setting is closely
related to planning in that planning determines the company’s goals as well as the means to
achieve these goals. Clearly devised goal setting ensures that goals are measurable, specific,
quantifiable and have a deadline for fulfilment. It is crucial to examine goals in order to evaluate
and prioritise them.
ACTIVITY 1.8
Now that you have learned about the characteristics of effective goals, put them into
practice. Think of the next assignment you have to do for this course or for another course.
What goals can you put in place to make sure that every day (or every few days) you are
making progress towards the successful completion of your assignment? Draw up a plan.
Types of goals
Just like plans, goals can be classified as strategic, practical and operational. Managers use these
goals to steer employees and resources towards achieving particular results.
Strategic goals are broad statements that officially indicate where the company aims to
be in the future. Strategic goals must be in line with an organisation’s strategic mission and
vision. These goals are clearly linked to the company’s strategic plans. Strategic goals are high
level in nature and are focused on an organisation as a whole (as opposed to being focused
on the level of a particular division or a department). As an example, an organisation may
19
Section 1.3: Management planning and stakeholders
set a strategic goal to improve its market share by 20 per cent over the next five years. Unlike
tactical and operational goals, strategic goals may not always be expressed in quantifiable
terms. For example, an organisation may set a strategic goal to enhance its reputation or to
become the most innovative in its sector.
Tactical goals represent the outcomes which major departments and divisions within an
organisation aim to achieve. These goals frequently apply to middle management and outline
the duties which important sub-units in the company must perform so that the organisation
delivers desired outcomes. Organisations put a lot of effort into quantifying tactical goals as
much as possible, in order to monitor progress towards particular objectives.
Operational goals are connected to results that an organisation seeks to achieve from
individuals, work groups and departments. These goals will frequently be measurable,
accurate and specific. Examples of such goals are: achievement of 90 deliverables on
schedule, cutting down on overtime by 10 per cent next week, the reduction of waste by
10 per cent and so on.
Organisational goals will frequently follow some sort of a hierarchical structure. This means that
goals fulfilled at lower levels of the organisation may be significant for the achievement of goals
at its higher levels. This is also known as a means-end chain. In other words, operational goals
enable the fulfilment of tactical goals and these in turn lead to the achievement of strategic
goals.
Operational goals are frequently the responsibility of low-level employees and tactical goals
are the responsibility of middle management, whereas top-level executives and management
deal with strategic goals. As stated, they should be specific and quantifiable. However, some
companies have decreased the role of middle management and emphasised employee
empowerment, which has led to an increased role for all employees within the company with
regard to goal setting.
To sum up, well-written goals have the following characteristics:
They focus on results rather than actions.
They can be measured and quantified.
They have a clear time frame.
They are challenging and attainable.
They are written explicitly.
They are communicated to all the members of staff who need to know about them.
It is good management practice to link the achievement of particular goals to rewards. (Theories
of motivation with regard to organisational behaviour are covered in a future section of the
course.) However, from a management perspective, it is crucial to emphasise that employees
who work hard and fulfil the company’s goals ought to be rewarded. This is a key management
practice. Employees who are rewarded are more motivated to work hard and are also more
committed to their employer. Rewards can take the form of promotion, a salary increase or a
bonus and certainly increase employees’ job satisfaction. After such rewards, employees usually
feel motivated to achieve even higher or more difficult goals.
20
Section 1.3: Management planning and stakeholders
ACTIVITY 1.9
Quiz
1. What is an organisational mission? What key elements should it include?
2. What is the significance of organisational planning?
3. Why should managers make formal plans?
4. What are the primary pitfalls of formal planning?
5. Why is goal setting significant for contemporary organisations?
6. What are the key characteristics of effective goals?
Stakeholders
It is useful to divide stakeholders in a business into internal and external. Internal stakeholders are
those in the business who have an interest or concern in strategy, projects, plans, production or
processes, for example, the board of directors and the CEO; the shareholders, operations, financial
and HR managers; investors; credit agencies; banks; trade union officials and the workforce. Of
these, the shareholders, suppliers, customers, lenders and employees are primary stakeholders.
External stakeholders include those who do not belong to the organisation but are affected by
the organisation’s performance, for example, customers, suppliers, the community within which
your business operates, the wider environment, the government in the form of regulations and
taxation, and competitors.
The expectations and interests of stakeholders will differ and there are often conflicts between
groups (see Johnson et al. (2017) p.136). Larger companies are very sensitive to the needs of
their shareholders, which are financial in that they expect a profitable return for their money. In
addition, shareholders also have the power to vote in decision-making and in the appointment
of directors. However, the profit motive is not the only business driver and too much attention
to this can result in short-term thinking and planning which leaves organisations vulnerable at
times of change. An analysis of stakeholders will focus on the many different groups and interests
that affect the organisation.
A stakeholder could be anyone who exerts influence on the business or on whom the business
has an impact.
Stakeholders who directly influence the business include:
shareholders
employees
customers
suppliers.
Stakeholders with an indirect impact on the business include:
government regulators
communities
workers in the supply chain
ecological impacts created by the business.
ACTIVITY 1.10
Complete the case study ‘Volkswagen’s governance crisis’ in Johnson et al. (2017) p.148.
21
Section 1.3: Management planning and stakeholders
ACTIVITY 1.11
In pairs, make a list of the stakeholders in your
employer
or
your college.
Decide what their interests might be. Are there any conflicts of interest between the
stakeholders in each case? Write a short report.
Conclusion
In this section we examined the five tasks of planning, why people plan and the content
of several types of plan. We looked at common techniques for how to gather information
for planning, understand effective goal setting and the motivational effects of goals. We
also highlighted the differences between formal and creative planning. By now you should
understand the strengths of planning and how to undertake it, but also the limitations inherent
in the planning process. Planning needs to consider primary and secondary stakeholders, both
internal and external, as their different interests often cause difficulties for a company. The
Volkswagen case study illustrated this point for you.
22
Unit 2: The external business
23
Introduction to Unit 2
Overview of the unit
Week
4
5
6
7
Unit
2 The external business
environment
Section
2.1 The national and global environment
2.2 Evaluating the external environment
2.3 Business ethics and corporate social
responsibility
Learning outcomes
By the end of this unit, and having completed the background reading and activities, you should
be able to:
understand how changes in the business environment pose threats and create opportunities
for businesses
interpret data relating to the external environment.
Unit 2: The external business
24
Section 2.1: The national and global
environment
Learning outcomes
By the end of this section and having completed the background reading and activities, you
should be able to:
define the process of globalisation and how it affects business activities
analyse the drivers that have led to the expansion of world markets and created opportunities
for business.
Background reading
Boddy, D. Management: an introduction. (Harlow: Pearson, 2016) 7th edition
[ISBN 9781292088594] Chapter 4 Managing internationally pp.133–7.
Cole, G. and P. Kelly Management theory and practice. (Boston, MA: Cengage, 2020) 9th edition
[ISBN 9781473769724] (ebook) Section 1, 2.1 Organisations, companies, corporations and
common legal forms.
Johnson, G. et al. Exploring strategy: text and cases. (Harlow: Pearson, 2017) 11th edition
[ISBN 9781292145129] Chapter 9 ‘International strategy’, pp.276–81.
Morrison, J. The global business environment: towards sustainability? (London: Bloomsbury
Academic, 2020) 5th edition [ISBN 9781352008975] Chapter 7 ‘International trade and
globalisation’.
Introduction
Success in business does not depend only on expansion, and many domestic companies are
satisfied with competing in the domestic market. In internationalising, companies decide to
expand from the domestic to the international market because they see business opportunities
in doing so. However, there is a great deal of risk involved in failure which can be expensive and
can damage the reputation of the company and its managers. The business environment can
change swiftly and customer preferences are not predictable. Political circumstances may also be
volatile and governments may impose trade barriers.
According to Yip (2003) the internationalising strategic drivers can be summarised as follows.
Market drivers. The company may be attracted by a possible new market for its products,
particularly if the domestic market has become saturated. There may be similar customer needs
for the product.
Cost drivers. Proximity to its customers might persuade a company to set up closer to them.
This would mean saving costs on logistics. Areas of specialisation are also attractive to companies
as this means that skilled and specialised workers can be found around these locations as well
as technical knowledge. There may be opportunities to transfer marketing campaigns and
branding.
Competitive drivers. Competitors may have become involved in the new market and the
company may be driven to increase its market share globally.
Section 2.1: The national and global environment
Government drivers. The host country’s government may have an advantageous trade policy
and may be keen to invite foreign enterprises. There may be few legislative barriers.
There are different ways in which a company can internationalise, with different country entry
decisions.
Foreign direct investment (FDI). In this strategy, the parent company creates a subsidiary and
uses shareholder funds to buy a site and build facilities, takes over an existing business facility
or acquires a foreign company. This is common practice among motor manufacturers such as
Nissan and General Motors. However, some countries (e.g. China) are resistant to the competition
provided by this type of investment and erect trading barriers.
Joint ventures. Companies in two or more countries can engage in projects in which they have
a mutual interest through joint ventures. They can also share the risks of the enterprise and take
advantage of the strengths of the host company and the local knowledge of the other. Before
the joint venture is launched, the companies agree the level of individual investment and how
the shares and profits are to be distributed. This kind of enterprise can be risky if not enough time
and expertise have been invested in surveying the industry and the local and business culture of
the companies. The strength and organisation of management is also a factor in success.
Outsourced production: Licensing. In this approach the company gives another firm (the
licensee) permission or the right to produce and sell its products. The Disney Corporation is a
leading company in this activity as it produces a high number of retail products associated with
its films and characters. The licensing company will receive a percentage of the sale and the
products are normally protected by trademarks – for example, Coca-Cola.
Franchising. This arrangement helps companies to grow quickly and to extend their market
share and is popular in the service industry. The franchise which the company buys gives the
rights to operate the business brand name and for the product design to enter the target
market. However, there are often strict regulations and controls on how the new business can
be operated, which means an agreement is made with independent businesses to trade in the
product.
Portfolio investment. This is when a company buys significant shares of profitable foreign
companies with the aim of favourably influencing strategy and policies.
ACTIVITY 2.1
Case study; answer the questions.
Walmart: international successes and failures
Johnson et al. (2017) p.279.
or
Guardian, Why did Tesco fail in the USA? (2012)
Write a summary of the reasons for Tesco’s failure in the USA.
Globalisation and international business
In 2000, the UK Department for International Development defined globalisation as:
The growing interdependence and interconnectedness of the modern world through
increased flows of goods, services, capital, people and information.
Globalisation is a complex activity. It can be seen as a series of processes that have affected
politics, economics and social life. In political terms, globalisation has produced an expansion of
institutions in which interregional transactions are managed. In economics, there is a growing
25
Section 2.1: The national and global environment
interdependence of world economies as a result of the growing scale of cross-border trade
and commodities, the flow of capital and labour and rapid, widespread use of information
technology. In social and cultural life, ideas and values are transmitted rapidly around the
world. Local events in all these spheres are shaped by incidents that take place far away. In turn,
worldwide relationships can influence small localities. Discussions of climate change include the
activities of powerful economies and their impact on smaller states.
Drivers
A number of drivers have enlarged the world markets for business, including developments in
refrigeration, shipping, air transport and the use of modern technologies.
Communications have been revolutionised by the internet, mobile phones and satellite
technology. Shared media worldwide provides swift access to knowledge and entertainment.
Supranational organisations have grown up to support global initiatives: the World Bank (1944);
the United Nations (1945); the International Monetary Fund (1946); the European Union (1952);
and the Association of Southeast Asian Nations (1961).
Economic interdependence and the division of labour has meant that articles can be designed in
the USA but manufactured in Asia and retailed around the world.
Offshoring
Offshoring is an aspect of globalisation and takes place when a company decides to relocate
part of its operations to another country where labour costs are lower. Popular examples of
this, although not without problems, are call centres and customer services operations. Once
a common language is established, phone enquiries can be rerouted to the centres which can
undertake various activities, including timetabling, booking technical services, dealing with
orders and refunds. The decision to offshore affects organisational culture and the HR function,
and will be discussed in Unit 4.4.
Winners
Economies that have gained from globalisation are those with low labour costs and
infrastructure in certain sectors as these make them competitive. Educated and skilled workers
are also in demand in technically developed industries. Multinational enterprises (MNEs) benefit
from outsourcing some production lines or processes and enabling tax avoidance. Migration
can benefit many groups of workers in terms of higher wages. Rugman (2005) in Boddy (2016,
p.135) suggests that what we believe is globalisation is really regionalism with international trade
taking place regionally between the trading blocks of North America, Europe and Japan/East
Asia. It is also pointed out that consumers have a wide choice of goods from larger markets and
that innovation and investment in new technology have been stimulated by world trade. New
regional trade groups are also emerging between Brazil, Russia, India China and South Africa
(BRICS) and Southeast Asia.
Fairtrade
The Fairtrade label began in the Netherlands in the 1980s as a response to what was seen as
unfair trading policies in the developing world from multinational enterprises. It guarantees that
the producers of the product (for example, cocoa, coffee, flowers and sugar) receive a fair price
which is governed by Fairtrade International. The cost of sustainable production is covered by
the minimum price and includes an extra premium that can be invested in local development
projects for the producers. Fairtrade labelling takes place in over 1,880 producer organisations in
71 countries (Fairtrade Organisation 2021).
26
Section 2.1: The national and global environment
Losers
It is important to understand that globalisation has also created inequalities and damage.
Manufacturers in high labour cost countries are faced with strong cost competition from low
labour cost areas. In some areas, notably the Rust Belt in the USA, entire industries have been
lost to lower cost economies. The poorest 5% of the world remain trapped in poverty and the
prosperity from globalisation does not affect their lives. Unrestricted business activity has meant
the environment is damaged by destructive processes which bypass laws and regulation and
contribute to climate change, pollution, and wildlife and habitat destruction. Unemployment
among manual workers is still a threat and for many migrants the promise of better working
conditions is not fulfilled.
ACTIVITY 2.2
Discussion
Do you consider your country has benefited from globalisation? What have been the
benefits and what have been the negative effects?
Make notes and prepare a presentation to put forward your point of view in a class
discussion.
Conclusion
In this unit you have examined some of the reasons why businesses may decide to invest
in foreign markets and some of the choices they have in doing so. You have evaluated the
reasons for the success or failure of these decisions in your case studies. You have analysed the
concept of globalisation and the evidence for the positive and negative impacts of this form
of internationalisation. You have related these to your own experience. This knowledge will be
revisited in Unit 4.
27
Unit 2: The external business
28
Section 2.2: Evaluating the external
environment
Learning outcomes
By the end of this section, and having completed the background reading and activities, you
should be able to:
describe external factors in the business environment
analyse the strengths and weaknesses of an organisation using the PESTLE framework
analyse what organisational culture is composed of and how it can be changed in response to
external challenges.
Background reading
Boddy (2016) pp.118–24.
Buchanan, D. and A. Huczynski Organizational behaviour. (Harlow: Pearson, 2019) 10th edition
[ISBN 9781292251578] Chapter 2 ‘Environment’, pp.55–9.
Cole and Kelly (2020) Chapter 12 ‘The business environment’.
Johnson et al. (2017) Chapter 3 ‘Industry and sector analysis’, pp.64–74.
Morrison (2020) pp.35–46, 411–2.
Surridge, M. and A. Gillespie AQA A-level business (London: Hodder Education, 2019)
[ISBN 9781510453340] pp.337–41, 461–5.
Introduction
As you saw in Unit 2.1, a company that is successful in the domestic market may take the decision
to develop its products and enter an international market by exporting or by other strategies.
Before taking this decision, however, it is important for managers to analyse and evaluate the
external environment in which the company will be involved. To enter the international market,
managers need to understand the political, environmental, social, technological, legal and
environmental markets in which they will be competing. In this unit, an important business theory
is presented. If a company intends to set up an operation in another country, a PESTLE analysis
of the external environment is essential. Francis Aguilar developed PEST in 1964 with the aim
of getting a better understanding of a firm’s business environment for owners and directors by
providing data on current issues and risks. The factors in this framework of analysis are as follows:
Political
Economic
Social and cultural
Technical
Legal
Environmental.
Section 2.2: Evaluating the external environment
PESTLE
The PESTLE model is used to analyse the macro-business environment and the factors that
might impact on the business. The results of this analysis can be used to identify the threats
and opportunities that the environment presents and these can be linked to a SWOT analysis
(Unit 3.1). It is important to involve as many managers as possible in this analysis. This model
presumes that it is possible to obtain all the data required and that it is correct. However, even
if this framework is applied, there is still a high element of risk involved and company senior
managers would be well advised to investigate further before taking decisions.
Political factors
Examples of political factors include all the policies and decisions that a government takes or
has taken in the past that would indicate whether the country’s market is stable and receptive to
new business.
Economic factors
Managers also need to be aware of the economic successes or weaknesses of the country and
the key financial indicators – for example, wage rates and taxation, the availability of resources
and whether there are already established competitors.
Social factors
Social analysis includes an estimation of the demography of the workforce and what should be
considered in managing a workforce with a different culture to the company. Managers cannot
assume that working days and public holidays will coincide with their own. They will also need
information on the educational levels and the skills available in the new workforce.
Technical factors
The technological strengths and weakness of a country need to be evaluated to determine
whether business will be slow or unproductive because of weak infrastructures in information
technology and communications or perhaps underdeveloped transport systems. IT specialists
and skilled workers are essential.
Legal factors
Legal constraints include not only international laws on trade and trade agreement but also local
and regional laws that affect both employers and employees.
Environmental factors
There is an increasing emphasis in the business world in responding to environmental impacts
connected to business activities. Ecology describes the relationship between living organisms
including the human effects on the environment. A careful analysis of the risks of pollution, waste
management, toxic spills and sustainability will be part of the environmental analysis of all but
the most ruthless, short-term, profit-seeking organisation.
For all these analyses, a great deal of data will be collected and the decision to internationalise
will require responses from the senior management. How will they be able to adapt their strategy
and management style for the new venture? What changes and innovation will be necessary?
ACTIVITY 2.3
In small groups, use the PESTLE framework to analyse the external environment of a
company with which you are familiar and the factors that might affect that organisation.
You can analyse a global or international company. What advice would you give
the management of this company based on your analysis? Prepare your results for
presentation to other groups.
29
Section 2.2: Evaluating the external environment
Organisational culture
Background reading
Boddy (2016) Chapter 3.
Cole and Kelly (2020) Chapter 7.
Introduction
Edgar Schein defined organisational culture as a system of shared values, assumptions, beliefs
and norms that unite the members of an organisation. It reflects the employees’ understanding
of how things are done in their organisation. The specific culture that can be found in each firm
affects how employees feel. In the same way, this will determine the recruitment policy of the
organisation in that they will be searching for people who ‘fit’ their organisation. This culture is
also evident to new employees as they go through the recruitment process. However, it can also
be part of the reasons why employees leave an organisation if the culture does not meet their
expectations. In this section you will examine the importance of values and ethics in business
and this section provides a background to this.
Culture and performance
Organisational culture determines behaviours in the workplace. It influences what is considered
acceptable and what is considered unacceptable. For example, employees will manage
their own behaviour through a sense of shared identity with their colleagues and with the
organisation. Staff will be committed to organisational goals and this generates a sense of
stability and continuity. In a stable existing culture, staff can rely on a sense of security and safety
in the workplace that is aligned with organisational goals and is predictable. Cultural values that
have been internalised may include ‘the customer comes first’ or ‘respect for the environment’. In
this way, the values of the organisation are understood and shared among the staff and reinforce
the existing culture preventing discord, confusion and uncertainty which could undermine
relationships, productivity and efficiency.
How is organisational culture expressed?
(See Johnson et al. (2017) Chapter 6 ‘History and culture’, Figures 6.6 and 6.7.)
Organisations can support their internal cultural assumptions in six ways.
1. They can create and sustain their own histories in the form of stories that are told about the
company, its past leadership and achievements.
2. Symbols such as people, logos, colours, design, office architecture and head office buildings
can represent and communicate the meaning of company culture.
3. Power structures and staff reporting arrangements will communicate whether the company
is likely to be authoritarian and status driven or more collaborative. They communicate who is
in charge and who exercises most power in the organisation.
4. Organisational structure supports the power base and indicates whether the roles and
responsibilities and reporting arrangements in the company contribute to a tightly controlled
organisation or more loose working arrangements.
5. Control systems such as working hours, financial controls and budgets, bonuses, competitive
behaviour, holiday allowances and dress codes can indicate how closely employees are
monitored and why.
30
Section 2.2: Evaluating the external environment
6. Rituals in a company can include awards for achievements such as employee of the month
and ceremonies to celebrate company anniversaries and success. Training programmes can
demonstrate the kind of behaviours that are expected and the limitations to individual’s roles.
Attendance at the office party, celebrating birthdays or taking part in social events at work
can be used to build organisational culture and function as a means of control. Routines
may include such behaviours as having lunch in a company canteen or keeping to parking
restrictions in the company site.
International cultures
Hofstede argued that attitudes to work, authority and equality can vary around the world. His
analysis identified four areas where they differ.
Power distance. If this is high, it represents high respect for authority; low power distance
represents a less controlled environment.
Individualism versus collectivism. This describes relationships between the individual and the
group and depends on whether individual work patterns or teamwork are preferred.
Long term versus short term. These attitudes will influence management strategy and
financial planning.
Uncertainty avoidance. This attitude will determine how the business strategy is formed.
Although Hofstede’s findings have some value, criticisms are based on his examples of national
behaviours which appear too generalised to be useful and on his creation of national stereotypes
in business which are to be avoided.
ACTIVITY 2.4
Analysis
Choose a multinational company in a competitive industry.
1. Write a short report on how its organisational culture is expressed by its logos or branding,
its mission statement, its company reports, its advertising and its business plans.
2. Comment on whether this description of the company is complete. How else might
you find out about the company culture? What questions could you ask?
Managing change
Managements often need to decide how and why to adjust their aims and objectives and
change their goals in response to external or internal forces. It could be that there are internal
forces driving this change such as a high staff turnover, falling sales, shareholder pressure. The
types of environmental forces may include changes in technology, a shift in market forces,
changes in social trends in the purchase or use of products and services or political changes that
have led to changes in rules and regulations.
The need for this change would be disseminated top-down from senior management to
the rest of the company. Alternatively, pressure for change could come from lower levels of
management, from trade unions or customer groups and be expressed from a bottom-up
direction. The need for change may put pressure on how a firm conducts its business and its
relationships with customers, suppliers and employees. However, it is important to understand
that organisational change is not inevitable and management does not need to introduce it
for short-term, superficial needs. Understanding organisational culture is very important if it is
intended to change or modify behaviours in relation to customer service, for example, or in any
31
Section 2.2: Evaluating the external environment
area where there are deeply held beliefs and practices. Organisational culture is important when
it comes to change policies as it can either facilitate or present barriers to these changes and
prevent the organisation reaching its goals.
There are a number of business models of change management. John Kotter (2007) designed an
eight-step process by which organisations can effect change using the following steps.
1. Establish a sense of urgency.
2. Form a powerful coalition of supporters of change.
3. Create a vision of change.
4. Communicate the vision of change.
5. Empower others to act on the vision.
6. Plan and create short-term wins.
7. Consolidate improvements and produce still more change.
8. Institutionalise new approaches.
The most significant steps are at the beginning of the process where management encourages
the workforce to commit to the need for change. Unless that happens, the other steps may be
more difficult to achieve.
Cole and Kelly describe the foundation of change as an external threat (Cole and Kelly (2020)
Figure 24.2). As discussed earlier in this unit, the change forces may be top-down or bottomup and they may be planned or unplanned. Changes can be transactional involving people
and processes or more transformational in the form of new vision and mission and changes in
culture, goals and strategies. Both Kelly and Lewin in his force field theory (Lewin, 1951, as cited
in Cole and Kelly, 2021) predict that there will always be resistance to change; a formal strategy
of communicating understanding of employees’ fears and making concrete project plans to
execute change will foster commitment to the process and make it more likely to be successful.
Conclusion
In this section you have analysed and evaluated the ways in which the external business
environment can impact on organisations. You have learned how to apply an external evaluation
framework, PESTLE, to an organisation and find where there may be potential weaknesses. The
importance of organisational culture has been identified and you have been introduced to how
changes in organisational culture can be part of a wider response to what may be perceived
as external threats to an organisation. These threats, which may affect profitability or efficiency,
require the organisation to adopt a policy of managing change. Three models of managing
change have been presented.
32
Unit 2: The external business
33
Section 2.3: Business ethics and corporate
social responsibility
Learning outcomes
By the end of this section, and having completed the background reading and activities, you
should be able to:
illustrate the significance of organisational culture and ethics
critically discuss aspects of corporate social responsibility and the environment and apply
relevant tools and frameworks for the assessment of these elements.
Background reading
Boddy (2016) Chapter 5.
Buchanan and Huczynski (2019) pp.65–8.
Cole and Kelly (2020) Chapter 5.
Johnson et al. Chapter 5 ‘Stakeholders and governance’, pp.150–3.
Morrison (2017) pp.406–10.
Surridge and Gillespie (2019) pp.447–52.
Introduction
According to Cole and Kelly (2020), corporate governance is the ‘system [of rules, practices
and processes] used to control and direct a company’s organisation’. Good governance is based
on the strategic company vision which guides the way that the organisation reaches it goals.
Managers can use stakeholder analysis to determine the extent of their power and attention. Two
models are common: the shareholder model and the stakeholder model.
Social responsibility and ethics will govern the company’s decision making and policies as these
values should hold its behaviour to high standards.
Importantly, the company will be bound by the necessity of keeping to the laws governing
its behaviour in the country where it operates and the regulations that apply. Worldwide
accounting standards are also powerful barriers to dishonest trading.
This compliance with rules and regulations is based on an understanding of the penalties
that will apply should the rules be broken and on the understanding that the company is
accountable to its stakeholders, investors and the public and that it has a reputation to protect.
Frequent and serious transgression will affect its national and international profile and may cause
customers and suppliers to desert.
Given these rules, practices and processes, senior managers may decide that transparency in
the company’s conduct and policies is the best way to ensure that the required standard of
corporate governance is kept.
Section 2.3: Business ethics and corporate social responsibility
Business ethics
In a stakeholder model, there are important benefits for a company that integrates ethical
behaviour into its strategy and planning. The first is the opportunity of building trust between
it and the customers and public opinion. In this way, the company may be more resistant to
short-term downturns in business which threaten sales as it will have invested in a high degree
of customer loyalty. This will protect business revenue on these occasions. Brand reputation is an
important part of brand competitiveness and protecting this reputation needs to be a concern
for all components of the business, not only marketing or sales.
There are also advantages for human resource management in that a company with high
standards of behaviour is more likely to attract employees who will fit that form of ethical
behaviour. Widespread knowledge of ethical considerations will help to embed company
culture and may protect against behaviour that leads to legal challenges and costly lawsuits. The
workforce understands the reasoning behind the policy and this engenders company loyalty
and pride, and minimises discontent and rivalry. Compliance with government regulations thus
becomes easier for senior management to maintain.
In its relationship with the external environment, there are clear advantages for a company that
takes into account its impact on the society or societies where its products are found or where it
trades, and ethical business strategy can produce constructive change.
ACTIVITY 2.5
Discussion: How ethical are you?
Buchanan and Huczynski (2019) p.71. Exercises:
1. Ethical conduct
2. Profits versus people.
Working in pairs, complete one or both these questionnaires that are designed to elicit
your personal and subject area views of ethical behaviours in business.
The discussion of your results can be matched to the employability matrix on page 73 of
the book.
Corporate responsibility
Business is an economic activity. The key elements of corporate responsibility (CR) are economic,
in terms of making a profit, and legal, in terms of obeying the law.
However, the key elements of corporate social responsibility (CSR) recognise that businesses
have responsibilities that go further than the profit motive in trading and service providing. In
examining its stakeholders, it would be clear to senior management that shareholders and profit
are not the only factors to consider as the business has wider accountabilities. Managers are not
employed by shareholders. Companies are formed of individuals and reflect ethical values. If the
company has created a negative impact by its operations, then the responsibility lies with that
company to acknowledge and address it. Companies also trade and operate inside societies
as part of the society not outside them and these responsibilities can mean helping to solve
important social problems, especially if their actions have contributed to the problem.
34
Section 2.3: Business ethics and corporate social responsibility
CSR versus the profit motive
In a shareholder model of business, arguments against CSR have focused on three objections.
1. The goals of shareholders are the dominant factors in decision making among all
stakeholders.
2. Managers do not have any expertise in solving social or environmental problems and these
are the concerns of others.
3. Companies may publish CSR objectives and involve themselves in publicity but in reality take
very little or no action and continue to pollute and to engage in poor labour practices.
ACTIVITY 2.6
Benefit corporations; discussion
Johnson et al. (2017) Chapter 5 ‘Stakeholders and governance’, p.155.
In this case study, you will analyse not-for-profit benefit corporations.
Answer the questions below.
1. What are the advantages and disadvantages of these corporations?
2. As a director of a benefit corporation, what would you argue when the survival of your
company depended on suspending expenditure on social objectives?
Conclusion
In this unit, you have analysed the connections and disconnections between corporate ethics
and obligations and understandings of corporate social responsibility and how these may be
in conflict with economic drivers in a company’s economic strategy. Using the shareholder
and stakeholder models of corporate governance, you have balanced the demands of other
stakeholders against the goals of investors or financiers and specifically in a not-for-profit
organisation. You have developed an understanding that organisations differ in the way they see
their position in society and that individual managers can have ethical dilemmas.
35
Unit 3: Strategy and strategic analysis
36
Introduction to Unit 3
Overview of the unit
In this unit you will develop an understanding of what a strategy is and how tools, techniques
and analytical business models are used in the strategic environment to help businesses
achieve their aims. There are several reasons for examining this process. First, to understand how
managers can develop deep business knowledge and identify key business drivers to inform
decisions within the company. Secondly, to understand how managers can develop a more open
management style that is responsive to different strategic models and can help an organisation
react to change and avoid rigid structures.
Week
8–9
10
11
Unit
3 Strategy and strategic
analysis
Section
3.1 Managing strategy
3.2 Mergers and acquisitions
3.3 Leadership and strategy
Learning outcomes
By the end of this unit and having completed the background reading and activities, you should
be able to:
analyse and discuss how managers make their choices regarding strategies and the
theoretical models that help these to be implemented successfully.
Unit 2: The external business
37
Section 3.1: Managing strategy
Learning outcomes
By the end of this section, and having completed the background reading and activities, you
should be able to:
understand how managers use strategy to determine the overall direction of the business
understand the importance of the role of senior management
understand how business models can be used to make a careful analysis of the business, its
capabilities and constraints.
Background reading
Boddy, D. Management: an introduction. (Harlow: Pearson, 2016) 7th edition
[ISBN 9781292088594] Chapter 8 ‘Managing strategy’.
Buchanan, D. and A. Huczynski Organisational behaviour. (Harlow: Pearson, 2019) 10th edition
[ISBN 9781292251578] pp.521–34.
Cole, G. and P. Kelly Management theory and practice. (Boston, MA: Cengage, 2020)
[ISBN 9781473769724] Chapter 8 ‘Managing strategy’.
Johnson, G. et al. Exploring strategy: text and cases. (Harlow: Pearson, 2017) 11th edition
[ISBN 9781292145129] Chapter 7 ‘Business strategies and models’.
Surridge, M. and A. Gillespie AQA A-level business. (London: Hodder Education, 2019)
[ISBN 9781510453340] Chapter 33 ‘Strategic direction’.
Introduction
Strategic organisation is the process of organising a business so that it is effective in reaching its
goals. An organisational strategy involves every action that the company takes to achieve both
short-term and long-term goals. All these actions make up a strategic plan.
Strategic management
This is the responsibility of managers. It is the management of an organisation’s resources
that are used to achieve its objectives. The process of strategic management is conducted in
the following way. First, senior and/or middle managers set objectives. Next, they analyse the
competitive environment and the internal organisation of the company and evaluate their
strategies to be sure that they can be implemented throughout the company and are aligned to
the desired goals.
A strategic plan requires managers to set targets. To monitor and evaluate how successful their
plan is, they need to:
clarify corporate objectives
set a target level of objectives.
Section 3.1: Managing strategy
The points to consider in a plan are whether the actions will improve:
profit potential
market share and sales
share price
future cost advantages.
Taking action in the market depends on timing, whether there is a window of opportunity and
whether the competitive market is favourable. Actions should be a good fit with the existing
corporate image and competencies of the organisation and ensure a long-term presence in the
market. Should the plan fail, it is important that there are low exit costs.
Figure 3.1: Seven elements of a strategic plan.
Understanding which markets to compete in
A SWOT analysis is a simple way of examining important issues that affect a business: strengths,
weakness, opportunities and threats.
It is low cost and can be used with PESTLE to get a good idea of risk. It can be used in marketing
objectives and helps managers to think in a structured way about the real situation in the
company and how to align future actions to company objectives. SWOT can be used in any size
of organisation and also by individuals who want to self-evaluate.
The results of this analysis can be used to devise strategies and create plans. The SWOT technique
is not without flaws and there are limitations to its use. For example, some strengths may also be
weaknesses when examined from a different position. The significance of the findings and the
solutions will still need to be identified by the management team. The analysis will only be as
accurate as the data supplied and if this is based on inaccurate figures and prejudiced opinion,
the interpretation may not be useful.
ACTIVITY 3.1
Surridge and Gillespie (2019) Chapter 25, p.339.
Business in focus: Toyota
Explain a way in which the information in this SWOT analysis might influence strategic
decision making by the management team at Toyota.
38
Section 3.1: Managing strategy
A strategic plan will also take into account the long-term direction of the business. The strategic
direction of the business refers to which markets to compete in and which products to offer.
The Ansoff matrix is a useful tool for managers creating a strategic plan. This diagram illustrates
the choices that managers might have.
Figure 3.2: Ansoff matrix.
Actions in the existing market, such as aiming to increase sales, are low risk as this is a known
risk. However, the risk increases if the managers decide to launch some new products in market
development. It may be that the existing market is saturated or stagnant and the management
team needs to consider new product development for their customers. This carries the risk of
failure and it may not be possible to research and develop in good time. Finally, the management
team may look to diversification. This would mean developing new products outside the existing
range to a new customer group. For example, the cosmetic and perfume company Estée Lauder
offered products to men; Disney cartoons moved into theme parks and products; Amazon has
moved into TV and films.
The Ansoff matrix is a useful tool but in sophisticated markets it may be difficult for managers to
determine what a new product is or what constitutes a new market.
Porter’s five forces theory
Michael Porter developed a theory of` ‘competitive advantage’, also known as industry analysis’,
which he used to analyse both horizontal threats to a company and vertical powers. He also
used it to assess current business environments and to help in the detailed analysis of sectors
in the economy, for example, catering, farming and electronics. Porter argued that it was vital
for businesses to understand the market in which they were competing in order to gain more
market share. He also pointed to the importance of business cycles.
The results of this kind of analysis often form part of a company’s business plan which can be
used to apply for finance or investment or to organise internal operations.
39
40
Section 3.1: Managing strategy
Figure 3.3: Porter’s five forces.
Competitive advantage
Porter developed two strategies that managers could use to position themselves in a market:
cost leadership
differentiation.
A cost leadership strategy means that the company has lower input costs, experiences
economies of scale, employs an experienced management team and makes savings in
production.
Differentiation strategy means the product is in some way unique or the company offers
services and advantages that other suppliers do not. If the higher price still covers the extra costs
involved, the company might profit over its rivals.
Competitive
scope
Porter emphasised that the competitive position of a company cannot be mixed. It is not
possible to be both low cost and differentiated and managers should decide their strategy and
then act forcefully to implement it.
Low cost
Differentiation
Broad target
Cost leadership
Differentiation
Narrow target
Cost focus
Differentiation focus
Table 3.1: Porter’s low-cost and differentiation strategies.
Section 3.1: Managing strategy
Porter’s low-cost and differentiation strategies
The strategy devised by management can change as a company tries to position itself in a
market or reposition itself. Sustainable competitive advantage is one of the keys to business
success. It is the force that enables a business to have greater focus, more sales, better profit
margins, and higher customer and staff retention than competitors.
The six factors of advantage that can enable a business to compete successfully are:
quality – better than competitors
price – lower than competitors or higher in a differentiated ‘niche’ market
location – closer to markets
selection – desirable products
service – high quality, tailored to customers
speed/turnaround – more efficient than competitors.
Sustainable advantage is a strategy that will last over time and can be protected. Products
can be patented to delay the entry of new producers. Good relationships with suppliers can
be deepened, preventing new entrants to the market from creating relationships. Business
reputation and a strong organisational culture can be protected, making it difficult for rival
competitors to establish themselves.
ACTIVITY 3.2
Boddy (2016) Chapter 8 ‘Managing strategy’, Activity 8.1 ‘Describing strategy’.
Answer the questions in this activity. Developing your knowledge of the current real-life
business world will help you to answer questions in Sections 2 and 3 of the examination
paper.
Conclusion
In this section you have looked at the choices that managers have in devising strategies to attain
competitive advantage and the business models that illustrate the tools for external and internal
analysis: SWOT analysis, Anzoff’s matrix and Porter’s theories of competitive advantage and
positioning. Strategic planning issues vary widely from sector to sector and it is important that
managers begin the process of planning with clear goals in mind.
41
Unit 2: The external business
42
Section 3.2: Mergers and acquisitions
Learning outcomes
By the end of this section, and having completed the background reading and activities, you
should be able to:
understand the motivations and drivers for expansion of an organisation
understand the reasons why managers choose a particular method to grow the company.
Background reading
Johnson, G., K. Scholes and R. Whittington Exploring corporate strategy. (Harlow: Pearson, 2008)
8th edition [ISBN 9780273711919] Chapter 11.
Morrison, J. The global business environment: towards sustainability? (London: Bloomsbury
Academic, 2020) 5th edition [ISBN 9781352008975] pp.302–4.
Surridge and Gillespie (2019) Chapter 35, pp.516–20.
Introduction
Organic development or encouraging a company to grow naturally using its own resources
is a common method of company growth. This ensures the independence of the company,
limits culture clash and limits the financial strain of having to find capital for purchase. Mergers,
acquisitions, joint ventures and franchises are alternative methods of growing a company.
In strategic terms, these actions carry high financial and reputational risk and it is vital that
managers fully consider the impact on the functional areas of the business: finance and the
need for capital to support the expansion; human resources and the need for recruitment and
training; operations and the need for more capacity and marketing and how to finance this. In
this section, you will evaluate the advantages and disadvantages of mergers, acquisitions, joint
ventures and franchises from a strategic point of view.
Motivation: strategic, financial and managerial
Merger refers to the mutual consolidation of two or more entities to form a new enterprise of
two equals. In a merger, one or more companies agree to integrate their operations into a single
entity in which there is shared ownership, control and profit. Horizontal integration refers to a
merger between companies in the same industry which consolidates their strength and power.
Mergers between institutions also take place in the public not-for-profit sphere. Globalisation
has made it more common for big companies to merge to dominate the market, and there are
sometimes concerns about the monopolistic or anticompetitive tendencies of these actions.
Vertical integration refers to a merger between businesses at different stages, for example a
supplier (backward) or a retailer of the product (forward). There are advantages to both these
strategies in security and control over resources and costs and control over pricing.
The purchase of an enterprise by another enterprise or investor is known as an acquisition. A
takeover requires the buyer to acquire the majority equity of the targeted company. This can be
done either by the purchase of the assets of the company or by the acquiring ownership over
Section 3.2: Mergers and acquisitions
51% of its paid-up share capital. This may be accepted voluntarily; if the offer is rejected, further
attempts to buy are called a hostile takeover.
Joint ventures are created by businesses collaborating on a mutually beneficial project but
retaining their independent status. Complementary skills can be used and there are fewer culture
clashes.
Franchises are created by the franchisor offering to sell the use of its name and business
processes or products to a buyer. In return, the franchisor will ask for a fee and a percentage of
the profits on sales. Franchises are common in the food and hospitality industry and agreements
can vary as to the responsibility for training and the use of the brand in marketing.
Strategic motivations for wanting to expand or grow a company can be categorised as a desire
for:
extension of the company reach – perhaps internationally in terms of location, products or
markets
consolidation by increasing scale, efficiency and market power in a merger
capabilities by gaining knowledge and enhancing technological understanding.
Financial motivation can include the following.
Financial efficiency is when a company with a strong balance sheet acquires or merges with a
company with a weak balance sheet.
Tax efficiency is achieved by reducing the combined tax burden. Tax bills may be transferable
to countries with lower rates.
Asset stripping involves selling off parts of the acquired company to maximise asset values
and then abandon the rest of the company.
Managerial motives may sometimes serve managerial self-interest:
The bandwagon effect comes into play when managers feel pressured to join the trend for
merger and acquisitions in their industry for fear of missing an advantage in a new growth sector.
Personal ambition is a desire to profit personally in the short term and give friends and
colleagues greater responsibility or better jobs.
ACTIVITY 3.3
Case study
Johnson et al. (2017) Chapter 11, Figure 11.1.
US hotelier and Chinese insurer contest ownership of Starwood
Answer questions 1 and 2 in the case study.
Targeting a company
Managers will consider two main criteria.
Strategic fit. Does the target firm strengthen or complement the acquiring company’s
strategy in aims, objectives and goals? Does it fit the vision and mission of the acquiring
company?
Organisational fit. Is there a match between the management practices and cultural
practices of the target and the acquiring firm?
43
Section 3.2: Mergers and acquisitions
The buyer’s curse
If the company is offered too little then the bid will be unsuccessful, but if the acquiring
company offers too much this may cause its financial planning to fail, which will affect profits.
Target choice is followed by valuation of the purchase and then negotiations as to the exact terms
and conditions of the merger or acquisition. This is followed by integration with the new business.
During this process a high degree of competency is required from manager at different levels,
especially if the process involves uncertainty or insecurity about relocations, careers and jobs.
ACTIVITY 3.4
Case study
Morrison (2020) pp.304–5.
Bayer takes over Monsanto: What are the implications?
Complete the mini case study.
Conclusion
This section has identified an issue that has implications for students of finance, law and
economics. Financial planning is vital for strategies that will expand the growth of a company
beyond the normal organic development. Monopolies and anti-trust legislation which may
be breached by mergers and acquisitions are governed by law, and economies of scale are a
familiar concept in economic planning for expansion. Takeovers can be friendly or hostile. The
section has pointed out there can be a mix of motivations in the choice to acquire another
company both personal and in the form of organisational strategy. The importance of strategic
fit and organisational fit in the selection of a company to buy or merge with has been strongly
indicated.
44
Unit 2: The external business
45
Section 3.3: Leadership and strategy
Learning outcomes
By the end of this section, and having completed the background reading and activities, you
should be able to:
demonstrate some of the key characteristics of leaders and their sources of power.
compare and contrast different styles of leadership
illustrate and assess the primary sources of power.
Background reading
Boddy (2016) Chapter 14 ‘Influencing’.
Cole and Kelly (2020) Chapter 6 ‘Leadership – theory and practice’.
Johnson et al. (2017) Chapter 15 ‘Leadership and strategic change’, p.470.
Introduction
In the previous sections, we illustrated the significance of planning and organising in business
management. In this section we will focus on the role of leadership.
Leadership is the process of influencing people, by demonstrating positive personal
attributes and behaviours, to achieve a common goal.
Chartered Institute of Personnel and Development (CIPD)
You may already suspect that leadership is found in all organisations. In essence, it is the driving
force behind organisational activities. It underpins decision-making and prioritises goals and
objectives. Here we define leadership as setting a new direction or vision for a group and
mobilising that group to achieve the goal (i.e. a leader is the spearhead for that new direction).
However, management controls or directs people and resources in a group according to
principles or values that have already been established. A manager depends more on a formal,
rational method, whereas a leader uses passion and stirs emotions. Having said that, leading can
happen in any part of the organisation where a new direction, motivation or achieving a new
goal is required. Leadership therefore has inherent transformational, inspirational and directional
attributes. Management is more about getting work completed with the aid of other people and
resources, usually using existing techniques and processes.
In this section we will discuss five characteristics that successful leaders display as well as some
recognised styles of leadership. We will further identify the primary sources of power drawn on
by leaders and managers, and examine the five primary responses to influence that managers
need to consider.
Section 3.3: Leadership and strategy
Leadership traits
Historically, research has tried to identify personal characteristics of leaders. Prominent figures are
studied, with the aim of discovering some aspects of their personality that could explain their
success. These characteristics – referred to as traits – are often relatively stable and are classified
in the following five categories. This is known as the ‘Big Five’ model.
Openness. People with this trait are creative, open-minded and intellectual.
Conscientiousness. This is a common characteristic of people who are dutiful, achievementoriented and self-disciplined.
Extraversion. This characteristic is typical of people who are identified as warm and positive.
Agreeableness. This is more common in people who are adapters, straightforward, compliant
and sympathetic.
Neuroticism. This behaviour can be described as reactive and is characterised by anxiousness,
depression and self-consciousness.
Conscientiousness was found to be one of the most consistent predictors of work outcomes.
This is mainly because people with this trait are dutiful, deal with tasks accurately and persist in
overcoming difficulties. They are therefore also in a much better position to be easily influenced
by supervisors to perform well. However, some have argued that certain traits have more
influence when they ‘fit’ the work situation. For example, it has been proposed that extroverts
are more influential in team-oriented firms, whereas conscientious individuals may be highly
influential when working in technical support units, where the job demands that staff work alone
to solve technical issues.
Styles of leadership
At the top level, leading and influencing skills have the most visible effects on strategy design
and execution. Managers at all levels have to exercise influence over others. The central question
is: how do leaders and managers exercise power and influence? At this point it is useful to
differentiate between leadership and management.
Based on the traits exhibited by leaders, researchers have identified two types of management,
namely transactional and transformational. A transactional leader treats leadership as an
exchange where they give their followers what they want only if they work in the way that the
leader desires. Such leaders influence their followers’ behaviours through striking a bargain.
For example, if followers behave in the way the leader desires, they are more likely to receive
rewards. In other words, transactional leaders are more likely to support the status quo by
rewarding the followers’ efforts and commitment. Transformational leaders, however, are those
who treat leadership as a way of increasing motivation and commitment in their followers by
constantly encouraging them to raise their aspirations by regularly performing higher ideals and
moral values. Transformational leaders often energise their followers by setting attractive goals,
reinforcing certain values and by allowing them to express new ideas.
One of the major differences between the two leadership styles is that transactional leaders
often motivate their followers to meet the leader’s expectation whereas transformational leaders
motivate their followers to exceed the leader’s expectations. It is worth noting that the two
leadership styles are not mutually exclusive. Managers or leaders, more often than not, may use
both styles, although they may not do so to the same extent.
The evidence on which type of leadership style is most effective in generating better
performance from followers is mixed. For example, researchers have argued that the ability of
transformational leaders to inspire and motivate others translates into business performance.
46
47
Section 3.3: Leadership and strategy
However, there is also the view that there is no universal trait that can guarantee enhanced
performance. Leaders have to use each of the leadership styles depending on the challenges of
particular settings: a trait considered to be valuable in one situation may be irrelevant in another.
Another influential perspective on leadership was developed by Blake and Mouton (1978). They
developed a managerial grid model which shows different combinations of concern for results
and concern for people.
High concern for people
Low concern for people
Accommodating
Sound
Status quo
Indifferent
Low concern
for results
Controlling
High concern
for results
Table 3.2: Leadership grid. (Source: Blake and Mouton, 1978)
In this grid, the horizontal scale refers to concern for results and the vertical scale relates to
concern for people.
Indifferent. At the lower left-hand corner is the indifferent style, indicating lower concern for
both results and people. These managers will not be actively involved and will do enough to
keep their position, but no more.
Accommodating. At the upper left-hand corner is the accommodating style which shows low
concern for results combined with a high concern for people. These managers will be caring
towards their subordinates, sometimes at the expense of objectives and plans that need to be
carried out.
Controlling. At the lower right-hand corner is the controlling style, which has high concern for
results combined with a low concern for people. These leaders will be driven by outcomes and
are focused on performance. They do not care about their subordinates but ensure that they are
able to make use of their skills to achieve their objectives.
Status quo. In the centre of the grid is the status quo. These managers achieve performance
from their staff by balancing the need to get results with paying reasonable attention to
employees’ needs. They do not like extreme positions (i.e. too much concern for business results
or too much care for employees) and try to maintain a balanced approach.
Sound. At the upper right-hand corner is the sound style which has a high concern for
results combined with a high concern for people. These managers do not view the need to
achieve results and to care for people as contradictory. They motivate people and encourage
performance by facilitating relationships of trust and respect in the workplace.
Another influential classification of leadership styles was developed by House (1996). House
considered that effective leaders are those who help their subordinates to identify the path
that enhances their performance. When subordinates can identify the paths that help them
to improve their performance, they are more likely to achieve the rewards they seek. House
identified four styles of leadership.
Directive. Directive leaders let their subordinates know what their expectations are and give
them specific guidance. They also direct their subordinates by asking them to follow certain
rules as well as procedures. This type of leader also schedules and coordinates the work of their
subordinates.
Section 3.3: Leadership and strategy
Supportive. This type of leader treats subordinates as equals, showing concern for their needs
and welfare. Creating a friendly environment in the workplace is also a key priority.
Achievement-oriented. These leaders set goals and targets for subordinates, often seeking
performance improvements. They also emphasise excellence in performance and expect their
subordinates to succeed.
Participative. Leaders with this leadership style often place emphasis on increasing the
participation of subordinates. Participative leaders often consult their subordinates and are more
likely to take their opinions into account.
House also suggested that no leadership style is superior and that a variety of factors (including
the work environment, particular challenges and, most importantly, the characteristics of
the subordinates) determine the level of successful outcomes. For example, House indicated
that a directive style of leadership may work best when the task at hand is ambiguous and
subordinates assigned to complete the task lack necessary experience. In such a situation House
also suggested that a participative form of leadership may work best when subordinates think
that they can perform without the help of their supervisor or support. In contrast, a supportive
leadership style may work best when the work is repetitive and physically unpleasant so that the
leader can join in with subordinates when needed.
Tannenbaum and Schmidt (1973), however, observed that leaders have different styles of
leadership that range from autocratic to democratic. They state that leaders can take positions
between these two extremes. Based on these positions, their leadership styles can either be
boss-centred, showing the level of authority used by the manager, or subordinate-centred, based
on the freedom given to subordinates. The more freedom the subordinates are given, the less
authority the manager has. As per the continuum of leadership behaviour of Tannenbaum and
Schmidt, the leadership styles chosen by a leader can depend on three forces.
1. The leader’s personality, which includes their values, preferences and ability to place
confidence in subordinates.
2. The perceived qualities of subordinates, which include their knowledge of the problem, need
for independence, tolerance of ambiguity and expectations of involvement.
3. The situation in which a leader and subordinates find themselves, which includes factors such
as the nature of the problem, the size and location of work groups, organisational norms and
the effectiveness of team working.
Clearly, leaders and managers have to influence others. When one person is attempting to
influence another, there are four likely responses: compliance, identification, internalisation and
resistance.
Compliance. This response to influence occurs when a person submits to the person who
is attempting to influence them, hoping that this relatively passive response will lead to a
favourable reaction. In other words, a person does what they are asked to do to avoid conflicts
and problems.
Identification. This response occurs when a person acts in a way requested by another to
identify with the person making the request. The main reason behind such a response is that the
individual aims to maintain a desired relationship with influencer and hence works as asked.
Internalisation. Internalisation refers to the response where a person not only agrees with the
influencer’s request but also makes a commitment to put in the effort required to complete a
task. The person internalises the values and reason for the request and agrees that the task needs
to be done. Such a response is the most successful outcome for the influencer, especially when a
particular task requires a high level of commitment.
48
Section 3.3: Leadership and strategy
Resistance. In this type of response, a person declines or actively refuses to carry out a task
requested by the influencer.
As we saw earlier, leaders use different types of skills to influence others. A critical question is:
where does a person’s power over another originate? In their influential study on power, French
and Raven (1959) identified five primary sources of power.
Legitimate power
This source of power originates from a person’s legitimate position or formal position (e.g. a
manager). The person’s formal position may give them the power to enact decisions such as
make capital expenditures, select a supplier, offer overtime to subordinates and even recruit staff.
Reward power
This is related to rewarding people who comply with specific requests or instructions. The
rewards can take several forms, ranging from financial to offering interesting work or time off.
Coercive power
Using this source of power, a person achieves compliance with arm’s-length measures such as
punishment or harm. Some of the coercive measures include demotions, threats, using bullying
language, reprimanding subordinates and even having a powerful physical presence.
Referent power
Also referred to a charismatic power, an individual possesses this because of their personality. For
example, a person may have certain characteristics that are attractive to people and which they
may identify with. This ultimately may give a charismatic person power.
Expertise power
This type of power comes from a person’s expertise or knowledge. For example, a person may be
an expert administrator, may know how an organisation operates, may have technical expertise
or may know how to do a particular task. Other people often acknowledge a person’s expertise
or knowledge about a particular task or job which, in turn, gives that person power. Furthermore,
people are more likely to follow the suggestions or guidance of a person who has the necessary
skills and expertise.
Each type of power can have a personal and positional source. When a source is personal, it comes
from the individual themselves – their characteristics, traits, skills and competencies. When a
source is positional, it is related to the individual’s role or level in the organisation’s hierarchy.
An individual’s ability to exert power or to influence the behaviour of others can come from
personal sources, which they may draw from positional sources. An individual with low access
to these sources of power may have less influence on the behaviour of others and vice versa.
However, it is worth noting that, to exert power or influence over others, people often continuously
focus on defending their sources of power while attempting to gain new sources of power.
49
Section 3.3: Leadership and strategy
Conclusion
In this section we learned the distinction between leadership and management, acknowledging
that leadership is about transformation, change and doing new things, possibly using different
ways of operating, whereas management is more about using existing techniques and processes
to get work done through leveraging people and resources. To be effective, leaders and
managers need to influence others. We identified ways in which people respond to attempts at
being influenced. We then traced a range of approaches to leadership. Earlier theories focused
on identifying the attributes and traits of a leader, whereas more modern theories acknowledge
a more contingency approach to leadership – that is, certain leadership styles will be more
effective in certain situations than others. Factors like the preferred leadership style of a leader,
nature of the task, time pressure, characteristics of the work group, the nature of the work
environment (e.g. culture) and rewards available sometimes make the choice of leadership style
for a particular situation quite difficult. We also looked at the sources of power for leaders and
managers, and the tactics they can use to influence people’s behaviour.
50
Unit
Unit 4:
4:The
The internal
internal business
business environment
environment
51 51
Introduction to Unit 4
Overview of the unit
Previous units have illustrated the significance of planning, organising and leading in
management. In this unit we will focus on the significance of management in guiding employees
to achieve particular objectives. It is important that management can identify whether these
objectives have been achieved. This not only highlights the importance of control processes but
also enables leadership to see whether particular activities are on track and to identify those that
need corrective action. This unit introduces the tools of control and performance measurement
systems, and the strategies that managers may adopt, and why.
Week
12
13
14
15/16
Unit
4 The internal
business
environment
Section
4.1 Organisational control and management by objectives
4.2 The supply chain and improving product quality
4.3 The HR function and recruitment
Learning outcomes
By the end of this unit, and having completed the background reading and activities, you should
be able to:
analyse and discuss ways by which businesses can pursue their aims and objectives with
effective management of resources, including human resource management, supplies and
quality control.
Background reading
Boddy, D. Management: an introduction. (Harlow: Pearson, 2016) 7th edition
[ISBN 9781292088594] Chapter 19.
Cole, G. and P. Kelly Management theory and practice. (Boston, MA: Cengage, 2020)
[ISBN 9781473769724] Chapter 19 ‘Control and performance measurement’.
Unit 4: The internal business environment
52
Section 4.1: Organisational control and
management by objectives
Learning outcomes
By the end of this section, and having completed the background reading and activities, you
should be able to:
identify key control functions in an organisation
evaluate the purpose and significance of the control functions
understand the process of management by objectives and the Balanced Scorecard.
Primary elements of the control function
This section will illustrate the four primary elements of the control function. It will then
demonstrate the significance of two management control systems used in organisations: the
balanced scorecard and management by objectives (MBO), including the four essential steps
of the MBO process. Activities will help you to deepen your understanding of best practices on
setting goals.
The control function aims to facilitate the achievement of objectives. Managers design control
systems and mechanisms for various organisational activities including accounting, finance and
marketing activities. Some systems of control may be formal, well defined and objective; others
may be informal, for example those based on cultural norms, informal supervision, trust and
relationships.
Systems of control incorporate four basic elements.
1. Setting targets. Targets provide direction and a level of performance to aim for. As
mentioned in Unit 2, targets need to be realistic. Targets set too high may be seen as
unattainable, but targets set too low may be seen as unworthy and meaningless. Some
aspects of performance may be objective and measured in precise quantifiable terms (e.g.
sales, profit, cost per product) and some can be more subjective (e.g. flexibility, reputation,
quality). For control of human performance at work, the general view is that goals should be
realistic and should be measured objectively, with the target performance and timeframe
stipulated clearly. The process of goal setting and control should be administratively feasible.
All controls should have regular feedback as performance progresses, to support corrective
action where necessary.
2. Measuring or tools of control. Performance needs to be measured against targets.
Managers can use various sources of information such as reports, information systems and
peer feedback as well as their own observation.
3. Comparing. Planned performance needs to be compared with actual performance to
identify discrepancies. Some variation may be acceptable, but managers need to know
precisely what range of variation is acceptable. As long as the variation is within the
acceptable range, the manager does not need to take any action. If the variation is significant,
the manager will need to determine the causes and decide on appropriate corrective action.
4. Correcting. The final stage of control is to act on significant variations to get performance
back on track. Managers may need to redesign some processes or allocate resources.
53
Section 4.1: Organisational control and management by objectives
There are five generic performance objectives: (a) quality, (b) speed, (c) dependability, (d)
flexibility and (e) cost. Each can be expressed in more detailed measures (e.g. number of
complaints, speed of delivery, response time) or more composite ones (e.g. customer satisfaction).
The more detailed measures tend to have more operational relevance; the more composite
measures have more strategic importance.
Table 4.1 outlines the five generic performance objectives and a range of generic and composite
performance measures.
Generic
measures
Composite
measures
Examples
of detailed
measures
Quality
Dependability
Speed
Customer satisfaction
Agility
Defects per
unit
Customer
returns
Delivery time
Lateness
Mean time
between
failures
Flexibility
Cost
Resilience
Range of
functions
Number of
options
Cost of raw
material
Labour cost
Table 4.1: Generic and composite performance measures.
(Source: adapted from Slack et al. (2013) p.607 in Boddy (2016) p.619, Table 19.4)
Managers need to keep a balance and be mindful of creating too many measures or not creating
enough. Too many performance measures may be difficult to manage and lead to a lack of focus
on the key performance indicators; too few may not provide the information and measurements
required. Managers aim to ensure that there is at least a clear link between the measures chosen
and their strategic objectives in various organisational functions (such as marketing, operations
and finance). Key performance indicators (KPIs) refer to the summarised set of the most
important measures of performance that inform managers how well an operation is achieving its
organisational goals.
ACTIVITY 4.1
In small groups or pairs, identify three examples of organisational controls. List three
reasons why the effective controls are important to organisations.
Case study
Boddy (2016) Chapter 19, pp.607, 615 and 618.
Answer the questions
Section 4.1: Organisational control and management by objectives
The balanced scorecard
The balanced scorecard (developed by two researchers at Harvard Business School, Kaplan
and Norton, in 1993) is a performance measurement tool that is widely used by organisations.
It provides a holistic framework that looks at four key areas contributing to organisational
performance (see Boddy 2016, p.620).
1. Customer perspective. This indicates whether the customer is getting what they are
seeking. The objective is to ensure that the customer is satisfied with the product or service.
The central question is: how do customers see us? Measures of performance are related
to customer satisfaction – for example, number of customer complaints. Note that relative
customer satisfaction (RCS) has been found to be one of the strongest single indicators of
how well an organisation is doing compared with its competitors.
2. Internal perspective. This refers to whether the company is doing the right things in the
right way. The objective is to ensure that the correct processes are established and are being
used efficiently. The central question is: what must we excel at? Measures depend on the
process. Examples in a manufacturing process include productivity, machine downtime,
speed of throughput and cost per unit produced.
3. Innovation and learning perspective. This indicates how intangible assets such as people’s
knowledge and information are supporting the organisation. X. The objective is to ensure
that the company is managing its intangible resource in an effective manner. Skills, talent
and knowhow can be measured with tools such as training and courses for development;
information performance can be assessed with measures such as data accuracy and IT faults.
The central question is: can we continue to improve and create value?
4. Financial perspective. This indicates how well the company is performing financially, so the
objective is to represent shareholder value. The measures of performance can be related to
profit, cost and revenue. The central question is: how do we look to shareholders?
Kaplan and Norton make clear that effective performance using the scorecard is measured by a
person, group or business unit reaching minimum acceptable targets in all four areas. There can
be no trade-offs; all four areas are important. For example, doing exceptionally well on learning
and growth cannot be traded against putting in a poor financial performance. It is also important
to observe the four primary features of effective control when devising a specific scorecard.
When a balanced scorecard proves ineffective, it is usually because some of these principles have
not been observed. Kaplan and Norton also indicate that the detailed goals need to be agreed
with those required to meet the performance targets and deadlines. Do not forget that controls
must also be motivational, and people are more likely to try to achieve performance levels when
they have agreed to them.
ACTIVITY 4.2
Read Boddy (2016) pp.619–24.
1. What four questions does a balanced scorecard seek to answer?
2. Figure 19.5 is a balanced scorecard for an airline (illustrative only). In pairs, discuss what
objectives and measures you would add if you were running your national airline.
3. Look at the NHS case study on pp.622–3 and answer the questions.
54
Section 4.1: Organisational control and management by objectives
Management by objectives (MBO)
Among the most popular methods of goal setting and controlling is management by objectives
(MBO). Companies use the MBO process to set mutually agreed goals between managers and
employee. Managers and employees work together and define goals for every department,
project and person, and use them to monitor progress and performance.
This method was first proposed by Peter Drucker in his book The Practice of Management (1954).
It focuses on turning company-wide objectives into specific objectives where an individual or a
group can assume responsibility. Thus it creates a mutually reinforcing hierarchy of goals. MBO
is useful not only in that it indicates how well individuals, teams or departments are performing,
but also, and significantly, it aims to direct people’s activities in the right direction, supporting
higher goals in the hierarchy of objectives.
Four major actions are needed for MBO to be successful.
1. Set goals. This is probably the most difficult step. Goal setting requires employees at all levels
(including senior management and top executives) to look beyond their day-to-day activities
and answer some questions. What is our organisation trying to accomplish? How are we
going to get there? As mentioned previously, a goal should be concrete, realistic and linked
to a specific timeframe. At the same time the MBO method emphasises the significance of
having a clear line of responsibility: knowing who is responsible for what. Employees (and
their managers) should have a clear understanding of the range of goals they are responsible
for. Goals should be jointly derived and mutually agreed between employees and supervisors,
so that employees become strongly committed to achieving their assigned goals. In the case
of teamwork, all team members must participate in setting goals.
2. Develop action plans. An action plan defines the course of action necessary to achieve
specified and agreed goals. Action plans are made for both individuals and departments. The
outcome is a hierarchy that connects goals from the lower level to the higher level of the
organisation. As mentioned in Section 2, however, managers and employees should not feel
locked into predefined behaviour and must be open to taking all steps necessary to produce
desired results. The essence of MBO is to make sure that goals are being achieved. When
things are not moving in the right direction, the action plan for the achievement of particular
goals can be amended. The ‘what’ stays the same; the ‘how’ can be changed.
3. Review progress. Reviewing progress periodically is important to make sure that goals are
functional and that progress is being made according to plan. The company can organise
periodic group reviews, but reviews can also take place informally between managers and
subordinates.
4. Appraise overall performance. The final step in MBO is to carefully examine whether
annual goals have been achieved both by individuals and departments. Employees should
be made aware of whether they are on the right track to fulfil their goals, whether they
have deviated or whether they have accomplished their goals(which is the desired state.
Success or failure to achieve certain goals can become part of the performance appraisal and
related decisions on salary increases, bonuses and other rewards. There is, however, a debate
about whether performance appraisal for learning purposes and performance appraisal
for rewards and promotion should be closely linked. The issue is the difficulty of getting
accurate information to help learning if the appraisal is inextricably linked with rewards. The
departmental appraisal and overall performance of the organisation will be used to shape
goals for the next year. This is how the MBO cycle repeats itself on an annual basis.
There are numerous benefits of the MBO process. Organisational goals are more likely to be
achieved when employees and managers agree on them and coordinate their efforts. Using a
performance measurement system such as MBO enables employees to see how their tasks, jobs
55
Section 4.1: Organisational control and management by objectives
and performance contribute to the business, generating a sense of ownership and commitment.
Furthermore, employees can understand better how their work is linked to other functions
within the organisation. Another crucial benefit of MBO is that it gives clarity on the connection
between lower- and higher-level goals. This enables managers to see clearly whether there is
alignment in the work at different organisational levels.
Problems with MBO arise when a company faces rapid change or operates in unstable
environments. When an organisation is challenged to change its goals every few months, there is
little time for action plans and appraisals to take effect. For MBO to be successful, it is important
that there is mutual trust between employees and their supervisors. Poor relationships between
employees and their managers will result in conflicts about the definitions of goals and action
plans. Sometimes it is difficult to measure the full range of performance, especially where the
context is changing and the level of difficulty varies.
Frequently, overemphasis on operational goals can harm the attainment of higher-level goals.
Furthermore, it is important to emphasise that MBO is a highly participative process. Without
the involvement of employees, MBO becomes a limited and one-sided exercise on behalf of
management. This leaves employees unmotivated and also excluded from understanding
organisational processes and actively contributing to them. Finally, if MBO becomes a process
of ticking boxes and filling out paperwork, rather than energising and motivating employees
to reach goals, it becomes a meaningless, largely bureaucratic exercise. The goal becomes to
complete the process successfully rather than to achieve the performance goals. One of the
complaints in large organisations is that the MBO process can be rolled out for every job, but not
all types of work are suited to MBO. Despite the mantra that what gets measured gets managed,
many aspects of work are not easily measured. And the downside might be that only what is
measured gets managed. In such cases employees may focus only on the measurements for
which they are rewarded. This indicates that MBO systems must be used realistically; they cannot
be used as comprehensively as managers might like.
ACTIVITY 4.3
Quiz
1. What are the four primary elements of the control function?
2. What is the significance of the balanced scorecard?
3. What is management by objectives (MBO)?
4. Outline the four essential steps of the MBO process.
5. Give two examples of the benefits and problems of MBO.
Conclusion
This section has looked at the primary features of effective control systems, and two systems
designed to focus an organisation and its members on higher goals and how and when they
can be achieved. Both the balanced scorecard and MBO approaches create a hierarchy of goals
and assume that humans are highly motivated by target setting. Both apply the principles of
goal setting, measurement and comparison – for example, targets against performance and
feedback for correction. The balanced scorecard is devised to focus attention on goals related
to many aspects of performance: financial, internal and external, and learning and growth. The
MBO process is less specific about the goals. Both approaches are aimed at aligning activity at
the lower and middle levels of an organisation with its strategic direction. Both are effective
when there are relatively few key performance indicators that can be achieved with little
challenge, agreed on by those who will perform the work, are clear and well communicated,
56
Section 4.1: Organisational control and management by objectives
and when there is regular feedback on performance, followed by correction where necessary. In
practice both systems must be used judiciously to mitigate the risks of goal displacement, overbureaucratic mechanisms, too many goals, and applying the systems and measurement to the
wrong kind of work or process.
57
Unit 4: The internal business environment
58
Section 4.2: The supply chain and
improving product quality
Learning outcomes
By the end of this section, and having completed the background reading and activities, you
should be able to:
describe and analyse the role of operations managers
outline the processes in supply chain management
understand the methods of product quality management.
Background reading
Cole and Kelly (2020) Chapter 37.
Surridge, M. and A. Gillespie AQA A-level business. (London: Hodder Education, 2019)
[ISBN 9781510453340] p.184–6.
Introduction
The operations manager is a crucial position in a company as this role determines how efficiently
the company can provide its goods and services to customers. The role relates directly to finance
in terms of keeping down costs and to HR in terms of the supply and training of the workforce.
Operational objectives must fit with the overall business objectives and must be part of
competitive strategy. Key objectives for operations managers are:
costs – the need to keep costs down to produce competitive goods
flexibility to cope with variations in demand
dependability – the company must be relied on to produce the goods on time and keep to
agreed timetables
speed of supply in industries where this is appropriate or in emergency public services
consistent quality to satisfy loyal customers. Quality issues are also the concern of marketing.
It can be seen how the role is connected to supply chain processes and the value chain. Other
pressures on operations include the need to minimise the carbon footprint of the company, the
recyclable possibilities of the product, health and safety concerns in production processes, and
the health and wellbeing of the workforce.
Operations management
The mission of the operations function is usually expressed in terms of profits, growth and
competitiveness. Operations management is the activity of managing the resources that are
devoted to the production and delivery of products and services. It provides the efficient
delivery of goods and services to customers through effective management, to maximise profit.
It is concerned with the design, management and improvement of the systems that create
the organisation’s goods and/or services. In other words, it concerns what happens inside an
organisation in terms of the production of goods. It is an important functional area as it plays a
crucial role in determining how well an organisation satisfies its customers. Most organisations’
Section 4.2: The supply chain and improving product quality
financial and human resources are invested in the activities involved in making products or
delivering services. Operations management is, therefore, critical to organisational success.
This role was created to respond to the demands of mass production and draws on the work
of scientific management theorists and manufacturers such as Ford in the USA. Given the
importance of this role it is necessary to organise, plan, coordinate and manage the function
so that it contributes to organisational goals. The operation strategy is the contribution the role
makes to the business and how operational objectives fit in with the overall objectives of the
company. These will vary according to the products or services supplied.
Operation planning: inputs
See Chapter 37, Figure 37.2 in Cole and Kelly (2020) for a description of the production and
operations process.
The operations process has five stages:
raw materials (the physical inputs to the process)
manufacturing
transportation
retail
disposal or recycling.
Operations managers take decisions that work on a feedback system. First, they set operational
objectives. Next, they analyse operational data to decide the existing situation in the company
and the level of output necessary to satisfy demand. Decisions will be taken on the range
of products the business wants to offer and how best to produce them. The results of these
decisions will be reviewed and this will determine whether any changes need to be made in the
operational objectives or decisions in future.
Supply chain management
Operations management is closely connected with supply chain management. This is concerned
with controlling what happens outside an organisation, which in turn affects company
performance. The operations strategy is the way in which the demands of the market are met by
the resource capabilities of the company. Operations managers can deal with unstable demand
by following either a make-to-order strategy, which provides confidence that stock is available
in advance, or a just-in-time strategy, which avoids the need to store finished goods. According
to Cole and Kelly (2020), ‘Supply chain management is the management of all activities that
facilitate the fulfilment of a customer order for a manufactured good to achieve satisfied
customers at reasonable cost.’
In Figure 4.2, the ‘downstream’ activities of inbound logistics describe the supply of goods or
material. ‘Upstream’ are the outbound logistics where the product is passed to storage facilities
and sales and marketing.
59
Section 4.2: The supply chain and improving product quality
Figure 4.2: Porter’s value chain diagram: example.
(Source: Wondershare, edrawsoft.com)
The operations strategy adds value to the business by reducing costs and enabling efficiency.
There are two different practices involved in supplying an organisation.
Production planning: Single-sourcing
This is the practice of obtaining all of one type of product, component or service from a single
supplier, rather than from multiple organisations. The advantage can be seen in building a good
relationship with a supplier and ensuring reliability and ensuring quality. The disadvantage is that
any disruptions to the supply at source will result in shortages and price rises.
Multi-sourcing
Obtaining the same type of product, component or service from more than one supplier in order
to maintain market bargaining power or continuity of supply is a way of avoiding disruption in
the chain. Fragmentation, where different components of the product or service are sourced
from more than one country, is a function of globalisation.
ACTIVITY 4.4
Discussion
Surridge and Gillespie (2019) Chapter 11, p.153.
Business in focus: Inditex
Analyse how Zara’s speed of response and flexibility helps it to compete. To what extent is
Uniqlo’s operational response better than Zara’s?
ACTIVITY 4.5
Writing
Surridge and Gillespie (2019) Chapter 11, p.155.
Business in focus: Tesla
Write two paragraphs in answer to the case study questions 1 and 2. Compare the answers
with your group.
60
Section 4.2: The supply chain and improving product quality
Operations objectives: product quality
Background reading
Boddy (2016) Chapter 18 ‘Managing operations and quality’.
Cole and Kelly (2020) Chapter 28 ‘Improving quality’.
Surridge and Gillespie (2019) pp.174–6.
Introduction
When setting operational objectives to fit in with the overall objectives of the company,
managers must take into account customers’ quality preferences. Quality can be defined in a
number of ways. According to the Corporate Finance Institute:
Quality management is the act of overseeing different activities and tasks within an
organisation to ensure that products and services offered, as well as the means used to
provide them, are consistent. It helps to achieve and maintain a desired level of quality
within the organisation.
The benefits of quality management are that it helps an organisation achieve greater consistency
in tasks and activities involved in the manufacturing products and providing services. Monitoring
quality can increase efficiency in processes, reduce waste and improve time management and
other resources.
The principles of quality management involve a customer focus. Strong leadership will engage
the workforce in this approach. Quality is best enhanced by using a process approach. The aim
of this is to design a continuous improvement process where there is evidence-based decision
making and the relationship between all the departments in a business are managed. To improve
product quality and thus competitive advantage, managers need to focus on three components:
product improvement
process improvement
people-based improvement.
In planning for quality assurance, control and improvement the manager will aim to:
identify and meet the customer’s needs and requirements
provide systems to meet or exceed the customer’s expectations
‘do things right’ first time
avoid failure (defects)
be consistent (reduce variation)
enhance continuous improvement through the notion of self-assessment and self-
improvement for the organisation and the individual
aim for quality in all that the organisation does.
There are four reasons for developing a company-wide attitude to quality:
to enable a business to improve its products, processes and systems on a continuous basis
and thus help to improve customer satisfaction
to enable organisations to market their business effectively and exploit new markets
to make it easier for businesses to integrate new employees who will be initiated into this part
of company policy. This will make expansion less risky.
61
Section 4.2: The supply chain and improving product quality
Various quality characteristics can be enhanced, as follows:
Functionality. This reflects how well the product or service does the job for which it was
intended – that is, whether it is fit for purpose.
Appearance. This refers to whether the product looks, feels or sounds appealing.
Reliability and durability. Some products are specifically designed to meet national or
international standards, for example the ISO 9001 Quality Management Systems benchmark,
which specifies consistency and performance over the life of the product and the ease with
which problems with the product or service can be resolved.
Service provision. This relates to the quality of advice or the professional response from
contact personnel.
Quality improvement management
Various techniques have been devised for business quality management. One of the most
popular is total quality management (TQM).
This means managing the entire organisation – not only operations and production but every
department, sales and marketing, finance and accounting, service and research – so that it excels
in all products and services that are important to the customer. There is a strong emphasis on the
organisational culture so that it is customer-centred, and customer experience and feedback are
of prime importance.
ACTIVITY 4.6
Discussion
In pairs, discuss how a business or organisation that you know well could improve the
quality of its products or operations.
Conclusion
In this section you have followed the stages in the production process and seen how production
is linked to the value chain in a business. You have analysed the importance of the key role of
the operations manager. You have identified the structure of the supply chain and seen how
effective supply chain management can contribute to the overall objectives of the company. This
unit has emphasised the importance of quality and quality management. Operations managers
will set specific targets for quality depending on the industry in which they work. Their aim is to
avoid failures and to achieve competitive advantage, and there are business processes such as
total quality management to ensure that the whole workforce is involved.
62
Unit 4: The internal business environment
63
Section 4.3: The HR function and
recruitment
Learning outcomes
By the end of this section, and having completed the background reading and activities, you
should be able to:
understand the need to set human resource objectives in a company
identify internal and external factors that impact on these objectives and decision making
understand the recruitment process.
Background reading
Boddy (2016) Chapter 11 ‘Human resource management’.
Cole and Kelly (2020) Chapter 14, Section 13 ‘HR’.
Surridge and Gillespie (2019) Chapter 20 ‘Setting HR objectives’ pp.259–62 and Chapter 23
‘Improving motivation and engagement’.
Introduction
Human resource management (HRM) refers to all processes concerned with managing people
in the workplace. HR, together with the finance, operations and marketing departments, is a key
function of business and is integrated into the decision-making process of all these areas. The
development aims of the HR department are to achieve competitive advantage by creating a
workforce of skilled and competent employees. In the recruitment process, the aim is to attract
the best applicants by offering chances for learning and development. HR may decide that
other incentives, such as good pension schemes, bonuses and holiday pay, are appropriate in a
competitive market and would help people to develop their potential within the company. There
is also a need for HR to aim to extend the skills base of the organisation through regular training
and continuing professional development (CPD) with a particular emphasis on multi-skills and
flexibility so that staff can be relocated to different departments where appropriate. HR also has
a role to play in performance management, in aiming to improve the performance of individual
employees and teams.
ACTIVITY 4.7
Case study 1
Boddy (2016) p.348.
BMW
In small groups, discuss the case questions 11.1.
Section 4.3: The HR function and recruitment
HR goals
The criteria for HR managers in developing their goals is that they need to be clearly aligned
to corporate goals. They need to be clearly stated and defined to ensure transparency. Human
resources represent a high cost in many organisations and HR managers need to be able to
provide a business case to show that their goals are not only positive for individuals but are also
based on the needs of the business and are stated in terms of realistic and achievable plans that
can be implemented and have a defined timeframe. In some companies, the workforce is seen
as a resource to be exploited or dispensed with in the pursuit of a low-cost operation. In other
organisations, the workforce is seen as a resource that is essential to long-term objectives and
success and that should be stabilised and retained.
Specific HR objectives depend on the industry. In manufacturing, labour productivity is a key
issue and an HR manager will focus on productivity aims. The location of the labour force and
flexibility in responding to expanding or seasonal demands for labour will require the manager
to set recruitment objectives. Different skills may be required from the workforce and the HR
manager needs to have training schemes in place. Training is a specifically job-related process
and forms a key part of HR strategy, especially in fields where developments in technology are
fast moving. HR managers may be keen to engage with the workforce to align their values to
corporate vision and mission. They may want to implement a quality programme or involve
them in plans for corporate social responsibility. In some companies, they may have a tradition of
workforce engagement and communication processes.
Internal influences on HR plans include the overall company objectives, whether for increased
profit, larger market share, reduced costs or possibly expansion. The company structure will also
influence HR strategy: it may be a centralised structure with decision making taken by senior
managers, or decentralised where more junior staff have autonomy and can develop their skills
and require less supervision. Centralised structures have fewer needs for delegation and can
speed decision making. However, this can put a strain on senior managers who have less ability
to focus on the long term. The leadership and management style of an organisation has a direct
impact on how HR managers can operate.
External influences on HR strategy, as you saw in Unit 2, include the wider political, economic,
social, technological, legal and environmental influences that apply to the company.
Performance management is a key responsibility of HR managers. This involves setting targets
for productivity, time management and other activities. However, there are many roles for which
statistical measurement of the output is not possible. Although employees may be engaged, in
that they take an active role in their job, they may not be motivated. Modern HR management
emphasises the need for a strategy for motivation of employees which in addition to efficiency
will provide:
work satisfaction
the desire to achieve a given organisational goal, which may be connected with the bonus or
reward system of the company.
There are a number of historical, psychological approaches to employee motivation which
originated in the USA in the 20th century including Maslow (1954), Taylor (1911) and Herzberg
(1959). Although none of these theories is perfect, it is clear that HR managers need to have a
strategy for motivation that is competitive within their own industry and organisation. In terms
of financial rewards, performance-related pay (PRP) has some support although the limitation is
that money is not the prime motivating factor for all employees. Profit sharing is another initiative
to engage employees in the fortunes of the company. Appraisal systems are also popular
motivation techniques in that they present the possibility for rewards for good performance but
also punish poor results and failure to achieve targets.
64
Section 4.3: The HR function and recruitment
Recruitment process
The recruitment process begins with job analysis. Job analysis will dictate the purpose of the
role, the key functions, the position of the role within the workforce, the expected outcomes,
the degree of autonomy of the role-holder, the communications and reporting strategy, and the
planned remuneration.
Job description (JD). The JD will describe the role and the desirable skills and experience
required. It is important that the JD does not include barriers to applicants. Advertising can
play a part in encouraging a diverse workforce by ensuring that vacancies are advertised
widely and not restricted to a limited range of media.
Shortlisting candidates. Decisions as to who to employ must be based on the candidate’s
ability to do the job advertised. Unfair discrimination can arise when the manager bases a
decision on incomplete evidence or prejudice on the groups to which applicants belong
to rather than on their ability to do the job. Discrimination tends to focus on gender, race,
disability and age. In many countries, these discriminations are addressed by law and the
HR manager needs to be aware of the need to demonstrate compliance. An HR objective
to improve diversity may also impact on organisational culture positively. One advantage of
a diverse workforce is that it may resemble the market in which the business is competing
and contribute this knowledge. It may also include members of the community where the
business is based, which would lead to a greater understanding of the market.
Interview process. This is normally based on written and oral assessment of the applicant.
Some companies may use psychometric testing (e.g. skills, knowledge, abilities, personality
traits, attitudes and job/academic potential), or require applicants to attend assessment
centres. Selecting the right applicant is important as recruitment is costly and making errors
delays the appointment and contribution of the new member of staff. Key concerns may
focus on the lack of appropriate training for managers who conduct interviews.
Organisational development and restructuring. This will also affect the HR strategy and
raise issues of redundancy or redeployment in the organisation.
Managing wellbeing in the workplace
In strategic human resource management (SHRM), managers produce an operational plan
or strategy to use human resources effectively and efficiently while paying attention to the
quality of life of the workforce. Promoting wellbeing can help prevent stress and create a
positive working environment. Good health and wellbeing can be a core enabler of employee
engagement and organisational performance.
ACTIVITY 4.8
Case study 2
Boddy (2016) p.356.
BMW
In small groups, discuss questions 11.4 and write a paragraph explaining your answers.
Share your work with other groups.
65
Section 4.3: The HR function and recruitment
Conclusion
In this section you have identified several areas of HR management: the need to integrate the
HR strategy with other areas of organisational planning and development; efficient resourcing;
recruitment and selection of high-quality staff; the need for staff training and learning; the value
of employee rewards, good employee relations and employee wellbeing. You have discussed
HR management as applied to the car industry in BMW. You have identified the need for a
fair recruitment process that ensures equal opportunities. You have investigated the various
methods of motivating a workforce both by financial and non-financial rewards.
66
Unit
Unit5:5:Making
Makingeffective
effectivemarketing
marketingdecisions
decisions
67 67
Introduction to Unit 5
Overview of the unit
Previous units have illustrated the significance of planning, organising, leading in management
and the role of HR. In this unit we will focus on the significance of marketing. This is the
process by which organisations set out to create and to satisfy existing customer needs. In
doing so they need to research customer markets carefully, advise on the creation of attractive
products, advise on setting prices and communicating the offer, and elicit feedback to find out
whether adjustments need to be made. Marketing is not confined to production or to forprofit organisations. The techniques of obtaining customer feedback in the form of interviews,
questionnaires, group discussion and social media input are also common to service providers
and not-for-profit organisations.
Week
17
Unit
5 Making effective marketing
decisions
18/19
Section
5.1 Customer segmentation, the marketing
mix and the product lifecycle
5.2 Building customer relationships
20
Learning outcomes
By the end of this unit, and having completed the background reading and activities, you should
be able to:
analyse and discuss ways by which businesses can pursue their aims and objectives with
effective management of marketing strategy.
Background reading
Boddy, D. Management: an introduction. (Harlow: Pearson, 2016) 7th edition
[ISBN 9781292088594] Chapter 8 ‘Managing marketing’.
Cole, G. and P. Kelly Management theory and practice. (Boston, MA: Cengage, 2020)
[ISBN 9781473769724] Chapter 31 ‘The marketing mix’.
Surridge, M. and A. Gillespie AQA A-level business (London: Hodder Education, 2019)
[ISBN 9781510453340] Chapter 9 ‘Segmentation, targeting and positioning’; Chapter 10
‘Using the marketing mix’.
Unit 5: Making effective marketing decisions
68
Section 5.1: Customer segmentation, the
marketing mix and the product lifecycle
Learning outcomes
By the end of this section, and having completed the background reading and activities, you
should be able to:
understand the use of customer and market segmentation in marketing strategy
identify how the marketing mix techniques can be used to increase profitability for a
company
identify the stages in the product lifecycle.
Customer segmentation
Introduction
The idea of market segmentation originates in marketing planning. It involves grouping
customers in segments based on perceived needs that apply to these segments. For example,
buyers may be grouped by age, social class, gender, culture, income, interests, lifestyles, and thus
may be expected to respond to a marketing initiative in a similar way.
These categories of buyers can be relied on to understand the value of the products offered
whereas other categories of buyers may not.
Market research activity provides important information about the customer base of a company,
which can be used to develop products and increase sales and market share or improve
competitive advantage. Managers are aiming to discover the key influences on demand that
will enable the company to prepare its sales strategy. Primary research collects new data and
secondary research uses the data already held to understand the target population in which the
market researcher is interested, for instance, a specific age group of customers. The data collected
can be quantitative in the volume of sales and specific sales and qualitative in providing
information on why people buy products and their opinions.
Technology provides opportunities to research product markets through market research
questionnaires and surveys and also through the presence of business on social media websites
and feedback mechanisms. The data collected can be comprehensive and is known as ‘big
data’ as it comes from a variety of sources, including customer reward cards and online buying
patterns. Typically, the researcher works on a sample of the target population to represent the
group; although this is cheaper than surveying large numbers it runs the risk of being unreliable
and unrepresentative. It is important to collect the right data so that the company can position
itself competitively in the market – for example mass marketing or niche marketing of its product
– and design effective marketing strategies.
Market segmentation, targeting and positioning (STP)
This model uses market research data in a process, which starts with identifying the market
segments – defined as groups of customers with similar needs and wants. Instead of treating
all the customers as having the same requirements, the marketing manager can get a better
understanding of the different segments. These segments can then be targeted individually with
selected products in marketing campaigns.
Section 5.1: Customer segmentation, the marketing mix and the product lifecycle
Segmentation of customers is a sophisticated process and is based on complex indicators which
include data gathered about the following.
Demography. This includes assumptions based on the characteristic needs and wants of age
groups, gender, the size of families and responsibilities in life.
Geographic factors. Where people live, their accommodation, the climate and technological
development can all influence buying patterns
Disposable income. This important segmentation describes the needs and wants of high- and
low-income groups, and is based on data from socioeconomic analysis of the characteristics of
occupational groups.
Buying behaviours. International buying behaviour depends on the culture of the country, the
distribution of public holidays and traditional buying patterns. Marketing in a new environment
requires extra research into the needs and wants of selected segments. Segmentation must be:
measurable
substantial
accessible
differentiated
actionable.
Targeting
Using this data, a business will target specific markets where there is a potential for sales and
profit and where the business can satisfy demand without incurring high costs. In evaluating
different targets, a company must look at:
the segment’s overall attractiveness
the company’s objectives
the size
growth of the target segment or market
profitability
economies of scale
long-term objectives, resources and competences.
Competitive positioning and risk
Market segmentation is based on market research. The value that is attached to this is based
on the need to avoid risk in promoting a product and to be sure that it will be competitive in
the chosen market. By determining which products have the best chance of gaining a share
of a target market and determining the best way to deliver the products to the market, the
clear objective is to minimise any form of risk. In doing so, the company can increase its overall
efficiency. This is achieved by focusing limited resources on efforts that produce the best return
on investment. To implement its marketing plans, the organisation must decide which position
to adopt to be correctly placed for the target customer.
Elements of competitive positioning are shown in Table 5.1.
Image
Value and power of its
brand
Price
High or low
Table 5.1: Competitive positioning.
Service
Level of service it
intends to offer
Product
Value of this product
to the target segment.
69
Section 5.1: Customer segmentation, the marketing mix and the product lifecycle
Competitive marketing strategies give the organisation a choice of four positions. A market
leader strategy will dominate the market share.
1. A market challenger will try to gain price advantage and a higher market share.
2. A market follower keeps a close eye on holding its competitive position in the market.
3. A niche market strategy is aimed at a small segment that is poorly served and seeks to
provide unique products and services.
Marketing mix
According to the Chartered Institute of Marketing:
Marketing is the management process responsible for identifying, anticipating and
satisfying customer requirements profitably.
This necessitates the creation of a strategic marketing plan which will integrate selected, targeted
marketing tactics with common goals and align them with overall company aims and strategy. If
there is a marketing department, the marketing manager will work closely with the HR, finance
and operations management departments. If there is no formal marketing department, the
marketing strategy must be known and common to all in the company. The management
process will require planning and analysis, resource allocation, control and investment in terms of
capital – both human capital and physical capital.
There are seven functions of marketing in the product development process.
1. Marketing information management: researching customers, trends and competitors.
2. Financing: acquiring money to set up and run a business.
3. Product or service management: obtaining, developing, maintaining and improving a
product or service.
4. Pricing: charging for goods and services to make a profit.
5. Promotion: informing, persuading and reminding customers about a product or service.
6. Selling: providing customers with goods and services.
7. Distribution: getting goods to customers.
Marketing mix and marketing techniques
A variety of techniques are used in the marketing of goods and these are known as the
‘marketing mix’ – product, price, place and promotion. Managers can choose and adapt these
approaches according to the condition of the market, the industry they work in and the goals
of the company. One marketing aim is to build customer value by achieving high customer
satisfaction. These customers will be loyal to the company for longer, are less price sensitive and
tend to buy more products and upgrades. They can be relied on to spread favourable reports
through social media, word of mouth and formal feedback.
Product
The product must be developed with a target customer segment in mind. This could be based
on factors such as customer demography, culture, income, interests, social class and gender. The
product itself must go through a feasibility process to be sure that the company will be able to
produce the numbers required. A prototype of the product is tested and improved before the
launch. Branding is an important feature of marketing with the aim of creating a brand equity,
a brand that is recognisable, has positive associations and attracts loyal customers. Packaging
can be another important consideration in marketing the product whether for attractiveness
in luxury goods or for practical use in everyday items, storage or the ease with which it can be
recycled. Mail order and online sales compete on the basis of after-sales service and white goods
70
Section 5.1: Customer segmentation, the marketing mix and the product lifecycle
products, electronics and cars provide warranties and guarantees. Many of these services are
governed by laws in the country of sale. The product portfolio, which contains all the company
products and services, must be monitored and improved to retain competitiveness.
Price
Market price, as we know from economics, is determined by supply and demand in a condition
of perfect competition. Price leadership will set a price that is below all other competitors.
This does not always reflect a strength and may be unsustainable and for short-term gain.
Penetration pricing may be a low price to gain initial entry to a new market. Premium pricing
is more common in luxury markets (e.g. wine, jewellery, high fashion, diamonds) to retain the
high status of the product or to reflect the technology required in production. Discounted prices
will generate increased sales in a very price sensitive market. Extension of payment periods
or extended credit terms can also influence pricing strategy. The cost of production must be
recouped by the price, but price can be influenced by other organisational decisions on target
markets, sales growth or profit maximisation.
Place
This describes where the products are distributed and needs to be appropriate for the pricing
decision. Traditionally, supermarkets will include lower priced items whereas exclusive designs
and high-end products are deliberately restricted to certain locations.
Promotion
Typical promotion activities include advertising, sales promotion, direct marketing and attempts
to engage the public around the brand or product by events, shows, celebrity endorsement,
special offers and by publishing positive customer feedback.
Service industries
Three more factors can be added to the traditional marketing mix to reflect the rise of service
industries in developed economies. Service industries, which are the third sector of the economy,
are not involved in manufacturing, and include, for example, banking, insurance, financial
management, retail, communications, professional services such as law and medicine, non-profit
organisations, hospitality and all government departments. In some countries, service industries
are the biggest sector of the economy and marketing in this sector includes people, physical
environment and process.
People and customer service. A customer is more likely to buy a service if the people
providing it are well trained, knowledgeable, reliable, friendly and efficient.
Physical environment. The presentation of the environment where a service is delivered is
important. In modern shopping malls the experience of buying is connected to demands for
leisure, catering and entertainment.
Process. This includes activities such as the speed of processing an order and the availability of
customised delivery times to accommodate lifestyles. Point-of-sale payment systems that rely on
efficient technology and security can improve sales.
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Section 5.1: Customer segmentation, the marketing mix and the product lifecycle
ACTIVITY 5.1
Discussion
In pairs, exchange information on two companies that you know. Identify:
a) how the marketing mix is used to promote the sales of their goods
b) the most significant part of the mix for these companies.
Report back to the group.
Surridge and Gillespie (2019) p.138 ‘Business in focus – location targeting’.
In pairs, discuss questions 1 and 2.
Management of product growth using the Boston Matrix
The Boston matrix (see Table 5.2) was designed to help managers monitor the success of products in
the market by measuring the percentage of sales they have and how fast these sales are growing.
Question mark
Star
This product is in a growing market but does
not have a high market share
This product has a high market share
Dog
Cash cow
This product is in a declining market and has a This product has a dominant share of the
low market share
market but low prospects for growth
Table 5.2: The Boston matrix.
This analysis provides the company with opportunities. The decision can be made to invest
more in the product to build the market share; or to continue to finance the product to hold its
competitive position; or to reduce investment and continue to receive revenue while using the
investment for another product; or to discontinue the product and use the resources elsewhere.
Product lifecycle theory
Use of this theory is another opportunity for the marketing manager to develop a long-term
sales strategy and to protect against losses.
Introductory stage: developing new products
In this stage, management will assess the potential of possible products. What is needed is
a product that is differentiated from the rest of the market in order to obtain competitive
advantage. Managers will also be examining the possibility of entering a new market and
whether a niche market would provide the ideal environment. A detailed forecast of likely
demand will be an essential part of the financial planning for any new enterprise. The target
product will ideally match the portfolio of existing products and will be feasible in terms of
existing manufacturing or development possibility using existing resources. If this is not the case
then the possibility of building or enhancing further infrastructure will need to be costed. Brand
development will be needed to make use of previous success. Managers will examine whether
the organisation has an existing skill set to create the product or where skills may be missing.
Launching a new product is the stage in which the risk is highest. This is because it takes time
to enter a given market and to attract the attention of the target customers. In this early launch
period, there is a slow sales growth and thus there is little or no profit. Costs remain high as there
are no economies of scale to take advantage of. In addition, promoting the product is expensive
and there are high distribution costs to cover.
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Section 5.1: Customer segmentation, the marketing mix and the product lifecycle
Growth
The growth stage is when the new product satisfies the market. Sales increase and thus so
do profits. Promotions and manufacturing costs may show signs of economies of scale. The
confidence that this creates means that new market segments may be entered and new
distribution channels of the product appear. New features may be added to the product and
consumers become increasingly knowledgeable about the product and its features. The quality
of the product improves in response to feedback and manufacturing control processes. The price
of the product stabilises or may decrease in response to the economies gained and increased
volume. However, new competitors may enter the market attracted by the profitability of the
product.
Maturity
This can be a long-lasting stage especially if the product has been popular with customers and
has been marketed skilfully. In this stage, there may be a slowdown in sales compared with
early stages. It may be necessary to increase the promotion of the product and to engage in
more research and development to support sales targets and maintain profitability. By this
stage, there may be a number of suppliers who are active in the market. Overcapacity may lead
to competition. There may also be substitute products that can compete in price with a longstanding product that has gained consumer acceptance.
Saturation
Here the market for the product is exhausted and profits shrink. Despite competitive strategies
on price, sales begin to fall.
Decline
Sales decline consistently and profits fall to zero. At this point, the product must be withdrawn
from the market before incurring losses.
ACTIVITY 5.2
Case study
Discussion and writing
Surridge and Gillespie (2019) ‘Case study: The Cambridge satchel’ pp.143–6.
Work in groups to answer the questions.
Conclusion
In this section, you have analysed how businesses use data that has been gathered through
customer research, to manage their customer demand by using segmentation, targeting of the
selected segment and positioning in the market for competitive advantage. You have investigated
how the marketing mix techniques are used to increase sales and profitability or to develop
other business strategies. You have seen how the product lifecycle theory influences investment
decisions in marketing planning. You have worked on case studies of companies that were
faced with the need to make marketing strategies. It is important to understand that although
marketing data is powerful it may not always reflect the reality of customer behaviour and
marketing managers need to be aware of the importance of avoiding risk and costly mistakes.
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Unit 5: Making effective marketing decisions
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Section 5.2: Information technology and
building customer relationships
Learning outcomes
By the end of this section, and having completed the background reading and activities, you
should be able to:
analyse the role of information systems in business management
outline the different types of management information systems and explain their
functionalities
understand the role of customer relationship management (CRM) and enterprise resource
planning (ERP) systems.
Background reading
Boddy (2016) Chapter 12.
Meyer, C. and A. Schwager ‘Understanding customer experience’, Harvard Business Review, 85(2)
2007, p.116.
Introduction
This section will focus on the role of information technology (IT) in contemporary organisations.
The amount of data that businesses have to deal with is rapidly expanding This may be partly
because our IT-enabled information systems are generating more data and information faster
than ever before, and partly because the massive processing capacity results in exponential data
and information growth. This section will give a brief introduction to information technology in
a business environment and examine the difference between data and information. It will then
illustrate and examine the most prominent types of information systems that organisations
use to support their activities and the key implications of information technology on customer
relationship management.
What is information technology?
Information technology (IT) refers to all hardware, software, telecommunications, database
and other technologies used to store, process and distribute information across people and
organisations. IT enables organisations to access and analyse data at a very fast rate and can also
generate information to improve decision making. Information technology has revolutionised
the way that business is being conducted and has opened innovative avenues for collaboration
across time and space. In the modern business context, IT supports a business information
system – a combination of technologies, people, knowledge, data and information that can
be used for business purposes. Information systems are part of the wider organisational IT
infrastructure, and include systems that are designed to collect, process, store and distribute
information. Information systems play a crucial role in supporting organisational activities.
Section 5.2: Information technology and building customer relationships
Data and information
Data can be illustrated by recorded descriptions of events, activities and transactions. This data
is raw, unanalysed facts, figures and events. Data can be displayed and distributed in numerous
forms such as text, a photograph or tables and may or may not convey relevant information.
Information, however, can be defined as a subset of data that has been processed in such a
way that it can be meaningful, informative and useful. Data can be seen as a record of events,
whereas information is data with purpose or use.
The production of reliable information depends both on the quality of data and the efficiency
and reliability of data-processing systems and techniques.
Characteristics of useful information
The performance of organisations relies heavily on high-quality information that will be used to
identify problems and develop strategic plans. The characteristics of useful information fall into
three broad categories.
1. Time. Information should be readily available and provided when needed. It should also be
up to date and related to the appropriate time period (past, present, future).
2. Content. Useful information does not contain errors or inaccuracies. It will be suited to the
user’s needs and will be concise and relevant.
3. Form. The information should be provided in a form that is easy to comprehend or process
and meets the user’s needs. Words, numbers, pictures or graphs should be used in the way
that most accurately represents information, and in the most comprehensive manner.
In summary, the characteristics of good information are that it is: valid, reliable, timely, fit-forpurpose, accessible, cost-effective, sufficiently accurate, relevant, has the right level of detail, from
a source in which the user has confidence, and the information is understandable by the user.
Types of information systems
Operations information systems. These are computer-based information systems that
support an organisation’s day-to-day operations. They contain all the information and
applications that employees use daily or on a regular basis. Operations information systems are
classified as follows:
a) Transaction processing systems. These record and process data related to transactions
between a firm and its customers and suppliers, salaries and information shared with
banks and tax authorities. They collect data as transactions occur and store it in a central
database. Managers use these systems to develop reports (daily, weekly, quarterly etc.) that
enable them to keep track of their financial transactions and their implications.
b) Process control systems. Managers need information about the quantity as well as
quality of the organisation’s production activities. As a result, they require systems that can
help not only control but also monitor physical processes. These process control systems
are used for the processing and control of variables describing the state of a physical
process, such as changes in temperature or pressure. These types of information systems
are widely used by companies such as petroleum refineries, food manufacturing pants,
power plants and others.
c) Office automation systems. These systems are used to create, process, store and
distribute relevant information. Office automation systems handle administrative
processes within organisations and provide input to other systems. To make structured
decisions, organisations frequently link this type of information system with process
control and transaction processing systems. The most common examples of office
automation systems include word documents and spreadsheets.
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Section 5.2: Information technology and building customer relationships
1. Management information systems (MIS). These are widely used to help managers in
making decisions. MIS are often supported by other operations information systems and
other sources. These systems provide accurate and up-to-date information on current
operations, enhancing their decision making. For example, a manager may need precise
information on the production activity of his firm, to make decisions about the purchases of
raw material, warehousing costs or employee schedules. MIS comprise different systems, as
follows.
a) Information reporting systems. These organise information in the form of pre-specified
reports that managers use in day-to-day decision-making. For example, information
reporting systems may generate reports on the monthly sales of an organisation, sales in
various geographic areas, sales per customer, or the frequency of purchase of certain raw
materials. The reports that these systems produce will depend on the organisation and its
requirements.
b) Decision support systems. These computer-based information systems use decision
models and specialised database models to help managers make decisions. Decision
support systems often draw data from operational systems. Organisations use these
systems to calculate the consequences of alternative courses of actions, during the
evaluation of various alternatives. For example, businesses use decision support systems to
analyse and evaluate the financial consequences of certain investments. Another example
is customer service centres that develop expert systems to help their employees decide
how to deal with certain customer requests.
c) Executive information systems. These facilitate the strategic information needs of the
top-level management. The main objective of this type of MIS is to provide executives or
top management with easy access to information related to an organisation’s strategy. This
information is related to the current status or projected trends of the specific important
factors. This information is provided in easy-to-understand formats and graphical patterns
for easy comprehension.
2. Customer relationship management (CRM) systems. Customer relationship
management systems are concerned with the creation and maintenance of the relationship
and business with customers. They track interactions between an organisation and its
customers, which are used by organisations to enhance their business relationships. These
systems hold various types of information related to sales, marketing and customer service
and enable organisations to create customer profiles. Organisations develop a better
understanding of their customers and their needs (including customers’ preferences and ways
of conducting business) and are therefore able to provide superior service and value.
3. Enterprise resource planning (ERP) systems. These are networked systems that enable
organisations to coordinate activities and decisions across many functions, departments
or business units. ERP systems handle various types of information, such as orders, sales,
distribution and receipt of payments. Among other things, ERP systems enable organisations
to:
a) integrate and use customer and financial information
b) standardise manufacturing processes and reduce inventory
c) improve access to information for management decisions across departments and
business units
d) facilitate real-time links of suppliers’ and customers’ systems with internal systems.
It is worth noting that ERP systems are highly complex and their implementation frequently
requires organisational changes. Therefore they are often considered high-risk investments
and their impact on performance varies.
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Section 5.2: Information technology and building customer relationships
ACTIVITY 5.3
Reading and writing
Read Boddy (2016) pp.383–92.
1. With examples, identify the differences between MIS, DSS and EIS.
2. Give two examples of e-business and assess how it functions to create value for the
firm and its customers.
Organisational implications of information technology
The use of information technology in organisations is crucial, as it may define the best ways
to compete. IT can further increase employee effectiveness, organisational efficiency, lead to
greater amounts of collaboration as well as organisational learning. Together with the benefits,
organisations should be vigilant about situations where the use of IT may produce overload.
Benefits of IT in business operations
The following paragraphs summarise the primary benefits of the use of IT as well as the
fundamental risk of information overload.
Increased employee effectiveness. Employees have access to a great deal of data and
information which improves their decision-making capabilities as well as the overall effectiveness
of their work. Geographical distance and differences in time zones dissolve, so employees
can work with their international counterparts around the clock. Instant access to data from
any place and at any time allows managers and employees to work more productively and
coordinate their activities.
Increased efficiency. The use of IT within an organisation can considerably increase the
efficiency of the organisation. This is mainly because IT not only speeds up work processes
but also helps to reduce costs. The use of IT may also eliminate administrative paperwork
and facilitate the automation of mundane tasks. There are countless examples of how IT has
helped organisations increase their efficiency. Banks, supermarkets and retailers are automating
their customer service with the use of IT in the form of chatbots. Interestingly, chatbots are
increasingly being used in providing healthcare services and medical advice. Organisations
around the world use IT tools (including social media) to understand their target markets better
and adjust their business models accordingly.
Collaboration. IT facilitates collaboration inside organisations, as employees are brought
together with colleagues across departments, business units and geographical regions.
Corporate networks and collaborative work systems (Skype for Business, Zoom, Microsoft Teams
etc.) enable employees to connect, share ideas and work in virtual teams. At the same time IT
facilitates collaboration with external stakeholders, including clients, suppliers, universities and
government bodies. Extranets or ERP systems connect organisations to clients, suppliers and
other external parties.
Better organisational learning. Organisations can easily get access to a wide variety of
data concerning industry, financial and demographic trends in their environments, enabling
managers to stay on top of the key issues affecting their business. Organisations are becoming
increasingly competent in analysing various types of data and generating useful information for
their business. Collaborative activities contribute to enhanced organisational learning. Last but
not least, IT helps break down physical boundaries, enabling people across the world to work
together and share ideas and knowledge, increasing the possibilities for organisational learning.
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Section 5.2: Information technology and building customer relationships
Drawbacks to the use of IT
Information overload. Although IT is the vehicle to access and analyse a variety of data, the
processing of too much data can be overwhelming for many organisations to handle. A major
problem associated with accessing more data is the challenge to sort out the valuable data
from the useless data. Organisations are increasingly being challenged to become competent in
filtering out unnecessary data and unusable information. In practice, managers need to ensure
that suppliers of data and information work closely with employees to identify the kinds of
questions that need to be answered and the type of data that is needed. Top executives should
be actively involved in setting limits on the critical questions or issues that need to be tackled.
ACTIVITY 5.4
Quiz
In groups, answer these questions:
1. What is information technology?
2. What is the difference between data and information?
3. What are the characteristics of useful information?
4. Give three examples of the role of operations information systems in a business setting.
5. Illustrate the major types of operations information systems and their primary
functions.
6. How does an enterprise resource planning (ERP) system work?
Conclusion
In this section you have learned how to distinguish between data, information and knowledge
and how information technology differs from information systems. In today’s fast-paced business
environment, organisations carry out an enormous amount of data and information processing.
Some companies have this activity as their core operation, that is taking in data, processing the
data and converting it into information for customers. Customers then use the information to
create knowledge and insight. Information systems, allied to the internet, are now fundamental
to organisations; they operate at different levels and purposeful different roles, whether to assist
senior management in decision making, business planning, customer relationship management,
or just carry out the high-volume processing of a bank. Clearly, organisations are now hugely
dependent on information systems and the But IT and systems and connectivity also bring a
number of risks to commercial activity that must be mitigated and overcome.
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