Business Management: Exam Notes
Unit 1: Business Organization and Environment
1.1 An Introduction to Business Management

Businesses combine human, physical and financial resources to produce goods and services.
o Goods: tangible items that are made, bought, or sold.
o Services: activities that other people will carry out for you.

Typical business is made up of:
o Production
o Marketing
o Finance
o Human resources

Human resources are the people needed to carry out the aims of the organization. Physical
resources include buildings, machinery, and raw materials. Financial resources include the
money needed to make the products or services.

There are 4 main sectors of business activities:
o The primary sector generally involves the acquisition of raw materials.
o The secondary sector involves processing raw materials, usually to create a product.
o The tertiary sector is where most service businesses sit.
o The quaternary sector provides services that focus on knowledge.

4 factors of production to be successful:
o Land
o Labour
o Capital
o Enterprise

Changing business activity:
o Industrialization – more secondary
o Deindustrialization – more tertiary

An entrepreneur is an individual who demonstrates enterprise and initiative to make a profit.

An intrapreneur is an individual employed by a large organization who demonstrates
entrepreneurial thinking in the development of new products or services.

Businesses are started for many reasons. Steps involved in starting up a business include:
1. Organizing the basics
2. Researching the market
3. Planning the new business
4. Establishing legal requirements
5. Raising the finance
6. Testing the market

A new business might face challenges at each stage. These can be both things within its
control and external factors beyond its control.

The elements of a business plan are: the idea, business organization, human resources,
finance, marketing, and operations.
o Executive summary
o Business details
o Marketing and sales strategy
o Management team and personal
o Setup
o Financial and projections

Reasons for starting up a business includes, rewards, independence, necessity, challenge,
interest, finding a gap and sharing an idea.
1.2 Types of Business Organization

Businesses in the private sector are owned and controlled by individuals or groups of
individuals. Owned privately to make profit.

Businesses in the public sector are owned and controlled by governmental authorities (e.g.,
hospitals, schools…)

Sole trader businesses are owned and managed by a single person. The individual is liable for
any debt the business might incur. Registering a business as a sole trader is relatively quick
and easy.
o The sole trader owns and runs the business.
o No legal distinction exists between the business and the sole trader.
o The finance is usually limited.
o The business is close to the customer.
o The sole trader has privacy and limited accountability.
o Registering the business is generally easy and inexpensive, and quick.

A partnership is a business owned and managed by more than one person. Decisions should
be made jointly, and all partners will be equally liable. Multiple partners can bring different
kinds of expertise and may also bring extra sources of finance.

Companies and corporations have multiple owners – usually shareholders. When a business
has registered as a company or corporation, the owners themselves are legally separate from
the business, so they are no longer liable for debt.
o Private limited company

LTD Co’s = shareholders (family/friends)

Benefits:


limited liability = only lose money invested

incorporated = can’t be personally sued

more $ put in.
limitations:

Cost to register.

Lose control.

Profits shared.
o Public limited company

PLC’s = shares sold on stock exchange

Benefits:



incorporated

limited liability

access to $$$
limitations:

Show accounts.

Takeover

Slow to change.
For-profit social enterprises have a social mission, but still aim to make a profit.

A social mission is the main aim of non-profit social enterprises. Any money made is called
‘surpluses. Most charities fall into this category.

Social enterprises
o Co-operations operate in many forms. The key is that all workers share the
responsibility and profits.
o They aim to offer services / products as close to cost price as possible.

Micro-financiers
o Are now a popular way for low-income people to receive a loan for business
activities.
o Make people self-sufficient, charity work given more sustainable.

Public-Private Partnership (PPP)
o A mix of both private and public sector. It often involves a social aim. For example, a
school or “clean energy” project.

Non-profit social enterprise (NPO)
o Aims to make surplus (not profit) which is used for social purposes. E.g., Red Cross,
Oxfam.

Non-government organizations (NGOs)
o Will support a cause and are independent of governmental control.
o Save the world without government intervention, do what the government is
incapable of. E.g., greenpeace.

Charities
o Make money to support social cause.
o May be a mixture of both. They create surplus to help social causes and may not have
government control.
1.3 Organizational Objectives.

A business must communicate its purpose values and identities and its stakeholders.

A vision statement should encapsulate what the business hopes to be in the future. It should
remain constant.

A mission statement describes what the business is doing now. it might need to be modified
as time passes. It describes the broad aims of a company, what they believe in, what the
business currently does.

Vision statements are often vague, so companies can go further by making mission
statements. Motivates employees by giving them a sense of purpose and direction.

Aims are long-term goals.

Objectives are short-medium-term goals which allow a business to meet its aims. Objectives
should be SMART (specific, measurable, achievable, relevant, and time-specific).

A business strategy is an over-arching plan of objectives which will enable aims to be met.

Business tactics are the actions and objectives which allow a business to implement strategy.

Strategic objectives:
o A strategy is a plan for the business.
o Strategic objectives = long term
o Tactical objectives = medium term
o Operational objectives = short term

Ethical objectives are goals that a business sets for itself based on established codes of
behaviour. It provides a social or environmental benefit. It can help gain,
o Customer loyalty.
o Brand image.
o Motivate staff.
o Increase profit.

Corporate social responsibility (CSR) is the concept that all businesses have an obligation to
operate in a way that will have a positive impact on society. A company committed to CSR is
intending to act as a good “corporate citizen”: in all matters acting responsibly and in a
manner that benefits society as a whole. A business committed to CSR not only obeys laws
but also interacts responsibly and honestly with customers and reduces its impact on the
environment. By recognizing CSR, a business is more than likely to have a sustainable
business model. By building strong links with society and the environment, the business is
more likely to be a valued part of the society.

A SWOT analysis is a tool used in business planning. It involves analysing inside the
business and externally, the:
o Strengths: what is the business good at doing?
o Weaknesses: what does it need to improve?
o Opportunities: where might future growth come from?
o Threats: what problems might they face?

The Ansoff Matrix is used to plan business growth. It considers new and existing products
and new and existing markets to identify opportunities. It allows a business to identify areas
of
o Market penetration: occurs when a business grows by increasing its market share,
selling more of its existing products in the same market.
o Market development: expands the market by looking for new markets or new market
segments in the existing market.
o Product development: the development of new products for the existing market
o Diversification: introducing a new product into a new market – a business combines
two elements of risk, lack of familiarity and experience in the new market and the
untestedness of any new product.
1.4 Stakeholders

Stakeholders are individuals or groups who have a direct interest in the business.

Internal stakeholders are individuals or groups that work within the business, such as,
o Owners: make a profit above all else.
o Employees: interested in job security, decent pay and working conditions.
o Managers: keep employees motivated and making a good wage.
o Shareholders: focus on return on investment, interested in profit.

External stakeholders are individuals or groups outside the business, such as,
o Customers: high quality and low cost.
o Suppliers: becoming main suppliers.
o Local community: impact on local area.
o Government: to collect taxes.
o Banks: lend money for investment.
o Trade unions: keep employees safe.

The interest of the various stakeholders will differ. Interests might include return on
investment, the impact on the local area, working conditions and the quality of the products
produced.

A large business can make use of a business tool called stakeholder mapping. It allows a
business with complicated stakeholder interests to analyze how best to meet various
stakeholder needs.
1.5 The External Environment

A STEEPLE analysis is a way of evaluating all the external factors which might influence
the success of a business.

The factors are: social, technological, economic, ethical, political, legal and ecological.

If any of the factors change, a business may need to adapt its strategy.

Social influences include (changes in society):
o Lifestyles
o Social mobility
o Demographics
o Education
o Fashion or tastes

Technological influences include (use of tools, machines, and science in a business):
o The economic or business cycle
o The rate of economic growth
o The rate of inflation
o The rate of unemployment
o The exchange rate
o The interest rate

Ethical influences include (moral issues of a business):
o Corruption
o Transparency
o Codes of business behaviour
o Fair trade

Political influence include (how the government protects business interests):
o Political stability
o Trade policies
o Regional policies
o Lobbying or electioneering

Legal influences include (changes to the rules and regulations affecting a business):
o Regulations
o Employment laws
o Health and safety legislation
o Competition laws.

Ecological influences include (the role a business plays in affecting the environment):
o Depletion of renewable energy
o Global warming
o Organic farming
o Carbon footprint
1.6 Growth and Evolution

Some businesses can offer more high-end products aimed at niche markets. Also, some
markets will always remain small.

An economy of scale occurs when the cost of a business goes down as the business grows.
The bigger the company gets, the cheaper the rate will be. For example,
o Purchasing – bulk
o Managerial – specialized staff
o Financial – lower rates
o Technological – advanced ICT
o Consumers – near to customers
o Employees – skilled workers available

The reverse of this is a diseconomy of scale, where the cost goes up as the business gets
larger, i.e., the business becomes less efficient.
o Too many workers = difficult to control decisions take time, unmotivated staff.

Small organizations might benefit form greater focus, greater cachet and motivation,
competitive advantage, and less competition.

Large organization might benefit from economies of scale, market-leader status, and high
market share.

Internal (or organic) growth is the gradual expansion of a business from within.
o Increase market share.
o Increase sales.

External growth can be quicker and riskier. A business might experience this sort of growth
through a,
o Merger: occurs when 2 businesses agree to join together.
o Takeover: when a business ‘swallows’ up another business by buying its shares, such
as PLCs.
o Joint ventures: occur when 2 or more companies set up a business which they run
jointly for a particular object.
o Strategic alliance: similar to joint venture but usually for a period of time.

Horizontal integration
o When 2 competitors join together – they make the same product at the same stage of
the production chain. E.g., Pepsi and Coca Cola.

Forward Vertical Integration
o When a business takes over a customer, for example, Sony buying an electronic
retailer/store. This will give Sony greater access to customers.

Backward vertical integration
o When a business joins with a supplier, e.g., if Coca Cola took over the business which
provide it with cocoa beans or sugar.

Lateral/conglomerate integration
o When 2 businesses with nothing in common join together, for example, if SCIS took
over Starbucks.

Franchises (external growth)
o A franchise is an agreement that allows you as a franchisee to buy the rights to sell
the product of an established business brand. (franchisor).
o Right to sell other business goods. E.g., McDonalds, KFC/
o Franchisor = (big guy) own business.
o Franchisee = (little guy) buys business
o Benefits:

Established brand (quick access to wider markets)

Training given.

Less chance of failure.
o Limitations:

No decisions

Pay royalty.

Large investment.

Can see image suffer if a franchise fails or does not perform properly.

A brand is a name given to a product/service which makes it different from the competition.

Multinational companies (MNCs) operate in more than one country.
o Due to improved communication and less restricting regulations, the MNCs, has
grown rapidly in recent years.
o Positive effects on the countries the MNC operates in:

Economic growth.

New ideas.

Skill transfer.

More choice of products.

Short-term infrastructure projects.
o Negative effects on the countries the MNC operates in:

Profits being repatriated.

Loss of cultural identity.

Brain drains.

Loss of market share.

Short-term plans.
1.7 Organizational Planning Tools (HL Only)

Fishbone diagram: allows businesses to look closely at problems and identify underlying
causes.
o Highly flexible and simple to understand however, they can lead to arguments as they
show problems not solutions.
o Benefits:

Motivating as they it brings people together to discuss problems.

Flexible, applicable to virtually any situation.

Simple and visually attractive.

Can highlight many factors before singling out the most significant.
o Limitations:

May show causes of problem but not show specific solution.

Can be divisive and lead to arguments. Requires knowledge and honesty to
justify assertions.


Begins the process of fixing a problem and requires a follow-up process.
Decision trees: provides a clear visual structure to help managers simplify complex decisions
and identify the most appropriate outcome.
o Benefits:

Gives a clear answer to a complex decision.

Is flexible and can be applied to many situations.

Is simple and visually attractive.
o Limitations:

Is based on estimates of both outcomes and probabilities of outcomes.

Is based on quantitative data and so ignore qualitative issues.

Can be difficult to draw for highly complex decisions with multiple outcomes
and interrelated choices.

Force field analysis: used to help businesses manage change. It focuses on the factors which
might influence the planned change.
o Driving factors (positive) vs. Restraining factor (negative)
o There are always pros and cons to a decision. The secret is deciding whether the pros
outweigh the cons BEFORE you take action. Force field analysis lists and scores the
factors for and against a decision, total the scores and see which is the best (score out
of 5).
o Benefits

Gives a clear answer to a difficult decision.

Is flexible and be applied to many situations,

Is simple and visually attractive.
o Limitations:


Involves interpretation in determining which factors to include.

Is based on estimates of the value of each individual factor.

Is based on mainly qualitative data. Not qualitative issues.
Gantt charts: used to plan complex projects and schedules. They enable businesses to allocate
resources appropriately and give a clear overview of the entire workflow.
o Benefits:

Gives a clear picture of current progress of the various tasks.

Gives a clear picture of the overall project.

Is flexible and can be applied to many situations.

Is simple and visually attractive.

Allows managers to plan the use of resources to complete the project in the
most efficient manner.
o Limitations:

Is based on estimates of the timings of each task.

Is difficult to follow when applied to very complex projects.

Is based on mainly qualitative data. Not qualitative data (such as costs).

Cannot separate out interdependent tasks.

Places a premium on meeting deadlines (milestones), which may lead to
erosion of the quality of the work.
Unit 2: Human Resource Management
2.1 The Functions and Evolution of Human Resource Management.

Human resource management
o HRM is critical to any business. A successful HRM department’s job is to endure
they have the right type of employee who is also working effectively.
o Human resource planning is a strategy to ensure that employees are selected, used and
developed in the most effective way.

Labor turnover is the movement of employees in and out of a business over a given period of
time.
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑎𝑓𝑓 𝑙𝑒𝑎𝑣𝑖𝑛𝑔 𝑜𝑣𝑒𝑟 𝑎 𝑦𝑒𝑎𝑟
o 𝑙𝑎𝑏𝑜𝑟 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑎𝑓𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟 × 100

Human resource planning can be influenced by both internal factors and external factors.
o Internal factors:

Changes in business organization

Changes in labor relations

Changes in business strategy

Changes in business finance.
o External factors:


Technological change

Government regulations

Demographic change

Social trends

The state of the economy

Change in education.

Labor mobility.
The most common steps in the process of recruitment are identification, application, and
selection.
1. Identification – identify business needs.
o Job description: details of job, what you must do.
o Job advertisement: include this information and payment details.
2. Application – a business can advertise a post using either internal or external methods.
o Internal: Notice boards, company website

Benefits
 cheaper, quicker, more efficient as the HR department will know
precisely what the business requires.

Limitations:
 limits the pool of potential candidates; agencies may have plenty
more applicants in their database.
 May cause a lack of focus in other areas/ may not cater for
specialist skills, in contrast with an agency, for example that
specializes in administrative vacancies.
o External: job center, agencies, newspaper.
3. Selection – a business now needs to select from a choice of application. It may use,
o CV selection (shortlisting)
o Interviews
o Testing (skills and aptitude)

Employees who stay with the company are entitled to receive training. This helps improve
their motivation and productivity.
o Improve the quality of the work.
o Lead to greater productivity.
o Motivate employees.
o Reduce labor turnover.

Induction – this is given to new employees. Information to first day needs. A good induction
program helps to endure that the new employees settle quickly so that they can begin work
right away.
o Limitations: limited expertise.

On-the-job training takes place as part of day-to-day work. it is usually led by an
experienced employee who can act as a mentor to the trainee.

Off-the-job training allows employees time off work to attend external training.
o Limitations: time consuming, expensive, business will not make any money from the
person that is sent away.

Cognitive training – not focused on one particular area but on developing overall skills.
Helps employees develop their thinking and processing skills so they can make quicker and
more effective decisions.

Behavioral training – helps employees develop skills such as customer service.
Interpersonal skills (how they work with others) and intrapersonal skills (how they manage
emotions). Useful for employees working in project trams and positions of leadership by
concentrating on, for example, emotional intelligence of stress management.

Appraisals – allow employees and their employers to review performance during a given
timeframe. It can help motivate workers and let them learn from mistakes. However, they can
be costly and time-consuming to carry out. (Cost the business money because it takes
employees away from what they should be doing.) the main methods are,
o Formative – overall feedback on a worker’s performance over a period of time.
o Summative – measure standard or targets workers must achieve.
o 360 degree – workers can receive feedback from other workers or even customers.
o Self-appraisal – workers will reflect on their own performance.

Good appraisal systems tend to have certain characteristics,
o They are not directly linked to pay or promotion.
o Appraisal systems are separate from disciplinary systems.
o Good appraisal systems require minimal paperwork.
o Appraisals provide an honest exchange of view.

A business will have procedures to deal with employees leaving. It is important as replacing
workers is expensive and could make a business liable to court if a worker is unfairly
dismissed. Employees may leave a business due to,
o Termination – employees decide to leave a post at the end of a contract for personal
reasons, e.g., career change or family.
o Dismissal – when an employee breaks the terms of their contract, e.g., being late,
theft…
o Redundancy – this happens when a business no longer requires a worker for many
reasons. E.g., from in demand, recession, bankruptcy…

As work practices and patterns have changed, businesses have had to adopt their HR
strategies.

Outsourcing occurs when organizations contract other organizations to carry out certain
functions, allowing them to concentrate on core activities.
o Benefits: lower production costs. Although the business would have to pay
subcontractors to complete the work, the subcontractors are likely to be specialists in
either manufacturing or distribution. They probably have fewer insufficiencies and
greater productivity in these areas of expertise and so would most likely charge less
than the cost of doing the work by themselves.

Offshoring is when functions are outsourced to another country, perhaps because labor is
cheaper, or production is quicker.
2.2 Organizational Structure

Delegation occurs when a manger gives authority for a particular decision to someone else.
The manager still holds responsibility for the outcome of that decision.

The span of control is how many employees are directly under the authority of a particular
manager.

A level of hierarchy is a level of responsibility within a business.

The chain of command is the formal route through which a decision must travel. Usually,
decisions are made at the highest level and are communicated down.

Bureaucracy refers to rules and procedures within an organization.

Centralization occurs when the majority of decisions are made by a small group of
individuals in a senior position with the business.

Decentralization is found where decisions are made by middle managers. Senior
management is likely to retain control of key strategic decisions.

De-layering occurs when a business reduces the levels of hierarchy by removing layers of
management.

A flat organizational structure has few levels of hierarchy and tends to have a wide span of
control. Decision making is decentralized.
o 1 person has authority and responsibility.

Benefits:
 Fast decision
 Better control
 Fast communication

Limitations:
 Stress of main person
 Few new ideas

A tall structure has many levels of hierarchy and narrow spans of control leadership tends to
be autocratic and decision making is centralized.
o Many levels of hierarchy.

Benefits:
 Promotion/motivation
 Specialized workers
 Faster decisions

Limitations:
 Lose control.
 More mistakes
 Slow communication.

Organizational structures can be organized by hierarchy, by function, by product or by
region.
2.3 Leadership and Management

A leader is someone who can motivate and inspire their workers to achieve a company’s
aims and objectives.

A leader will often employ a manager to help achieve these aims. A manager is responsible
for the planning of day-to-day operations, and to organize and control the workers in the
business.

Key functions of management
o Planning
o Organizing
o Commanding
o Coordinating
o Controlling

Autocratic leadership
o When a leader makes all business decisions by themselves. It’s better for unskilled
jobs or dealing with emergencies. However, you have to monitor workers who are
often demotivated (unwilling to work).
o Benefits:

Lines of authority are clear, and decisions can be made quickly.
o Limitations:

Employees tend not to develop the ability to manage their own work or to
make decision.

Demotivates employees as they are not empowered to make autonomous
decisions.

Democratic leadership
o When a leader encourages workers to join in with decision making. They will discuss
and listen to ideas. These leaders are good communicators and can increase the
motivation and confidence of staff. Most effective when used with skilled, freethinking, and experienced subordinates who enjoy the relationship and chaos that can
result from belonging at a highly effective team.
o Benefits;

Can produce results in terms of quantity, since many employees like the trust,
cooperation, and sense of belonging that do with it.
o Limitations:

Requires a positive “chemistry” in the team. If this characteristic is absent, no
amount of democracy can make the style work.

Laissez-faire leadership
o Means to “leave alone”. This type of leader allows employees greater freedom in how
they carry out their work. employers can set their own goals and manage problems as
they seem fit.
o Benefits:

Many employees enjoy the freedom it provides and it can foster creativity and
innovation.
o Limitations:

The individual interest of the employees may diverse too far from the focus of
the organization, and the organization can veer away from its visions and
aims.

May be unnerving, as this type of leader doesn’t give much guidance and may
not provide much feedback.

Situational leadership
o Uses the idea that different situations require different types of leadership. It will
require a business to consider the nature of its employees. E.g., are they unskilled vs.
highly trained.

External effects n leadership style
o A successful leader will also need to consider various ethical or cultural differences
when making decisions.

Ethical dilemma – closing a factory to relocate and reduce costs, making
people redundant.

Cultural dilemma – Asian vs. Western attitudes towards how you address your
staff.
2.4 Motivation

Motivation looks at the reasons for people’s actions, desire and needs. It can be defined as
the behavior that causes a person to act in a certain way.

Types of motivation
o Intrinsic motivation – refers to the idea that someone gets satisfaction from the work
itself, they don’t need reward.
o Extrinsic motivation – refers to people that work because of the benefits or rewards
given.

Fredrick Winslow Taylor believed that the standardization of working practices and
enforced adoption of the most efficient ways of working were the key to ensuring maximum
output in the shortest time. Time and piece rate. Money is the main motivator.

Abraham Maslow argued that human needs can be categorized in levels of importance. The
more needs an employer can satisfy, the more motivated a worker will be.
o “Hierarchy of Needs”
1. Self-actualization – morality, creativity, spontaneity, problem solving, lack of
prejudice, acceptance of facts.
2. Esteem – self-esteem, confidence, achievement, respect of others, respect by
others.
3. Love/belonging – friendship, family, sexual intimacy.
4. Safety needs – security of body, employment resources, morality, the family,
health, property.
5. Basic needs – food, warmth, shelter.

Fredrick Herzberg distinguished between “hygiene needs” and “motivational needs”.
Motivational needs are the ones which truly motivate workers.
o Hygiene factors

Pay, working conditions.

Company policy and administration.

Relationship with supervisor.

Work conditions.

Salary.

Company car.

Status.

Security.

Relationship with subordinates.

Personal life.
o Motivational factors (Maslow’s ideas)


Achievement

Recognition

The work itself

Responsibility

Advancement
John Adams’ equity theory suggests that employees will be most motivated when they can
see a balance between what they put into a business and what they get out of it.
o Inputs – affective and cognitive qualities that an employee brings to a business or
organization.

Skills, hard, work, effort, dedication…
o Outputs – what an employee receives from working at the organization.

Salary, rewards, thanks, praise…
o When employees believe that their outputs are greater than their inputs, they will be
motivated.

Daniel Pink suggests that the workplace has changed dramatically since earlier observers
developed their theories. Pink argues that businesses must nurture their employee’s in-built
motivation. Workers have more creative/complex tasks which require new ways to motivate.
o “Self-Determination Theory”
1. Autonomy – an environment that permits employees to shape their own lives. As
much as possible, businesses should give employees freedom in when they work
(time), how they do their job (technique), who they work with (team), and what
they do (task).
2. Mastery – opportunities that allow employees to learn, innovate and create new
things. Employees will achieve mastery when they are given tasks that matter to
them and are neither too easy nor difficult. Easy tasks bore employees; tasks
beyond employees’ capabilities cause excessive anxiety. Tasks fostering mastery
are those that allow employees to “stretch” themselves and develop their skillset
further.
3. Purpose – a sense that their work better their own lives and the world. Employees
must know and understand the organization’s purpose (other than profit) and how
each person contributes to these purposes. To Pink, businesses should emphasize
“purpose” goals as much as profit goals as reaching profit goals has no positive
impact on a person’s well-being.

Financial rewards include,
o Wages – are either calculated by time rate (paid for each hour of work). it may
include overtime if they work longer hours. Or by piece rate (paid for each item they
produced).
o Salary – a fixed amount of money paid each month. It’s for jobs like office staff as its
difficult to link to output or performance.
o Commission – paid to sales staff. They earn more money for each item they sell.
o Performance related pay – earn more depending on how well you work.
o Profit sharing – when a worker receives a share of company profits.
o Share ownership – when a worker receives a share in the company.
o Fringe benefits – extras given on top of a worker’s salary such as a company car or
staff discount.

Non-financial rewards include,
o Job enrichment – better things to do.
o Job rotation
o Job enlargement – more work to do.
o Empowerment
o Purpose
o Teamwork
2.5 Organizational and Corporate Cultures (HL Only)

Culture
o Culture refers to the attitudes, beliefs, and values of a country’s organization.
o The culture of an organization is a reflection of its personality or character. It evolves
over a period of time and leads people to behave in certain ways without thinking
about it.
o Managers will try to influence the culture of an organization; they will expect staff to
behave in a manner the manager has set. How the workers react can often be different
between countries.

Charles Handy created a memorable way of viewing organization culture:
o Power culture – control is centered a few individuals who retain most of the power in
an organization.
o Roles culture – a business with a traditional hierarchy, each employee has a clearly
defined role and operates within a highly controlled structure.
o Task culture – teams address specific problems in an organization within a defined
time frame. There is no one particular person in charge.
o Person culture – individuals feel they are right and just “do their own thing”.
Common in professions like doctors, lawyers, etc.

Edgar Schein describes 3 levels of culture,
o Organization attributes – when entering an office workplace, you can “feel” the
culture.
o Professed culture – using slogans, images, and statements to convey culture.
o Assumptions – people with a company a long time have an idea how its “run”

When two organizations merge together, “culture clashes” can occur, for example different,
o Languages
o Leadership styles
o Time zone
o Work practice
o Formal styles
Consequence could include,


Lack of focus

Preoccupation with the merger

Sense of division

Sense of isolation

Unresponsive management
Addressing culture problems
o If an organization does not try to fix these problems, serious issues may occur.

Lower productivity

Higher labor turnover

Decreased profits.

Business failure
2.6 Employer and Employee Relations (HL Only)

Employee and employer representatives act on behalf of employees and employers in
negotiations.

A trade union are made up of a group of workers who have joined together to try to improve
work conditions in a business. They act as employee representatives to negotiate changes.
E.g., increased pay, more holidays, sick leave entitlement, etc.

Collective bargaining is when the workers (trade union) begin to negotiate with their
employers to agree on issues such as wages and working conditions.

Sources of conflict
o Change
o Different interest
o Different values
o External factors
o Insufficient resources
o Poor communications
o Poor performance

When negotiation fails, worker may carry out the following actions:
o Slowdowns – occur when worker deliberately work less efficiently than they can.
o Work to rule – when employees follow every rule and regulation exactly, which
often means slowing down production.
o Overtime ban – when employees refuse to work anymore than their contracted
hours.
o Strike – workers refuse to work and may also protest outside their workplace. It is
important to note that a strike is seen as a “last resort”. A strike can only happen after
a ballot (51% of workers agree). If a strike is unlawful, workers will not be entitled to
“strike pay” which is used to support them during this time.

Employers may negotiate by making threats of redundancies or changing the terms of
employees’ contracts. This would put pressure on workers and might persuade them to
agree to a settlement.
o A lock-out involves closing the business for a short time, preventing employees from
working and being paid.

Employers may use a 3rd party to help resolve a dispute. This is called conciliation and
arbitration. Conflicts can also be resolved through industrial democracy, no-strike
agreements, and single-union agreements.

Successful organizations use their HR strategy to manage employees through the process of
change.
Unit 3: Finance and Accounts
3.1 Sources of Finance

Capital expenditure is money spent to acquire fixed assets in a business, which includes
machinery, land, buildings, vehicles, and equipment, while revenue expenditure is money
spent on the day-today running of a business with expenses that include rent, wages, raw
materials, insurance, and fuel.

Internal sources of finance, which are obtained within the business, include personal loans,
retained profits and sales of assets.
o Internal finance does not increase the debt of the business.

External sources of finance are that obtained outside the business include,
o Share capital – selling shares in the business.
o Loan capital – borrowing long term from the bank.
o Overdraft - borrowing short term from the bank. High interest rate (less money
going back into the business, emergency fund).
o Trade credit - This is an agreement between businesses that allows the buyer of
goods or service to pay the seller at a later date (30~90 days). How businesses work
together.
o Government grant - Receiving cash from the government. Governments, for
example, would prefer to offer grants to businesses that agree to set up in areas of
high unemployment so as to improve the welfare of people living in those areas.
o Government subsidies - Receiving government help to lower his selling price. This
is given to companies who are in businesses that have a positive public interest. Ex.
Tesla
o Debt factoring - Selling debts to an agency.
o Leasing - this is where a business (lessee) enters into a contract with a leasing
company (lessor) to acquire or use particular assets such as machinery, equipment, or
property. This allows a firm to use an asset without having to purchase it with cash.
o Venture capital
o Business angles

Short-term finances which last for one year or less provide a business with its needed worker
capital. Medium-term finance that lasts for more than one tear to about five years is mostly
used to purchase assets such as equipment or vehicles. Long-term finance with a duration of
more than five years to thirty years, is funding obtained for the purpose of purchasing long
term fixed assets or other expansion requirements of a business.

A business must also consider the length of time any funds are needed. E.g.,
short/medium/long term.
o Short term: up to 3 years
o Medium term: 3 ~ 10 years
o Long term: over 10 years

In deciding on the appropriate source of finance to use. Businesses need to consider; the
purpose of the funds, cost, flexibility, their status and size, amount required, gearing and the
state of the external environment.
3.2 Cost and Revenues

Every business will face different cost and it’s day-to-day running. A manager’s job is to
keep track of these. Controlling costs will help improve overall profits.
o Revenue - costs = profits.

Fixed costs are costs that do not change with the amount of goods or services produced and
are paid regardless of any business activity the firm engages in.
o Rent, insurance, rates…

Variable costs are cost that very with the number of goods or services produced or that
change in proportion to business activity.
o Wages, raw materials, fuel…

A semi variable cost is a mix of both. (semi-fixed costs or mixed costs)
o Mobile phone contract.

Total cost = fixed costs + variable costs

Direct costs are expenses that can be directly related to a particular product, department, or
cost center.

Indirect costs (overheads) are expense that are not clearly identified with the production of
specific goods or services but relate to the whole business.

Total revenue is the income gained form the sales of goods and service. It is also known as
sales revenue or sales turnover.
o Total revenue = price * quantity

Available revenue streams to businesses include rental income, sales or fixed assets,
dividends, interest on deposits, donations, grants, and subsidies.
3.3 Break-Even Analysis

Contribution per unit is the difference between the selling price per unit and variable cost
per unit while total contribution is the difference between total revenue and the total
variable cost.
o Contribution per unit = price per unit – variable cost per unit
o Total contribution = total revenue – total variable cost
o Total contribution = contribution per unit * number of units sold

Profit can be obtained by getting the difference between the total contribution and the total
fixed cost or by subtracting the total costs from the total revenue to obtain a positive value.
o Profit = total contribution – total fixed costs.

A break-even chart is a graphical method that measures the value of a firm’s cost and
revenues against a given level of output and helps in identifying the break-even point.

Margin of safety measures the difference between the break-even level of output and the
actual (current) level of output in a business. A business must consider the level of risk
involved in what it sells. Margin of safety measures the extent to which sales exceed the
break-even point.
o Margin of safety = current output – break-even output

Break-even quantity can be calculated by dividing the total fixed costs by the contribution
per unit.
𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
o Break-even quantity = 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠+𝑡𝑎𝑟𝑔𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡

Target profit output formula is

Break-even revenue formula is 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 × 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Benefits of break-even analysis.
𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
o Break-even charts provide an easy and visual means of analysing a firm’s fnancial
position at various levels of output.
o At a glance, by using the charts, the management of a business is able to determine
the proft or loss, margin of safety, break-even quantity, and break-even revenue or
cost.
o Formulae can also be used to give more accurate results when calculating the above.
o Changes in prices and costs and their impact on proft or loss, break- even point, and
margin of safety can be compared by using the charts or by calculation.
o Break-even analysis can be used as a strategic decision-making tool such as deciding
on key investment projects or whether a business should relocate or merge with
another frm.

Limitations of break-even analysis.
o Break-even analysis assumes that all the output produced by frms is sold with no
possibility of stocks being built up or held. In reality, many businesses may hold
stocks to cater for any sudden changes in demand. Stocks may also build up because
goods cannot be sold.
o It assumes that all revenue and cost lines are linear, i.e. represented by straight lines.
This is not always the case. Offering price reductions or discounts will influence the
slope of the revenue line. The slope of the variable cost line will also change if a frm
pays overtime wages in an effort to increase output. This change will then influence
the slope of the total cost line.
o Apart from showing fixed and variable costs, semi-variable costs are not represented
on the break-even chart. If these are included it makes the process more complex.
o A break-even chart may not be very useful in changing or dynamic business
environments. For example, the break-even chart may not cope with sudden changes
in prices, costs, or technology.
o The accuracy and quality of the cost and revenue data used determine the
effectiveness of break-even analysis. Unreliable or inaccurate data may influence the
conclusions reached in the overall analysis.
o Fixed costs may change at different levels of activity. It would be preferable to
represent these fxed costs as a “stepped” line. For example, in order to increase output
a frm may need to double its capacity. This may lead to sharp rises in fxed costs,
thereby complicating break-even analysis.
3.4 Final Accounts

Final accounts are fnancial statements compiled by businesses at the end of an accounting
period that inform internal and external stakeholders about the financial position and
performance of an organisation. Internal stakeholders include shareholders, managers and
employees while examples of external stakeholders are customers, suppliers, government,
financiers and local community.

Ethics in accounting is the study of moral values and judgements as applied in the accounting
process. A code of ethics is a set of principles usually based on the firm’s core values that
guide accountants on the standards that need to be upheld.

A profit and loss account shows the records of income and expenditure flows of a business
over a given time period and is also known as an income statement.
1. Gross profit
2. Operating profit
3. Retained profit.
o The Trading Account.

Sales revenue records the total value of products sold not the profit.

Opening stock shows how much unsold stock I had left from last year.

Purchases

Closing stock is unsold stock left at the end of the year. You don’t always sell
everything.

Cost of goods sold is the cost of buying goods sold by the business during the
year.

Gross profit = sales revenue - costs of goods sold
o The Profit and Loss Account

Net profit before interest and tax = gross profit – expenses

Net profit before tax = net profit before interest and tax– interest

Net profit after interest and tax = net profit before tax – corporation tax
o The Appropriation Account


Retained profit = net profit after interest and tax – dividends.
A balance sheet is a snapshot of the financial position of a firm and is used to calculate a
firm’s net worth. It gives the firm an idea of what it owns (assets) and owes (liabilities)
including how much shareholders have invested in it (equity).
o Non-current (fixed asset) – is anything that you own in a business that can be useful
for longer than one year. A fixed asset can be used many times over. (Real estate,
machinery)
o Current Assets – these mean things that less than 12 months. Once you use them, they
are gone and need to be replaced.

Debtors: proper who owe your business money.

Stock: it’s used to make or sell the product.

Cash: it’s used for day-to-day expenses.
o Working Capital - The cash now available for day-to-day expenses

Working capital = current assets – current liabilities

Total assets = fixed assets + working capital
o Non-Current (Long Term) Liabilities

Long term debt = +12 months

Total assets less current liabilities = (fixed assets + current assets) –
current liabilities

Total assets less current liabilities = fixed assets + working capital

Net assets = total assets less current liabilities – long-term liabilities

Equity = share capital + retained profit

Net assets = equity
o Equity
o How to Make a Balance Sheet
1. Make a title!
2. Fixed Assets (machinery, buildings, equipment). Longer than 12 months.
3. HL: depreciation (depending on question)
4. NET fixed assets
5. Current assets (cash, stock, debtors). Less than 12 months.
6. Current liabilities (overdraft, creditors, short term loans). Less than 12 months.
7. Determine working capital.
8. Deduct long term liabilities.
9. NET assets.
10. Financed by share capital or accumulated retained profit.
11. EQUITY
12. NET ASSETS = EQUITY

Intangible assets are fixed assets that lack physical substance or are non- physical in nature
and can be very valuable to a firm’s long term success. These include patents, copyrights,
trademarks and goodwill.

Straight line depreciation method spreads out the cost of an asset equally over its lifetime
by deducting a given constant amount of depreciation of the asset’s value per annum.
Reducing balance depreciation method on the other hand adopts an accelerated
depreciation technique whereby the depreciation amount charged to an asset declines over
time based on the useful life of the asset. (HL only)
o Straight-line method
𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡−𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒

Annual depreciation = 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡

Benefits of straight-line method:
 It is simple to calculate as it is a predictable expense that is spread
over a number of years.
 It is mostly suitable for less expensive items, such as furniture, that
can be written of within the asset’s estimated useful life.

Limitations of straight-line method:
 It is not suitable for expensive assets such as plant and machinery
as it does not cater for the loss in efficiency or increase in repair
expenses over the useful life of the asset.
 It is known to infate the value of some assets which may have lost
the greatest amount of value in their first or second years, such as
motor vehicles.
 It does not take into account the fast-changing technological
environment that may render certain fixed assets obsolete very
quickly.
o Reducing-balance method

Net book value in year 1 = cost of original asset – (cost of original asset * rate
of depreciation %)

Benefits of reducing-balance method
 It more realistically matches the cost and revenue of the business.
This is because the higher amount of depreciation provided in
the early years is matched against the larger amount of revenue
generated by the increased production brought about by the use of
the new asset.
 It provides a more accurate measure of depreciation compared to
the straight-line method, especially in the valuation of assets over
the years.
 It increases non-cash expenses immediately, which lowers the
income tax expense in the early years, thereby improving cash fow.

Limitations of reducing-balance method
 It is a more complex method of calculating depreciation compared
to the straight-line method.
 It charges high amounts of depreciation in the early years, which
may not be realistic for some less expensive assets.
 The formula used to obtain the rate of depreciation may be
subjective because without residual value it cannot be used.
 It lowers profits, which some stakeholders, especially if the
company is publicly traded on a stock exchange, might object to.
 It defers tax payments for later years. This is not a problem if the
company keeps growing and increasing in profits. However, if a
company experiences difficulty, growth and profits slow or go
down and the company has to delay future capital expenditures, the
income tax burden will increase just as the company is facing cash
fow pressures from slowed or declining sales and operating profits.
3.5 Profitability and Liquidity Ratio Analysis

Ratio analysis is a fnancial analysis tool that assesses a firm’s financial statements and aids
its decision making by making meaningful historical and inter-firm comparisons through
analysing past ratios and ratios of other businesses in the same or different industries.

Proftability ratios that assess a firm’s ability to generate proft include gross proft margin
(GPM) and net proft margin (NPM).
o Gross profit ratio – shows how much profit is made as a percentage of total sales.
A business wants to maximize this figure.

𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
Gross profit ratio = 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 × 100
o Net profit ratio – proves more useful as we take away all the costs or expenses
associated with selling our product.


𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
Net profit ratio = 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 × 100
An example of an efficiency ratio that assesses how well a firm internally utilizes its assets
and liabilities is return on capital employed (ROCE).
o ROCE shows how much of return you are getting from the money invested into
the business.
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑜𝑟 𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡=𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡−𝑒𝑥𝑝𝑒𝑛𝑠𝑒)
o ROCE = 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 (𝑜𝑟 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦+𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠) × 100
o ROCE will vary between industries.
o It is based on a snapshot of a business’ balance sheet.
o Comparisons over time and with key competitors are most useful.

Liquidity ratios measure the ability of a firm to pay its short term debt obligations with two
examples being current ratio and acid test (quick) ratio.
o Current Ratio – This ratio shows how easily a business can meet all its liabilities
(debts). A ratio of 1:1 shows debts can be covered. It is suggested that the 2:1 is a
‘safe’ figure.

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
Current ratio = 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
o Acid Test Ratio - This ratio uses a similar formula, but you take off stock. The
question is how easy some businesses can dispose of ‘old’ stock?

Acid test ratio =
(𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡−𝑠𝑡𝑜𝑐𝑘)
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
3.6 Efficiency Ratio Analysis (HL Only)

Other efficiency ratios that assess how firm’s utilize their resources in terms of assets and
liabilities include stock turnover ratio, debtor days, creditor days and gearing ratios.

Stock turnover ratio measures how fast a firm’s stock is sold and replenished over a given
period. It can be measured in two ways. Firstly, it assesses how many times in a given period
a firm sells its stock and secondly, it considers the number of days it takes for a firm to sell
its stock.
o This ratio measures how quickly the business sells it stocks. There is no ‘perfect
figure’. It depends on the stock sold.
o Stock turnover ratio (# of times) =

Average stock =
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘
(𝑜𝑝𝑒𝑛𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘+𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘)
2
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘
o Stock turnover ratio (# of days) = 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 × 365

Debtor days measures the average number of days it takes for a frm to collect money from
its debtors. It is also known as debt collection period.
𝑑𝑒𝑏𝑡𝑜𝑟𝑠
o Debtor day ratio (# of days) = 𝑡𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 × 365

Creditor days assesses how fast in number of days within a year a frm is able to pay its
creditors.
𝑐𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠
o Creditor day ratio (# of days) = 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 × 365

Gearing ratio measures the percentage to which the capital employed by a firm is financed
from loan capital to establish whether it is high geared or low geared.
o This ratio shows how much capital is raised with loans. Can the business repay its
debt. (Appropriation)
𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑙𝑜𝑎𝑛𝑠
o Gearing ratio = 𝑒𝑞𝑢𝑖𝑡𝑦 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
3.7 Cash Flow

Profit is the positive difference between total revenue and total costs when both cash and
credit transactions are considered. Cash flow on the other hand is the flow of money in and
out of the business and only considers cash transactions.

The working capital cycle is the time interval between payment for goods supplied to a
business and finally receiving cash from their sale. In order to effectively maximise on the
working capital it is usually desirable to keep the cycle as short as possible.
o ‘Working capital’ is another word for the cash needed for the day to day running
of a business. For example, paying wages, electricity, etc. if there isn’t enough
money flowing in, you can’t pay your bills. Which means the business will
become insolvent.

Cash flow forecast is a financial document that shows the expected month by month cash
receipts (cash inflows) and payments (cash outflows) of a business that have not yet
occurred. Cash inflows include; cash sales from selling goods or business assets, payments
from debtors and borrowing from banks. Cash outffow examples include; purchasing
materials or fixed assets for cash, cash expenses such as rent, wages and salaries and
dividend payments to shareholders.
o Constructing a cash flow forecast
1. Title (Cash flow forecast for the (name) of (months ) of (year) )
2. Opening balance
3. Cash inflows (cash sales revenue, payment of debtors, rental income…)
4. Total cash inflows
5. Cash outflows (electricity, raw material, rent, wages, telephone, loan
repayments…)
6. Total cash outflows
7. Net cash flow
8. Closing balance (the first month needs to be the sum of opening balance and net
cash flow, then it becomes next month’s opening balance)

Some strategies to reduce cash outflow include; negotiating with creditors to reduce payment
and delaying to purchase fixed assets, while some strategies to improve cash inflow include;
insisting on cash purchases and offering incentives to encourage debtors to pay early.

Benefits of cash flow forecast.
o A cash-flow forecast is a useful planning document for anyone wishing to start a
business. This is because it helps to clarify the purpose of the business and
provides estimated projections for future performance.
o Cash-flow forecasts provide a good support base for businesses intending to apply
for funding from financial institutions. This is because they enable the banks to
check on the solvency and creditworthiness of the business.
o Predicting cash flow can help managers identify in advance periods where the
business may need cash and therefore plan accordingly to source it.
o A cash-fow forecast can assist in monitoring and managing cash fow. By making
comparisons between the estimated cash fow figures and its actual figures, a
business should be able to assess where the problem lies and seek the respective
solutions to solve it.

Limitations of cash flow forecast.
o Unexpected changes in the economy
o Difficulty in predicting competition behavior.
o Unforeseen machine or equipment failure
o Demotivated employees
o Predictions generally characterize a cash flow forecast and inaccuracies are bound
to occur that limits the forecast’s effectiveness.
o A business must consider that all decisions involve a level of risk. Any future
cash flow predictions may change due to unforeseen events.
3.8 Investment Appraisal

Investment appraisal is the quantitative assessment of the viability of an investment proposal.
It establishes whether a particular business venture is worth pursuing or profitable as well as
assisting businesses in making comparisons with other different investment projects.
Investment appraisal techniques include payback period, average rate of return and net
present value.

Payback period looks at how long a business will take to recover its principal investment or
initial cash outlay from its net cash flows. It is simple to calculate and a useful method in
rapid changing industries. However, it does not consider the cash earned after the payback
period and ignores the overall profitability of an investment project.

𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡
Payback = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
o Payback to work out the exact month we need to use the formula which works out
the extra cash we need to pay for the project and divides it by the amount we are
expected to earn in that year.

𝑒𝑥𝑡𝑟𝑎 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑
𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤 𝑖𝑛 𝑦𝑒𝑎𝑟
× 12 𝑚𝑜𝑛𝑡ℎ𝑠
o benefits of payback period

It is simple and fast to calculate.

It is a useful method in rapidly changing industries such as technology. It
helps to estimate how fast the initial investment will be recovered before
another machine, for example, can be purchased.

It helps firms with cash-fow problems because they can choose the
investment projects that can pay back more quickly than others.

Since it is a short-term measure of quick returns on investment, it is less
prone to the inaccuracies of long-term forecasting.

Business managers can easily comprehend and use the results obtained.
o Limitations of payback period

It does not consider the cash earned after the payback period which could
infuence major investment decisions.

It ignores the overall profitability of an investment project by focusing
only on how fast it will pay back.

The annual cash fows could be affected by unexpected external changes in
demand which could negatively affect the payback period.

Average rate of return assesses the profitability per annum generated by a project over a
period of time and is also known as accounting rate of return. It makes use of all the cash
fows in a business and shows the profitability of an investment project over a given
period of time. However, it does not consider the timing of cash inflows and effects on
the time value of money.
o The ARR looks at the rate of return over the whole life of the asset. Most
businesses will sell an asset after a period of time as its no longer useful/needed.
o ARR =
(𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛−𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡)
𝑦𝑒𝑎𝑟𝑠 𝑜𝑓 𝑢𝑠𝑎𝑔𝑒
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
× 100
o Benefits of average rate of return

The ARR shows the profitability of an investment project over a given
period of time.

Unlike the payback period, it makes use of all the cash flows in a business.

It allows for easy comparisons with other competing projects, for better
allocation of investment funds.

A business can use its own criterion rate and check this with the ARR for
a project, to assess the viability of the venture.
o Limitations of average rate of return

Since it considers a longer time period or useful life of the project, there
are likely to be forecasting errors. Long-term forecasts decrease the
accuracy of results.

It does not consider the timing of cash inflows. Two projects might have
the same ARR but one could pay back more quickly despite this.


The effects on the time value of money are not considered.
Scrap value
o You can usually sell an asset at the end of its life cycle.
o Remember to add the scrap value to the total returns of the investment.

Net present value is the difference in the summation of present values of future cash
infows or returns and the original cost of investment. It makes use of the discounted cash
fow method in its calculation. It includes all cash fows in its computation as well as the
opportunity cost and time value of money. However, it is more complex to calculate and
can only be used to compare investment projects with the same initial cost outlay. (HL
only)
o NPV looks at the difference between current and future returns on an investment
by considering the value of today’s money in the future.
o E.g., $100 received in 3 years’ time is only worth $75 in today’s money due to
interest rates and the value of money over time.
o ‘Discounted cash flow’
o NPV = total present value – original cost
o Benefits of net present value

The opportunity cost and time value of money is put into consideration in
its calculation.

All cash flows including their timing are included in its computation.

The discount rate can be changed to suit any expected changes in
economic variables such as interest rate variations.
o Limitations of new present value

It is more complicated to calculate than the payback period or ARR.

It can only be used to compare investment projects with the same

initial cost outlay.

The discount rate greatly infuences the final NPV result obtained, which
may be affected by inaccurate interest rate predictions.
3.9 Budgets (HL Only)

A budget is a financial plan that helps in target setting by estimating the revenue and
expenditure of a business over a specifed future time period.

Budgets are important for,
o
Planning - Gives purpose and sense of direction and helps identify future
problems.

o
Motivation - People feel empowered and trusted.
o
Resource allocation - Helps to prioritize scarce resources.
o
Coordination and control - You can monitor progress across departments.
Cost centres are sections of a business where costs are incurred and recorded and help to
collect and effectively use cost data, while proft centres are sections of a business where
both costs and revenues are identifed and recorded, which allow businesses to calculate
how much proft each centre makes.

Cost and proft centres are important in aiding decision making, improving accountability,
tracking problem areas, increasing motivation and benchmarking. However, some
challenges faced include difficulties in allocating indirect costs to particular cost centres
and external factors beyond the firm’s control.

Variance analysis is a budgetary control process of assessing the differences between the
budgeted amount and the actual amount. If the difference between the budgeted figure
and actual figure is beneficial to the firm it is known as a favourable variance. On the
other hand if the difference between the budgeted and actual fgure are fnancially costly it
is known as an adverse variance.
Unit 4: Marketing
4.1 The Role of Marketing

Marketing is essentially about getting the right product to the right customers at the right
price and right time. It involves working with other business functions to satisfy the needs to
the customers.

The basis:
o Important to understand that a business will have to market these types of products in
a different way to each other,


Products are tangible items that are bought or sold.

Services are intangible activities that other people will carry out.
Marketing of gods concerns the 4 Ps of the marketing mix while marketing of services
involves 3 additional Ps of the marketing mix.

Product orientation focuses on producing the product first before selling it. A business brings
out what they want. Ignoring customer needs. E.g., Apple, as it follows the vision of Steve
Jobs to produce products that consumers find appealing.
o Advantages:

It is associated with the production of high-quality products such as luxury
sports cars and safety products such as crash helmets.

It can succeed in industries where the speed of change is slow, and the firm
has already built a good reputation.

It has control over its activities, with a strong belief that consumers will
purchase its products.
o Limitations:

Since the firm ignores the needs of market, it takes risks that may lead to
eventual business failure or closure.

Spending money on research and development without considering consumer
needs could be costly and not yield any promising results.

Market orientation involves carrying out market research before producing and selling the
product. A business puts its customer first. Using market research to decide on a product
range. Companies like McDonalds use this method.
o Advantages:

As a result of market research, first the business would have an increased
confidence that the product will sell, therefore reducing risks of failure.

Access to market information means that firms can respond quickly to
changes in the market and are also able to anticipate market changes.

Firms will be in a strong position to meet the challenge of new competitors
entering the market.
o Limitations:

Conducting market research can be costly and therefore weigh heavily on a
firm’s budget.

Due to frequent changing consumer tastes, firms may find it difficult to meet
every consumer’s needs with its available resource.

Uncertainty about the future could also have a negative influence on
marketing-planning strategy.

Marketing is vital in business because it allows you to,
o Increase customer awareness.
o Create brand loyalty.
o Increase market share.
o Increase profit.

Commercial marketing activities determine consumer needs and wants before using
appropriate strategies to market the product. It is undertaken by a business that wants to make
a profit. This involves creating, developing, and exchanging goods or services that customers
want and need.

Social marketing aims at influencing a positive change in individual behavior and
improvement in social well-being. It is carried out by governments/NGOs.
o Advantage:

It gives firms a competitive advantage as consumers may perceive such firms
to be socially responsible and therefore buy products from them.

Firms can charge premium prices for providing goods that society is deriving
benefits from.

Social media marketing focuses on the use of the internet through social networking websites
to market a firm’s product.
o Advantages:

It enables a firm to get direct feedback from its customers while still appealing
to them personally, through its interactive sections that provide customers
with the opportunity to ask questions and voice their complaints. This is
known as social customer relationship management.

It provides a low-cost way for firms to reach a large target audience.

It can enhance a firm’s brands, since many social networking websites already
have large established online communities, firms can gain exposure by simply
joining these websites.
o Limitations:

Since it is easy for any business to join a social networking website, it can be
difficult for a business to stand out from the crowd, hence the need to rely on
other marketing techniques.

The sales of a company do not always reveal how well a company is doing relative to the
competition. Hence, we can, look at its
o Market growth
o Market size
o Market shares

Market size looks at the total sales of all firms in a market while market share is the
percentage of one firm’s share of the total sales in the market.
𝑓𝑖𝑟𝑚′ 𝑠 𝑠𝑎𝑙𝑒𝑠
o Market share % = 𝑡𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑚𝑎𝑟𝑘𝑒𝑡 × 100

The main marketing objective of for-profit organizations is to identify, design and develop
marketing strategies that are profitable to the business. On the other hand, the objective for
Not-for-profit organizations (NPOs) is mostly for social marketing reasons.

Innovation vs. Invention
o A company that innovates will take an existing product and make changes to its
marketing mix to improve it. E.g., New feature.

Ethics in Marketing
o Ethics now have a major impact on how a business uses marketing to present itself to
the public.
o A business must be careful not to create unethical advertising.

Culture in Marketing
o Culture can influence marketing strategies used by business. Adapting your products
used by business. Adapting your products to local markets and tastes is vital.

Change in Marketing
o Change can influence a business because a business will always need to look at the
marketing strategies used by the competition and adapt accordingly.

Globalisation in Marketing
o Globalization allows a business to sell its products/services internationally. However,
many businesses will need to ‘localize’ their marketing strategies.

Strategy In Marketing
o Strategy in Marketing brings all these ideas together for the business. E.g., Starbucks
is seeking to increase its market in China.
4.2 Marketing Planning (Including Introduction to the Four Ps)

A marketing plan is an essential document that concerns the development of marketing
strategies that aid in achieving an organization’s marketing objectives. The marketing plan
will focus on several issues,
o Where is the business currently?
o Where does the business want to be in the future?
o How are the objectives going to be met?

Benefits of marketing planning
o Helps a firm in identifying potential problems and seeking solutions to them.
o Setting SMART objectives improves the chances of success of a firm’s marketing
strategy.
o Sharing the market plan with other business departments improves coordination and
provides the whole organization with a clearer picture or sense of where it is heading.
o Devising a marketing budget ensures that resources are not wasted on unprofitable
activities.
o A clearly spelled-out plan could improve employees’ motivation and inspire
confidence in them about the organization’s future.

Limitations of marketing planning
o Marketing plans may become outdated if organizations are not quick to consider
changes in market conditions.
o The process may consume considerable resources in terms of time, expertise, and
money in designing the plans.
o Failure to prioritize marketing objectives may make it difficult for firms to tell
whether they are meeting them.

The four Ps of the marketing mix are product, price, promotion, and place.

An appropriate marketing mix for a business ensures that consumers’ needs and wants are
sufficiently met by producing the right product, charges at the right price, available at the
right place and communicated through the right promotion channels.

A target market is a group of consumers with common needs or wants that a business decides
to sell to while a market segment is a sub-group of consumers with similar characteristics in a
given market.

Market segmentation means aiming your products at a specific group of consumers in a given
market.
o Demographic segmentation: this considers the varying characteristics of the human
population in a market, which includes:

Age

Gender

Religion

Family characteristics

Ethnic group
o Geographic segmentation: this is where the market is divided into different
geographical sectors and may consider factors including:

Regions in a country where consumers reside.

Climatic conditions.
o Psychographic segmentation: this divides the market based on people’s lifestyle
choices or personality characteristics, such as:

Social and economic status

Values
o Advantages:

Segmentation helps businesses identify existing gaps and new opportunities in
domestic as well as international markets.

Designing products for a specific group of consumers can increase sales and,
through this, profitability.

Segmentation minimizes waste of resources by businesses through identifying
the right consumer for their products.

By differentiating their products, businesses could diversify and spread risks
in the market and so increase market share.
o Disadvantages:

Can be expensive in terms of research and development, production, and
promotion as a firm attempt to reach a large segment of actual and potential
consumers.

A mass market is a broad market that ignores specific market segments while a niche market
focuses on a narrow market segment.
o Mass market (broad range of customers)

Businesses consider the common needs or wants of consumers in the market
and aim to sell their products to a large number of customers in order to
maximize their sales.
o Niche market (specific range)

These firms may serve market niches where there are few competitors and
take advantage of opportunities that may have been overlooked by larger
firms.

Businesses using this strategy can market their products more efficiently and
effectively by targeting consumers it can serve best and most profitable.
o Segmented market

With segmented marketing, firms hope to gain a stronger position in each of
their segments and so increase their sales and the market share of their brand.

The primary focus of product positioning is to analyse how consumers perceive a firm’s
product compared to other products in the market in an effort for these firms to gain a
competitive advantage in the market.
o Product Positioning is a business tool that allows you to see how consumers perceive
a firm product compared to the competition.

A position map could help a firm to establish which are its close competitors
or threats in the market.

It also helps identify important gaps or opportunities in the market that firms
could fill by creating or offering new products.

It is a simple and quick way of presenting usually sophisticated research data.

It helps a firm in targeting specific market segments to best satisfy consumer
needs and wants.

Upselling (Unique) Selling Point
o Product differentiation: a way of making your product or service different form the
competition.

Helps to establish a firm’s competitive advantage in its product offering and,
as a result, helps to attract more customers.

Leads to customer loyalty as customers can identify something special about
the product in comparisons to rival products, resulting in increased sales.
4.3 Sales Forecasting (HL Only)

Sales forecasting is a quantitative process of estimating a firm’s future sales levels and trends
over a specified period of time.

Sales forecasting makes use of numerical data to estimate a firm’s future sales levels and
trends over time. However, these are predictions and could change because of many factors.

Seasonal variations are caused by changes in demand due to the varying seasons in the year.
Cyclical variations on the other hand are tied to the business cycle in an economy while
random variations are notable changes that stand out from a given trend.
o Seasonal variations e.g., sales for some business might increase in winter.
o Cynical variations e.g., cages in economy, such as economic recession.

Moving averages greatly assist in developing trend lines that help to smooth out any
fluctuations from sales data.

Centring is a more complex method of calculating moving averages that involves the use of a
four-year and an eight-year moving total to establish a mid-point when calculating four year
moving average.

Extrapolation is the use of a line of best fit drawn to predict future sales.

Benefits
o Better cash flow management - by taking into consideration cyclical and seasonal
variation factors, financial managers can better plan to improve the liquidity position
of a business.
o Increased efficiency - sales forecasting greatly assists the production department in
knowing the number of goods to produce and in planning for the amount of stock
required in the future.
o Better workforce planning - accurate sales forecasting can help the human resources
department in succession planning regarding the number of staff required in the
future.
o Improved marketing planning - marketers will gain greater awareness of future trends
and be able to adjust their marketing strategies accordingly in an effort to increase
their market share.

Limitations
o Sales forecasting is time-consuming - it takes a long time to calculate because of its
complex nature, especially when considering the calculation of average seasonal
variations in each quarter over a number of years.
o Sales forecasting ignores qualitative external factors. A number of political, social,
and economic factors can influence the accuracy of sales forecast predictions, for
example political instability, changes in consumer tastes and preferences, and
exchange rate fluctuations.
4.4 Market Research

Market research aids in business decision making by collecting, analyzing and reporting data
related to a particular market.

Primary research (field research) and secondary research (desk research) are the two ways in
which market research can be carried out.

Primary research methods include:
o Surveys (by mail, telephone, online): questionnaires sent out to particular target
audience to enable the researcher to gather useful information.

Advantages:
 They enable researchers to collect a large amount of data in a
relatively short period of time.
 If designed well, surveys can be administered and completed easily by
the respondents.
 Surveys can be used to collect information on a wide range of aspects
including attitudes, preferences, and opinions.

Disadvantages:
 Surveys that are poorly constructed and administered can undermine
otherwise well-intended research.
 The answers provided by respondents on a survey may not be an
accurate reflection of how they truly feel, with some results also being
biased.
 Large samplers are usually used, surveys can prove to be costly and
use up a lot of time in their construction and administration. While
random sampling is generally used to select participants, response
ranted can bias the result of a survey.
o Interviews: a conversation during which the interviewer asks the interview questions
in order to gain information.

Advantages:
 They can provide detailed information about the perceptions and
opinions of consumers through in-depth questioning.
 They usually achieve high response rate because of the one-on-one
attention provided. Precise wording can be tailored to the precise
meaning of questions clarified during the interview process.

Disadvantages:
 The whole process can be very time-consuming as it involves setting
up the interview, carrying it out, analyzing responses, gathering
feedback and reporting.
 Some interviewers may be biased, therefore influencing interviews’
o Focus groups consists of a small number of people brought together to discuss a
specific product or idea. The group comprises individuals who are representative of
the customers of the business or of a specific segment of customers.

Advantages:
 As focus groups consist of a small group of individuals, using them is
a cheap and easy way of gathering market research.
 They can be used to measure the reaction of customers to a firm’s new
product or to the firm’s strategies.
 They help identify key product requirements as well as other needs not
addresses by the business audits competitors.
 They provide insight on the current position of the firm’s competitors
in the mind of the consumers.

Disadvantages:
 The business may seek information about the entire market or segment
and it could be that the opinions of a small number of individuals do
not reflect it.
 There is the possibility that some members of the group may not
express their honest and personal opinions on the discussion topic.
They may be hesitant to express their own views, especially when their
opinions oppose those of another participant.
 Focus groups are more costly to carry out than surveys as each
participant usually has to be compensated in cash or in kind.
o Observations: fundamental and basic method of getting information by carefully
watching and trying to understand certain things or people’s behavior.

Advantages:
 it is a direct method of collecting data to information when studying
actual human behaviour, as the researchers can see exactly how people
behave in a given situation.
 Many individuals can be surveyed in a short space of time.
 Observation is usually cost-effective way of gathering data.

Disadvantages:
 Complete answers to any problem or issue cannot be obtained by
observation alone, so market researchers need to combine this with
other methods such as issuing questionnaires.
 Observation cannot be used to study attitudes or opinions of
individuals because this usually requires a verbal response from the
participant.

Secondary research methods include:
o Academic journals: publications of scholarly articles written by experts.

Advantages:
 Academic journals undergo a peer-review process where they are
checked by academics and other experts. This increases the reliability
of the information.
 Most academic journals include reports, reviews of current research,
and topic-specific information. They are therefore good sources when
a firm is in need of original research on a topic.

Disadvantages:
 Since they contain information of very specific academic interest, they
may not be the best source for general-interest topics.
 The peer-review process can be time- consuming, which may also
affect the provision of the latest or current event information.
o Media articles: these include newspapers and magazines.

Advantages:
 Communicating via a newspaper is cheaper than communicating via
television.
 Most serious newspaper articles have been well researched, written
with reliable sources, and edited for accuracy, which is not the case for
some Internet resources.
 They are widely available and can be found in many retail stores.

Disadvantages:
 It is difficult to communicate events in real-time. As the process of
producing content, printing, and distributing the finished paper is timeconsuming, articles that were written may be out of date by the time
they are delivered to the customer.
 Newspapers can be biased, depending on the type of organization that
owns them.
 The process of producing newspapers could be considered a waste of
paper and energy resources.
o Government publications: these are articles produced by the government on a wide
variety of topic. They could provide businesses with useful information on the
population census in a country, statistics on social trends, or even surveys on
consumer expenditure patterns.
o Market analyses: these include commercial publications or market intelligence
reports that gather data about particular markets. The highly detailed reports are
usually carried out by specialist market research agents. They can be sourced at
various local business libraries, but they are quite costly.

In reality, a business cannot survey all people. Such as, a business will use various sampling
methods to select a small group of people to represent everyone.
o Random sampling: everyone has an equal chance to be picked.

Advantages:
 Random sampling reduces bias as everyone has an equal chance of
being chosen.
 It is a relatively easy way of obtaining a sample.

Disadvantages:

The sample chosen may be too small and/or it may not consist of the target
population: a larger, more representative sample may have to be selected.
o Quota sampling: e.g., pick only people between 15-20 (identified target market)

Advantages:
 This is a quick and cost- effective sampling method, especially where
the proportions of the different groups in the population are known.
 Findings obtained are usually more reliable than those of random
sampling.

Disadvantages:
 Results obtained are not always statistically representative of the
population as random sampling is not done; this also leads to statistical
errors.
 The interviewer may be biased in the selection of interviewees and
choose those who will cooperate in the process.
o Cluster sampling: take people who live in a specific area.

Advantages:
 It is a quick and cheap method of carrying out research from widely
geographically dispersed populations.

Disadvantages:
 Results obtained may not be representative of the whole population
and may be biased, especially if the cluster sample is obtained from
areas where people share similar characteristics.
o Stratified Sampling: the target population is made up of many different groups who
are subdivided into segments or strata that share similar characteristics.

Advantages:
 The sample selected is more representative of a particular target
population.

Disadvantages:
 It is not easy to select relevant strata from a population of very similar
characteristics.
o Snowball sampling: people surveyed suggest contacts to ask.

Advantages:
 It is a cost-effective method of obtaining information through referrals.

Disadvantages:
 There is potential for getting a biased sample, since friends sharing
similar lifestyles may refer each other and be part of the same sample.
o Convenience sampling: This is a sampling technique where groups are selected based
on their easy access and proximity to the researcher.

Advantages:
 It is a fast, easy and cheap method of sampling because the research
groups are readily available.

Disadvantages:
 The sample may be biased and not be representative of the entire
population.

Quantitative research concerns the collection, analysis and interpretation of numerical data as
compared to qualitative research that collects, analyses and interprets data about consumer
opinions, attitudes or beliefs.

In conducting market research, it is important that the data collection methods businesses use
are appropriate and offer a high degree of accuracy while maintaining integrity in the
research process.
4.5 The Four Ps (Product, Price, Promotion, Place)

A product life cycle illustrates the six life cycle stages that a product passes from its
development, introduction, growth, maturity, saturation and decline in the market.
o Introduction: sales will be low. A business will use advertising to let customers know
about the product.
o Growth: sales start to increase quickly.
o Maturity: at this stage sales will peak. The market becomes saturated.
o Decline: sales will fall unless an extension strategy is used.

Extension strategies are implemented at the maturity or saturation stages of a product’s life
cycle in an effort to stop a firm’s sales from falling by lengthening the product’s life cycle.

The Boston Consulting Group (BCG) Matrix is a growth-share matrix that measures the
market growth rate and relative market share of a firm’s product portfolio by classifying the
products as stars, problem children, cash cows or dogs.
o Stars: products with high market growth and high market share.
o Cash cows: products with low market growth and high market share.
o Problem child: products with high market growth and low market share.
o Dogs: products with low market growth and low market share.
o Limitations

It focuses on the current market position of the firm’s products, with little
advice or information for future planning.

It may be a time-consuming and complex exercise for businesses to define or
classify their products according to market share and market growth.

High market share does not necessarily equate to high profits. This is because
sales revenue could be gained using competitive pricing that may have a
downward effect on a firm’s profitability.

BCG Matrix strategies include harvesting, holding, building, and divesting.

Branding is concerned with distinguishing on business’s product from another by designing
and producing the physical container or wrapper of a product. Many businesses use branding.
This means creating an image that is unique to the business. By appealing to the customer,
you create brand loyalty. Sometimes a business will even use a logo as a brand. Having a
strong brand often means charging higher prices. Branding is often seen as one of the most
important aspects of marketing. Customers make judgements about products and services on
the way it is presented to them.

The Importance of Branding
o Gives customers a clear image with which they can associate the business.
o Consumers will associate such brands with consistently high quality, enabling the
businesses to make good sales and earn high profit margins on a regular basis.
o Customers make judgments about certain products and services based on the way
they are presented to them. Something as simple as choosing the right colour for a
firm’s brand can have a massive impact on the way it is perceived by the public.
o A firm’s brand name can provide legal protection to a product’s specific features to
prevent the product being copied by competitors.
o Branding provides the product with a unique name that makes it different from its
competitors, therefore enabling the business to have a sense of ownership of its
products.

Brand Awareness
o This refers to the ability of consumers to recognize the existence and availability of a
firm’s good or service. To effectively promote a product, creating brand awareness is
a major step businesses should take. In addition, it is important when promoting
related products because there is usually very little difference between one firm’s
product and its competitors’ products. As a result, the product with the greatest brand
awareness will sell more than its competitors’ products.

Brand Development
o This is any plan to improve or strengthen the image of a product in the market. It is a
way of enhancing the brand awareness of a product by increasing the power of its
name, symbol, or sign, ultimately leading to higher sales and market share.
Businesses may have to invest more in promotional campaigns such as sales
promotions and advertising to persuade consumers to purchase their products and
therefore further develop their brands.

Brand Loyalty
o This is when consumers become committed to a firm’s brand and are willing to make
repeat purchases over time. Brand loyalty is a result of brand preference, where
consumers prefer one brand over another. Customers with brand loyalty will
consistently purchase products from their preferred brands, despite the high prices of
some products, because they feel the added value the brand carries justify its price.
Successful businesses will often employ a variety of marketing strategies to cultivate
loyal customers. In so doing, these businesses develop brand ambassadors. These are
consumers who will market a particular brand by talking positively about it among
their colleagues, friends, or relatives. They help provide free marketing by word of
mouth, which is very effective in enhancing the image and reputation of a business.

Brand Value
o This refers to how much a brand is worth in terms of its reputation, potential income,
and market value. Brand value is the extra money a business can make from its
products because of its brand name. Brands that have a high value are regarded as
considerable assets to a business. This is because consumers are willing to pay a high
price to obtain such brands.

Packaging plays a strong role in marketing. As well as the obvious protection of a product, it
helps your product stand out from the competition.
o It provides physical protection.
o It offers convenience (easy for consumers and distributors to handle, or the ability to
reuse, recycle, and dispose of.)
o It provides information (ingredients, instructions, warnings)
o It can help reduce security risks (tamper-proof features)
o It aids promotion

Price as one of the marketing mix elements is essential in generating revenue for a business
and refers to the money customers give up for using a good or service.

Appropriate pricing strategies include cost plus pricing, penetration pricing, competitive
pricing, price skimming, psychological pricing and price discrimination. Price is a total part
of the marketing mix. A suitable pricing strategy allows you to maximize sales revenue and
attract new consumers to your product or service.
o Cost-plus Pricing refers to adding a suitable mark-up % to the average cost of
producing a product. It’s simple and quick way to calculate a selling price but does
not consider competitor’s prices.

Advantages:
 It is a simple and quick method of calculating the selling price of a
product.
 It is a good way to ensure that a business covers its costs and makes a
profit.

Disadvantages:
 It fails to consider market needs or customer value when setting prices.
 Since competitors’ prices are not considered, a firm could lose sales if
it sets a selling price that is higher than its competitors’.
o Penetration Pricing refers to offering an initial low price when a product is
launched. This allows you to gain new customers and increase market share.
However, high sales may not mean high profit.

Advantages:
 As the prices are low, consumers are encouraged to buy the products,
and this leads to high sales volume and market share for the business.
 The high sales volume can lead to decreases in the costs of production
and increases in stock turnover.

Disadvantages:
 Gaining high sales volume does not necessarily mean achieving high
profits, especially where the prices are too low.
 Customers may perceive the product to be of low quality if the price is
kept too low.
 Penetration pricing is only suitable for use in markets that are very
price sensitive. Therefore, as businesses increase their prices over time
they risk losing potential customers, who may seek lower-priced
products from rival firms.
o Competitive Pricing refers to charging a price that is in line, or just below the
competition. Products in maturity use this strategy most often.

Advantages:
 Consumers benefit from the low prices, especially in very competitive
markets.
 After using destroyer pricing, remaining dominant firms could gain
higher sales revenue as a result of the higher prices charged.

Disadvantages:
 Predatory or destroyer pricing is a form of anti- competitive behaviour
and is illegal in many countries because it is used to restrict
competition.
o Price Skimming refers to when firms set high prices when introducing new products.
Firms use this revenue to cover R&D costs. However, higher prices can discourage
consumers.

Advantages:
 Consumers associate the high price with a high-value or high-quality
product and an enhanced brand image.
 Firms are able to obtain initial high revenues that help in recovering
their research and development costs.

Disadvantages:
 The high prices may discourage some consumers from buying the
product.
o Psychological Pricing refers to the idea that consumers are attracted to products that
are seen as offering good value for money. Supermarkets will often use this strategy
to sell product.

Advantages:
 The psychological effect of selling at a slightly lower price can obtain
large revenues for a firm selling in large quantities.
 Since it looks at consumers’ perceptions, it is a strategy that can be
suitably applied in many market segments.

Disadvantages:
 Using prices such as US$199 or US$9.99 may be inconvenient for
some businesses that require whole numbers in their transactions, for
example transport businesses.
o Price Discrimination refers to charging different prices to different groups of
consumers for the same product. Time-based discrimination is a common example
used. E.g., Cinemas.

Advantages:
 Time-based price discrimination can be of benefit to either consumers
or producers. During peak times businesses such as phone companies
charge high prices and so generate higher revenues, while during offpeak times consumers benefit from the lower prices charged.

Disadvantages:
 Businesses need to be certain about the type of elasticity of demand of
their consumers. For example, charging higher prices in a market with
elastic demand could lead to lower sales revenue. In addition, if firms
were still to charge a lower price in the elastic market, they should
ensure that the extra cost of producing and selling more products does
not exceed the extra revenue.

Promotion’s main aim is to obtain new customers or retain existing ones by communicating
information about a firm’s products to consumers. It can be categorized as either above the
line or below the line. Promotion is all about a business trying to obtain new customers or
retain existing ones by using different forms of communication to inform people about a
firm’s product or services.

Above the line promotion uses independent mass media to promote a firm’s products
including advertising through television, radio or newspaper. Aimed at many people.
o Television adverts reach millions of people who you can target. However, it’s very
expensive.
o Radio is cheaper and you still target specific people. But its sound only, people can’t
see the product.
o Newspapers & Magazines are bought by specific people. But adverts can be difficult
or boring to read.
o Posters & Billboards have a visual impact and are seen by many people. But they can
contain little information.
o Leaflets & Junk mail are cheap to produce and distribute but are often ignored by
many people.
o Sponsorship means an established company will provide money to a business or
person in return for advertising the firm’s brand.

Below the line promotion does not depend on the use of independent media and firm’s focus
their direct control on promotional activities to consumers who they know or those who are
interested in their product e.g., direct marketing, personal selling, public relations, and sales
promotions. Target specific products or services.
o BOGOF - short for buy one get one free!
o Discounts
o Competitions
o Free Gifts
o Point of Sale
o Public Relations - getting free advertising

Marketers are increasingly incorporating technology in their marketing strategy. These
strategies include social media marketing, which is a way building relationships, driving
repeat business and attracting new customers through social media sites. In addition, viral
marketing uses peer-to-peer communication where people pass on promotional messages
within their social network.
o Social media marketing (SMM) involves getting individuals to share information with
their friends to help build awareness of a business.
o Viral Marketing happens when viewers to websites such as YouTube will share a
video to other users by word of mouth. It can be passed on in videos, images and
messages.

Guerilla marketing is a low-cost unconventional marketing strategy that has a great
innovative and significant promotional effect on a business. Guerrilla Marketing makes use
of ‘untraditional’ activities to try and promote a business. It is a low-cost unconventional
strategy that is highly efficient at capturing people’s attention.
o Benefits:

Low cost

Flexibility - can be changed easily because of its small scale

Simplicity

Identified target market - activities can be targeted at the market that is most
likely to buy the product or service. This improves the efficiency of the
marketing campaign and improves returns.

Communication tool

Interaction opportunity

Accessibility - most guerrilla marketing activities aim to be as accessible to
customers as possible, therefore increasing the customer base.
o Limitations:

Denting the brand image - if guerrilla marketing strategies are directed to the
wrong group of people or not executed properly, they can seriously hurt the
company’s brand image.

High negative attitudes - since the main goal of some advertisements is to
evoke a range of negative emotions, such as fear and anger, guerrilla
marketing campaigns may lead to highly negative attitudes towards the brand
or the whole company. Overuse of fear-related marketing campaigns may
cause the overall effectiveness of the promotion to decline.

Negative impact on social life - for example, billboards placed in the middle
of a highway or in places with high traffic congestion may cause traffic
accidents.


Ethical Issues
Place is about how a firm’s product is disturbing to make it available to consumers by getting
the right product at the right place at the right time. Place refers to how a firm product is
distributed to consumers. A business uses various distribution channels to meet this target.
o Intermediaries - “Middle people”

Distribution channels include zero intermediary channel, one intermediary channel and two
intermediaries’ channel.
o Zero Intermediary Channel - product is sold directly from the producer to the
consumer.

Advantages:
 It is low cost.
 It is fast.
 It is ideal for perishable products.
 The producer is the key decision-maker in the distribution process.

Disadvantages:
 Promotion is done by the producer, which could be time-consuming
and expensive.
 The producer incurs all storage and delivery costs.
o One Intermediary Channel - This involves the use of one intermediary such as a
retailer or an agent to sell the products from the producer to the consumer.

Advantages:
 Promotion and customer service are done by the retailer.
 The costs of holding stock are incurred by the retailer.
 The retailer assists in selling the product at convenient places to
consumers.

Disadvantages:
 As the retailer’s profit mark-up is included in the selling price, the
product may be expensive for consumers.
 The producer may not be aware of the promotional strategy used by
the retailer.
o Two Intermediaries Channel - In this case two intermediaries, which usually include
wholesalers and retailers, are used by producers to sell the product to the consumer.

Advantages:
 The wholesaler incurs storage costs, therefore reducing these costs for
the producer.
 The wholesaler breaks the bulk for the retailer by providing large
quantities in smaller batches.
 This is an appropriate channel when selling over long distances.

Disadvantages:
 Two profit mark-ups could lead to a more expensive product offered to
consumers.
 This channel further reduces the producer’s responsibility for
promoting products.
4.6 The Extended Marketing Mix of Seven Ps (HL Only)

People comprise an essential element of any service business so businesses should ensure
that their employees have the right attitude, skills and appearance at all times as they are the
face of the organization. These people also form a transactional link between the organization
and its customers due to their vital role in the long-term customer relationship between the
business and the consumer.
o As a service in an intangible good (cannot be touched), providing good customer
service is vital. Staff should have the right attitude, skills and appearance at all
times.

Processes are the procedures and policies pertaining to how an organization’s product is
provided and delivered to the consumer. They inform customers on the ease of doing
business with a particular organization.
o Goods can be bought in store and paid for in a number of ways. Having
procedures to deal with unhappy customers is vital/ having a system in place for
delivery, returns and faulty goods is a key USP.

Physical evidence includes the visible touch points that are observable to customers in a
business and is an important differentiator in service marketing.
o Stores which are well laid out, welcoming and clean are vital in having customers
return. The threat of competition from on-line sales trying to enhance the ‘retail
experience’ such as IAPM shopping mall.
4.7 International Marketing (HL Only)

International marketing is the marketing of goods and services from one country to another.
It provides businesses with the flexibility to differ in their marketing approach to other
countries. Globalization is the main casual factor to the rise in international marketing.

Modes of entry into international markets include the internet, exporting, direct investment,
joint ventures and international franchising.

The opportunities of international marketing include a larger market share, diversification,
enhanced brand image, economies of scale and the formation of new business relationships.

The threats of international marketing include political, economic, social, legal and
technological challenges.

Due to global business environment becoming more competitive, businesses that can adapt
their strategies to suit the changes in external factors will remain competitive and continue to
take advantage of the opportunities that arise in international markets.

As a result of the significant role culture plays in international marketing, businesses that
recognize the varying cultural differences globally in marketing their products stand a better
chance of gaining a competitive advantage than businesses that do not.

Implications of globalization that businesses will need to consider in international marketing
include competition, changes in consumer tastes and expectations, location decisions and
economies of scale.
4.8 E-commerce

E-commerce is the buying and selling of goods and services via the internet.

Common features of e-commerce include ubiquity, customization, global reach, integration,
and universal standards.
o Ubiquity: the internet is widely available at any time. It can be accessible at home, at
work, or in hotels for 24 hours each day, 7 days a week.
o Customization: individuals can personalize their messages and decide how they will
be delivered to other individuals or groups.
o Global reach: also known as the worldwide web, the internet transvers many national
boundaries.
o Integration: the internet allows the combined use of audio, video, and text messages
to deliver a marketing message.
o Universal standards: there is only one set of internet standards globally.

E-commerce due to advancements in technology has had a great impact on the marketing mix
elements of product, price, promotion in businesses.
o Product: business can sell wide range of stock which can be customized to consumers
o Price: consumers can make easy price comparisons. It has led to more competition.
o Promotion: business use online advertising, which includes audio, video, text.
o Place: consumers have access to a global market, with no need to visit a shop to buy.

The categories of e-commerce include business to business (B2B) where a business trades
with another business. Business to customer (B2C) which is carried from a business to a
customer or consumer and consumer to consumer (C2C) which allows transactions from one
consumer or customer to another.

Benefits of e-commerce include a wider market reach, cost effectiveness and convenience
while costs of e-commerce are internet security concerns, increased competition, and a lack
of ability to try out product before purchasing it.
Unit 5: Operations Management
5.1 The Role of Operations Management

Operations are the fundamental activities of organizations. Every business is a producer of
something. It does not just include large factories with many machines but even a hotel or
school is a business with an end product. Operations management means the way a business
produces goods and services and how they meet consumer needs and wants.

Operation management is the business function that combines inputs (such as human and
financial resources) to produce outputs (goods and services). It applies to activities in the
primary, secondary and tertiary sectors.

The operations management division of an organization is in charge of all aspects of the
production process, such as:
o Production methods
o Lean production
o Quality management
o Business location
o Production planning
o Research & development
o Crisis management & contingency planning

Operations are done by people – human resources.

Operations need to be funded – accounts and finance.

Operations produce goods and services which need to be promoted and sold at the right place
– marketing and sales.

To produce goods and services, businesses need to combine human, physical and financial
resources in an effective way. These resources are collectively known as the factors of
production:
o Land - These are natural resources needed to produce goods and services. Examples
inside water, timber, sand, minerals, metal ores, plants and animals.
o Labour - This refers to human effort used to produce goods and services.
o Capital - This refers to non-natural (or man-made) resources used in the production
process. Examples include tools, machinery, motor vehicles, physical premises, and
infrastructure.
o Entrepreneurship - This refers to the knowledge, skills and experiences of individuals
who have the capability to manage the overall production process. Entrepreneurs have
the ability and willingness to take risks in order to produce goods and provide
services to customers, profitably.

Types of Products
o Production can be divided into two areas.

Goods: physical products used by a consumer.

Services: Non-physical products. E.g., a plane ticket.
o In realty, it is not always possible to distinguish between a product as either a food or
a service, as most are a combination of both. Some examples include the following:

Food served at a restaurant goods, but the waiting staff and chefs provide a
service.

Estate agents sell property, such as physical apartments and houses, but
clearly provide a service in doing so.

Supermarkets sell a wide range of goods, but also provide services (such as
packing and delivery services)

Retailers of consumer electronic goods also provide after-sales services, such
as technical support, installation and warranties (guarantees).

The Production Process
o Inputs: factors of production
o Production processes: adding value.
o Outputs: physical goods and intangible services.

Operations management is influence by economic, social, and environmental factors.
Operations should aim to be sustainable in all three areas.

Operations Management Sustainability
o A production manager must consider the idea of sustainability. This means
considering how the business impacts other areas such as ecological, social, and
economic issues.

Economic sustainability means using raw materials to their best advantage
ensuring profits and performance.

Social sustainability takes human factors into account, such as considering
different stakeholders’ opinions.


Ecological sustainability looks at business effect on nature and ecosystems.
Triple Bottom line
o In summary, when all 3 are combined you create the ‘triple bottom line’. Businesses
have a responsibility to people, planet and profit.

To maintain profit while having a purpose which address global issues, does
good to the planet, and benefit its stakeholders.

Linear economy is when products are manufactured, used then disposed.

Circular economy is when products can be recycled or repaired to be used
again and again.

Reusing certain parts, like special metals for other products

Ownership

Sent back to manufacturers to be repaired.

Considering sustainability factors all throughout the production process,
especially in designing to minimize waste.

Recycling plastic bottles to make shirts

Using materials that have the least impact on the environment.
5.2 Production Methods

Understanding how we produce a good or service is just as important as what we produce.
Large organizations are constantly looking to new innovations to improve products, and
more importantly lower their cost of manufacturing.

Job (or customized) production us market-oriented, meaning that the customer or client
decided what the product should be. This is often production of a special, one-off product.
o When a firm produces individual products which are unique. They require highly
skilled labour and are labour intensive.
o Possible examples of job production could include:

Bridges

Construction of roads, schools, hospitals, and hotels

Garden landscaper

Hair cuts

Movies (films)

Tailor-made suits

Portrait paintings

Private music lessons

Wedding dresses
o Advantages of job production

It is the most flexible product method, allowing output to be catered to the
specific requirements of the customer.

Due to its uniqueness and exclusivity, the production of the good or service is
of an exceptional quality standard.

This also means that a premium price can be charged (because of the
product’s originality and exceptional quality). This means the profit margin
will be higher.

Workers are likely to be highly motivated as they are exceedingly skilled
workers who produce work the is original and which they can be proud of.
o Disadvantages of job production

High labour costs (due to the need to higher highly skilled and experienced
employees) and limited opportunities for economies of scale mean that job
production can be very expensive.

Long production times as job production cannot rely on technologies used for
mass productions, non-standardized output in order to meet specific needs of
individual customers, e.g., time needed to meet and consult with the
individual client.

Batch production create a group of identical products, standardized products.
o When a larger number of items are produced. They are initially identical to each other
but will be finished differently.
o Possible examples of batch production could include the output of:

Bread

Casual clothing (such as t-shirts of various sizes and colors)

Cookies (biscuits)

Food items for buffet meals

Home furniture

McDonalds’s burger meals

Shoes
o Advantages of batch production

Average costs of production are lower than if job production is used, because
batch production enables the organization to have greater economies of scale.
Fewer workers are needed as there is a reliance on machinery and mechanism.

A variety of products are made, rather just one product in the case of job
(customized) production, customers have a greater choice. This is likely to
lead to more sales.

It reduces the risks associated with concentrating on the output of a single
product. For example, not all customers like or want brown leather shoes or
chocolate chip cookies. Batch production enables firms to make a variety of
different products, thereby spreading risks.

It is suitable for making products when the level of demand for them is not
enough to justify using mass production.
o Disadvantage of batch production

There is less flexibility for customers, compared with job production, as they
can only select from a range of standardized output.

There is a greater need for capital expenditure, such as the purchase of
machinery and capital equipment. There is also a greater need for working
capital as the business needs to purchase a lot more stocks (inventory such as
raw materials).

These is idle time the machinery needs to be cleaned and/or changed
(reconfigured) in order to produce another batch of products. This reduces
productivity and can be costly.

Similarly, reliance on machinery and automation for batch production means
that technical problems or breakdowns would be costly to the organization.

Mass production creates a high volume of identical, standardized products. Flow, line or
process production is an aspect of mass production, wherein a business has a constant flow
of materials in the production process.
o Products are identical and made in high volume. A factory works 24 hours a day with
few stops. Machines replace people. A convert belt is used to link each stage.
o Possible examples of mass made products include:

Ball bearings

Beer

Bottled water

Buttons

Canned soft drinks

Paper clips

Toothpicks

Zips
o Advantages of mass production

As products are mass produced, the business benefits from economies of
scale, i.e., lower costs per unit of output. This means it can charge lower
prices and/or enjoys higher profit margins. Therefore, customers benefit from
better value for money.

Automation results in lower labour costs as fewer people need to be hired, and
for shorter periods of time. Labour intensive output (as with job production)
requires workers to have rest breaks and be paid for their overtime.

As production is capital intensive, a large volume can be created, and often
continuously on the production line. Hence, the business benefits from a faster
rate of production.
o Disadvantages of mass production

Due to standardized (homogeneous) output of mass-produced goods and their
relatively low prices, the firm earns lower profit margins. This means the
business must rely on selling a large volume of output in order to break even.

Unlike job production, or batch production to some extent, there is almost no
flexibility with mass production because large quantities of standardized
(identical) goods are produced.

Flow/continuous production requires effective stock management systems.
This may involve stockpiling of raw materials, semi-manufactured goods, and
finished goods for sale. Inventory and storage costs can be very expensive for
a business.

Start-up costs are likely to be high, especially for new businesses because of
the amount of capital expenditure needed. For example, the business may
need to invest in specialized capital equipment, robots, machinery, and
production systems.

Technical breakdowns will cause major problems for a business, as all
production on the assembly line will come to a complete halt.

Staff, who are mainly unskilled workers, can become easily demotivated s the
tasks they perform are unchallenging, unexciting, and repetitive.

Mass production on its own does not sell the physical goods that are produced.
It still requires marketing support to inform and persuade people to buy these
products on a large scale.

Cellular manufacturing is a form of manufacturing in which teams of workers are
responsible for certain parts of the production process.
o Workers are placed into smaller teams (cells), where each group is given
responsibility to produce one part, which are then moved on the next cell. Each cell
focuses on quality and team effort.
o Advantages of cell production

There should be improvements in the quality of the output because cells are
responsible for and take ownership of quality assurance.

Job rotation prevents demotivation associated with mass/flow production.

Similarly, it involves team working, which is a form of non-financial
motivation according to theorists such as Herzberg.

Workers are also more likely to be committed and productive, due to being
members of a team and taking responsibility for their role in completing a
whole unit of work. This also gives them a sense of achievement.
o Disadvantage of cell production.

Cell production requires capital expenditure, such as the cost of specialized
machinery, equipment, and inventory ordering systems. This can be
expensive. Even for existing businesses that choose to adopt cellular
manufacturing, there is a need to recognize the factory to accommodate for
the cellular layout. Again, this is often a time consuming and costly task.

Machinery and equipment are not used as intensively as with mass/flow
production, so this does not allow the business to make the most out go
potential economies of scale.

It is time consuming and costly to recruit and train suitable employees to work
in cells.

Choosing the right production method
o Expected sales.
o Flexibility
o Niche vs Mass market
o Nature of the product?
o Cost of setting up
5.3 Lean Production and Quality Management (HL Only)

Lean production is an approach to operations management which aims to cut waste and
promote maximum efficiency.

A business seeks ways to reduce its production costs. It can do this by using a Japanese
method called ‘lean production’. You cut costs by reducing waste to increase efficiency.
o The 7 sources of waste (or “muda” in Japanese) can be remembered by the acronym
WOMDOTS:

Wasting times - delays in the production process, perhaps due to disorganized
procedures, a lack of training and/or inefficient machinery.

Overproduction - producing more than necessary (the amount demanded by
customers), which simply leads to waste.

Motion - excess worker movement between workstations, for example, waste
time and reduces productivity.

Defects - output that is substandard, so has to be re-produced, wasting time,
resources and money.

Over-processing - this means adding more features or functions to a product
than is necessary to meet the needs of customers. Over-processing does not
add value but adds to the firm’s production cost.

Transportation - unnecessary and excessive transportation adds to production
costs yet reduces efficiency, both of which represents waste to an
organization.

Stockpiling (excess inventories) - having too much stock is wasteful as it ties
up liquidity and stock control can be costly (such as the costs of insurance and
maintenance, or the opportunity cost of the stocks being damaged, stone or
being obsolete).

Any stage of the production process that does not “add value” to the customer is eliminated.
Some examples of “waste”:
o Time
o Transport
o Space
o Inventory
o Energy
o Talent

Efficiency means using resources more productively in order to generate output. There is
greater efficiency if an organization can produce more goods and/or services (increasing its
output) by using the same or fewer resources (its inputs).
o Efficiency can be measured in a number of ways, depending on the context of the
business organization. Some examples include:


Sales per person

Output per worker

Output per machine hour

Average costs per unit of output

Greater efficiency can be achieved in a number of ways, such as:

Improved level of motivation in the workplace

Improved technologies and capital equipment

Improved provision of training and development for all employees.
The continuous improvement method (Kaizen) of lean production involves continuous
change, as opposed to occasional changes. This approach must include all levels of hierarchy
and focusses on the process rather than the end product.
o Refers to way of getting all workers involved in discussions which identify how
improvements can be made on a regular basis.

The just-in-time method (JIT) reduces the amount of stock held by ensuring products are
made only when ordered.
o Holding large volumes of stock (inventory) can be very costly and wasteful. Just-intime (JIT) is a lean method of stock control whereby materials and components are
scheduled to arrive precisely when they are needed in the production process. Hence,
JIT aims to eliminate buffer stock requirements by ensuring raw materials and
components are received just before they are needed.
o It reduces costs as the business does not need to store lots of parts. But suppliers need
to be located near the factory to be able to deliver parts quickly as needed.
o Advantages

Buffer stocks are not required, so this reduces the costs of stock management
and waste.

It avoids the opportunity costs of stockpiling, such as the costs of storage,
insurance, maintenance or security, damaged stocks, and obsolete (out of date)
inventory.

The above points can also improve the firm’s cash (liquidity) position.

JIT fosters lean production as workers need to be more careful and ensure
things are done right, first time round as there are no spare stock.
o Disadvantages

As orders are placed in smaller quantities at regular intervals, administrative
and implementation costs of JIT can be relatively high.

Similarly, JIT stock control does not enable firms to enjoy bulk buying
economies of scale as raw materials and/or component parts are only ordered
as and when they are needed for production.

There is the risk of running out of stock if demand is higher than expected.

JIT is inflexible, which puts the organization at greater risks and unforeseen
circumstances.

There is total reliance on third party suppliers to deliver the right products, at
the right time. Having direct and easy access to local and reliable suppliers is
not always possible, even though it is essential for a JIT system.

Just In Case
o If a supplier cannot supply a part for a product, then production stops (you cannot
have a computer monitor without a screen). By having extra stock, the business can
keep selling to customers.

Kanban is a system which supports JIT. It aims to ensure a steady flow of production,
without any waste.
o Kanban uses a system of messages to convey information to workers. Imagine a table
with coloured stickers to be moved around, telling workers that to do next.

Andon refers to a signal which will inform workers of a problem in the production process.
It allows problems to be identified and resolved as quickly as possible.
o Andon refers to a cord that workers pull to stop production if there is a problem,
everyone stops to solve it.

Cradle-to-cradle design and manufacturing is the concept that once products are used, they
should be entirely recycled to create the same product again.

What is Quality?
o Quality is about meeting the needs and expectations of customers. Its more than a
product simply “working properly”.
o Good Quality Management means products don’t have to use the highest quality
materials but instead are “fit for purpose” (carry out the job required)

Quality control and quality assurance should ensure that products and services are reliable,
safe, durable, innovative and offer value for money.
o Quality control involves inspecting finished products to check they meet the desired
level of quality.
o Quality control is the traditional way of checking a product. Work will be tested and
inspected. A business looks for mistakes that have been made.

Quality assurance is a system of setting and monitoring quality standards across the whole
production process.
o Quality assurance means thinking about the design of a product which minimizes
problems. The key is to involves all employees in thing about the quality.

A business that produces quality goods can:
o Increase sales.
o Obtain brand loyalty.
o Reduce production costs.
o Charge premium prices.

A quality circle is usually a group of volunteers who meet to discuss ways of improving
quality.
o Quality circles are important as they allow workers to get together and discuss ways
of improving quality. By involving all workers and not just senior management it
allows all views to be heard.
o Advantages

They promote team working (a form of non-financial motivator) and boost
team cohesiveness. This can therefore help to improve employee morale, as
staff feel more valued.

Almost any organization, in any industry, can use quality circles to improve
quality standards.
o Disadvantages

Quality circles are not necessarily cost-effective, as employees have to be
suitable qualified and trained in the process of identifying problems and
making feasible suggestions.

For quality circles to work well, staff must be full supported by senior
management. If their recommendation are rejected or not adequately funded,
members of the quality circle will lose any motivation to continue.

Some staff members may be unable or uncomfortable to take on such level of
responsibility, arguing that senior managers are the people paid to problem
solve and resolve quality issues.

Benchmarking involves comparing products or services against the products or services of
competitors.
o Benchmarking is about comparing yourself with the competition. As a point of
reference business can compare itself against other similar businesses.
o Benchmarking allows a business to follow marker leader examples of “best
practice”. Such as in a hotel (5-star standards). However, what works for one business
might not work for another.
o Advantages

Almost any aspect of an organization’s operations can be benchmarked, so
long as it is measurable, such as
 Wages or salary rates
 Budgets
 Sales revenue
 Profit
 Reject (defect rates)
 Market share
 Labour turnover

Benchmarking encourages organizations to continually learn from their
competitors, in an attempt to improve their processes, performance and overall
quality.

It enables an organization to determine its strengths and weaknesses in
comparison to its competitors.

Effective benchmarking helps an organization to improve its performance and
competitiveness.
o Disadvantages

Benchmarking only enables a business to identify the areas that need
improving. It does not determine to how the business house solve the
performance and quality issues.

Benchmarking is not always done in a meaningful or objective way, such as
perceptions of customer feedback.

It can be expensive to benchmark best practice in an industry, as time and
money are needed to ensure adequate comparisons are made.

Total quality management (TQM) is an overarching approach to improve quality. It can
include a combination of different quality tools.
o Total quality management (TQM) involves all workers having responsibility for
maintaining quality standards throughout the production process. TQM aims to
achieve zero defects by preventing mistakes being made in the first place. Instead, it
focuses on getting things done right, first time round. It therefore requires the
empowerment of all workers so that they can take responsibility for quality issues in
all aspects of the firm’s operations. In reality, total quality management encompasses
other aspects of lean production, such as continuous improvement (Kaizen),
benchmarking of all business operations, and quality circles.
o TQM thinks of ways to reduce waste - (lean production)
o Advantages

TQM aims to reduce the reject rate to zero, thereby reducing the reworking
costs by doing everything right the first time. As a result, production costs are
likely to fall as wastage declines or disappears.

The corporate image is likely to improve as the organization has the “right
first time” approach to production, so defects are minimal if at all existence.

Staff morale increases because they feel more valued and empowered being
part of the total quality process and culture.
o Disadvantages

TQM is highly expensive because of the significant costs required to train
staff and to endure and uphold the philosophy of total quality management.

There is a time lag between when the TQM approach is implemented and
when its benefits are experienced.

TQM only works if every employee is fully committed to the approach. This
may be far more difficult to achieve in reality than in theory.
5.4 Location

Choosing the right location is vital to success. Whether it’s a sole trader or Multinational.
You must consider how and where goods are produced.

Locating a business will depend on multiple factors including costs, competition, type of
land, labour pool, infrastructure, government, proximity of suppliers. More specifically,
o Market: where are the customers? Transporting products long distances is time
consuming and expensive. Perhaps having production close to the target market
makes more sense.
o Services: are electricity, gas or water available?
o Supplies: some businesses have little choice about where they do production. Oil
companies only drill where there is oil. Lumber companies will not set up I the
centre of Shanghai but will go o central Brazil where there is a lot of wood.
o Production process: bulk reducing industries will tend to be nearer supplies
(lumber); bulk increasing industries will be nearer customers.
o Labour: are there suitable members of workers available? With suitable skills?
What record does a country have in terms of industrial relations (striking etc)?
o Other businesses: big computer companies are based in Silicon Valley,
California (concentration). Many of their suppliers will set up close by.
o Communication: with the introduction of computers and the internet, many
service businesses can be set up almost anywhere.
o Infrastructure: transport facilities (roads, canals, railways).
o Land: is there suitable site available? What cost?
o Image: location can be used in a business marketing. Perfume companies may
mention Paris. Fashion companies may use Milan.
o Government: are grants available? Is the government pro or anti-business? Is the
government stable?

Clustering
o Firms often choose to locate near other firms operating in related industries in
order to benefit from passing trade and demand for products in complementary
markets.
o For example, coffee shops might be located in shopping malls to attract customers
who may need a coffee break from their shopping. Children’s clothes retailers
might choose to locate near toy stores.

Government Incentives
o Economically assisted areas are the locations identified by the government that
are in need of economic regeneration. These areas are likely to have a very high
unemployment rate, low average incomes and relative poverty.
o Businesses may choose to locate in these areas due to existence of government
incentives, such as: grants, subsidies tax concessions and interest-free loans (or
loans on very low rates of interest).

Bulk-Increasing Industries
o These industries need to be located near to the customer because the final product
(such as hand-made home furniture) is bulkier and heavier than the raw materials
used to make it.

Bulk-Reducing Industries
o These industries need to be located near to raw materials used to produce a certain
good. For example, in the brewery industry, it makes financial sense for breweries
to locate near where there is a readily available supply of barley and water as the
weight of the final output is less than the raw materials.

Strategic Reasons
o Multinational companies often locate overseas markets in order to bypass trade
protectionist measures, I.e., trade restrictions imposed on imported goods and
services.

Impact of Globalization on Location
o Pull factors: setting up or relocation abroad is an attractive option for many
businesses.

Improved communications

Dismantling of trade barriers

Increasing size of multinationals.
o Push Factors: there are also a number of internal factors to push a company
overseas.

Reduced costs

Increased market share

Extension strategies (product life cycle)

Defensive strategies (protect!)

Outsourcing is the practice of using another business to complete part of the work.
o At SCIS various functions are outsourced because we assume these outside
companies will do a better job at a lower price than if they were provided
internally, for example, the security,
o Factors effecting outsourcing include.

Quality

Flexibility

Can it be produced?

Can it be delivered on time?

Many jobs have left rich world countries and moved to China and Eastern
Asia where it is cheaper to produce things.
o Outsourcing includes subcontracting.

Useful when your business doesn’t have all the skills required capable to
complete the job

Someone making a film may shoot the movie, then subcontract to a Special
FX company so the FX can be added.
o Advantages of outsourcing

The organization is freed up to concentrate on its core activities and
strategy.

The organization gains from the specialized services and cost advantages
of the their-party partner.

Outsourcing helps to rationalize business operations, hence cuts costs and
improves efficiency and profitability for the organization.
o Disadvantages of outsourcing

Quality issues and concerns can arise with the use of subcontractors.

There are costs involved in monitoring and maintaining professional
relationships with subcontractors.


There can be potential conflict of interest with third party providers.
Offshoring is an extension of outsourcing, which involves contracting with a business in
another country.
o Outsource outside your home country for resources of cost.
o A bank may have a call centre in India.

In-housing (insourcing) is the reverse of outsourcing. It is when organizations choose to
bring outsourced activities back into the main business.
o Insourcing refers to the use of an organization’s own resources in order to fulfil a
specific job, function or project instead of it being outsourced to a third-party
provider.
o The firm’s own employees do the work, e.g., the organization hires its own
accountants, market researchers, lawyers, and computer engineers. Hence,
insourcing (or in-housing) enables the business to retain full control of its
operations.
o Advantages

Insourcing involves the use of existing resources and employees, so this
can be cheaper than using an outsourced provider. This is especially the
case of there are no significant capital investments costs involved.

It enables an organization to have better control of its operations.

It helps to develop institutional knowledge (the collective historical and
cultural awareness and understanding of skilled and experienced workers).

It maintains or creates jobs in the local and domestic economy.

It is suitable for start-ups businesses and smaller organizations with little
or no experience in using subcontractors.
o Disadvantages

Employees may not have the required knowledge, abilities or experience
to perform the tasks. By contrast, outsourced specialists could be more
effective and productive.

Multinational companies that want to expand in overseas markets cannot
rely on insourcing as a growth strategy.

Reshoring (the practice of bringing back business functions to the
domestic country) can be expensive as the costs of insourcing are likely to
be high. This will have a negative impact on profits, at least in the short
term.

Reshoring is the opposite of offshoring. Activities may still be outsourced, but they are
outsourced in the home country, rather than overseas.
o It is important to note that there has been a recent trend for businesses to reverse
outsourcing.
o Reshoring refers to the practice of taking back jobs lost to subcontracting
overseas. Rising labour costs in China have played a part in this decision.
5.5 Production Planning (HL Only)

Production Planning involves looking at the “supply chain” in a business. This chain looks t
the links between the company, supplier and consumer.

A business must consider ways of reducing waste and reducing level of stock the held.
However, you must ensure you are able to meet customer demand.

The supply chain is the system of connected organizations, information, resources and
operations that allow a business to fulfil its business activities. It includes suppliers,
distributors, retailers and customers.

Just in case (JIC) is a traditional method of stock control which means holding a reserve of
raw materials and finished products in case of a sudden increase in demand.
o The old approach is called JIC. A business holds “buffer stock”. It’s a safe amount of
stock held for unforeseen rises in demand.
o Extra stock kept in case of unexpected events
o JIC reduces risk but is expensive to use.

Just in time is a modern methos of stock control which involves getting supplies only when
necessary and producing only when an order is made.
o JIT means that stock arrives on the production line just as it is needed. This
minimizes the amount of stock that has to be stored (reducing storage costs)
o Goods are made to order. Stock is kept to a minimum.
o JIT requires you to have very good links with your supplier and high degrees of trust.

Stock Control Charts
o The most efficient way for a business to control its stock management is to use stock
control chart.
o Stock Control Charts - The Headings

Initial Order - first amount ordered

Usage Pattern - how much stock is used over a given time period.
(Seasonal)

Maximum Stock - how much stock can the business afford to hold.

Minimum Stock - how much of a buffer is there?

Reorder Level - at what level should the stock be reordered.

Reorder Quantity - the mounds of stock the tis required to be ordered.

Lead Time - how long does the stock take to arrive.
o Why Keep Stock?

Some Benefits:
 No lost Sales
 No idle workers
 Meet Special Orders

Some Problems:
 Storage Costs
 Money tied up
 Wastage
o High storage costs and possible storage wastage must be balanced against possible
lost sales or idle production.
o A stock control chart outlines usage patterns, stock levels reordering quantities and
levels in order for a company to efficiently manage their stock.
o Buffer stock is a safe amount of stock kept for accidents.
o Re-order quantity is the amount the company orders re-order level is the amount that
is reached where the will re-order.
o Amount of time given for re-ordered stock to arrive.

Capacity Utilization
o For future planning of a business, it is vital to see how efficient it is with its output.
o The higher the utilization rate the lower the average cost should be as economies of
scale happen.
o Capacity utilization refers to what % of a factory’s capacity is actually being used, for
example, if a factory can produce 10,000 cars a week but is actually producing 8,000
then capacity utilisation is 80%
𝑎𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
o The capacity utilization rate is calculated by𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑒 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 × 100

Productivity Rate
o The Productivity Rate can be calculated as the amount produced by each worker.
𝑡𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦
o 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑝𝑒𝑟 𝑤𝑜𝑟𝑘𝑒𝑟 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟
𝑡𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
o The productivity rate is calculated by 𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑝𝑢𝑡 × 100
5.6 Research and Development (HL Only)

Research and development allow organizations to develop new and existing products in an
innovative way.
o R&D involves making changes to existing products or involves the development of
new ones. To remain a business must research into new ideas.
o R&D represents an investment for the long term. It is a vital source of the ideas,
innovation and gaining competitive advantage. It also allows a business to extend its
Product life cycle.
o Advantages

Improve production.

Reduce waste and costs

Gain competitive advantage.

Faster development times

Improve quality.

Create new markets
o Problems with R&D

R’&D may only be suitable for companies with ‘deep pockets. It will take
a considerable investment of both human and financial interest to succeed.

Patents
o A patent allows a business to protect its idea for up to 20 years. It means no other
business is allowed to make that product during this time. Many drug companies have
patents.

Trademarks
o A Trademark protects intellectual property. This mean things like logos, designs and
catch phrases.

Types of innovation in a business:
o Product innovation exists when new products are created, or existing products are
improved.
o Process innovation improves the manufacturing or service delivery process.
o Positioning innovation refers to the use or perception of a new product – where it sits
in the market and how it is perceived.
o Paradigm innovation is a substantial innovation which could change the whole
industry.

R&D or Not…?
o A business will need to consider -


The cost of investment

Level of competition

Long vs. short term strategy
2 types of creativity
o Adaptive creativity transfers and applies existing forms of thinking and problemsolving to new scenarios or different situations.
o Innovative creativity generates new forms of thinking, addressing problems from a
new and unusual perspective.
5.7 Crisis Management and Contingency Planning (HL Only)

What is a Crisis?
o The term crisis is often heard in the press. In business a potential ‘crisis’ which will
negatively affect a business, will try to be controlled or planned for. The following
factor need to be considered,


Time

Communication

Speed

Control
Examples of Crises include:
o Power failure
o A fire
o Workers going on strike.
o Severe weather conditions, e.g., flooding, hurricanes, droughts, snowstorms, and
forest fires.
o An economic recession
o A global financial crisis, as occurred in 2008.
o Political turmoil, such as in Turkey 2016
o The outbreak of highly infectious disease, such as SARS (2003) the norovirus
(2016) , and the coronavirus (2019 - 2020)
o A widespread product recall, such as Toyota’s recall of 5.8 million cars worldwide
o Technological failures, e.g., security breaches, machinery breakdowns and problems
with internet technologies
o Natural disasters, e.g., earthquakes, volcanic eruptions, landslides, and tsunamis
o Traffic congestion and delays, e.g., international flight cancellations or delivery
problems, such as KFC running out of chicken products
o Liquidity problems, (a financial crisis faced by an individual organization)

Crisis management is a direct response to a specific, unpredictable event.

Crisis management needs to be well-communicate, controlled and prompt (although not
rushed).

Contingency planning refers to an organization’s efforts to minimise the negative effects of
potential crises.

Contingency planners must take account of costs, time, risks and safety.