BUSINESS STUDIES A

LEVEL NOTES 9609

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 Contents

1 Business & its environment ......................................................................................................................................2

1.2 Business structure ...............................................................................................................................................2
1.3 Size of business ..................................................................................................................................................3
1.6 External influences on business activity .............................................................................................................4
2 People in organisations .......................................................................................................................................... 13
2.3 Human resource management (HRM) ............................................................................................................. 13
2.4. Organisational structure .................................................................................................................................. 18
2.5 Business communication ................................................................................................................................. 23
3 Marketing ................................................................................................................................................................ 28
3.4 Marketing planning ........................................................................................................................................... 28
3.5 Globalisation & international marketing ........................................................................................................... 32
4 Operations & project management ......................................................................................................................... 36
4.2 Operations planning ......................................................................................................................................... 36
4.4 Capacity utilisation ........................................................................................................................................... 36
4.5 Lean production & quality management .......................................................................................................... 38
4.6 Project management ........................................................................................................................................ 42
5 Finance & accounting ............................................................................................................................................. 45
5.3 Costs ................................................................................................................................................................ 45
5.6 Budgets ............................................................................................................................................................ 46
5.7 Contents of published accounts ....................................................................................................................... 48
5.8 Analysis of published accounts ........................................................................................................................ 50
5.9 Investment appraisal ........................................................................................................................................ 52
6 Strategic management ............................................................................................................................................ 54
6.1 What is strategic management? ...................................................................................................................... 54
6.2 Strategic analysis ............................................................................................................................................. 55
6.3 Strategic choice ................................................................................................................................................ 58
6.4 Strategic implementation.................................................................................................................................. 61

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 1 Business & its environment
1.2 Business structure
1.2.1 Local, national, & multinational businesses
❖ main differences between local, national, & multinational businesses
- Local business: a business which provides goods &// services to a limited & specific area of one country
i.e., a village / town. E.g., small building & carpentry firms, single-branch shops & hairdressing businesses.
- National business: a business that provides goods / services to many different regions of one country.
E.g., car-retailing firms, retail shops w/ many branches & national banking firms.
- Multinational business: a business that has its headquarters in one country but operates in at least one
country other than its home.

❖ the growing importance of international trading links & their impact on business
activity
- Free trade: no restrictions / trade barriers exist that might prevent / limit trade between countries.
https://youtu.be/r4US7okMBb8
- Protectionism: using barriers on free trade to protect a country’s own domestic industries.
https://youtu.be/LfP9geym9cc
- Tariffs: taxes imposed on imported goods to make them more expensive than they would otherwise be.
- Quotas: limits on the physical quantity / value of certain goods that may be imported.
- Voluntary export limits: an exporting country agrees to limit the quantity of certain goods sold to one
country (possibly to discourage the setting of tariffs/quotas).
- Globalisation: the increasing freedom of movement of goods, capital, & people around the world.
https://youtu.be/w3ohMzkTdpk
- The World Trade Organisation – countries committed to freeing the world from trade restrictions. They
hold meetings to discuss the reductions in tariffs & quotas & these must be agreed on by all its members.
- Free-trade blocs – countries, usually geographically grouped, that have arranged to trade w/ each other
w/o restrictions.
https://youtu.be/MuZXCvA24_8
• NAFTA (North American Free Trade Association – USA Canada & Mexico)
• ASEAN (Association of South East Asian Nations)
• EU (European Union)
- Advantages & disadvantages of international trading links to businesses

Advantages Disadvantages
A larger market – global market Higher competition = pressure on price = less profits
Fewer restrictions placed on import/export More consumers = more variety = less economies of scale
Lower import duties by the participating governments Developing countries have lower wages = exported products are
Growth of a business cheaper = loss of jobs in other countries
Economies of scale Not all goods are acceptable for sale = alcohol, weapons, etc;
Beneficial sharing of expertise business should be aware

- Advantages & disadvantages of free trade to nations

Advantages Disadvantages
Consumers are offered a more variety Lack of efficiency = cannot compete = loss of jobs in firm
Imported raw materials = produce output = industrialisation Conflict between countries = issues to import (specialisation)
Countries can specialise = economies of scale = higher standard Transition to specialisation may lead to job losses
of living due to higher income due to better quality New business may face challenges
Importer may sell good below cost to eliminate competition
If imports exceed exports, there will be loss in foreign exchange.

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1.2.2 Multinationals
❖ benefits & disadvantages of a multinational.
https://youtu.be/lhCNnJQDD3Q

Advantages Disadvantages
Closer to main markets = lower transport costs Communication links w/ headquarters may be poor
Government grants & tax incentives to encourage Language, legal & cultural differences lead to
industrialisation misunderstanding
To the business

Close to main markets = viewed as local company = gain Poor coordination w/ headquarters = conflicting marketing
customer loyalty policies
Lower labour rates Cost of training programmes due to high skill levels
Cheaper rent & site costs
Close to main markets = more market information
Avoid import restrictions by producing in local country
Access to local natural resources; not available in host
country
Foreign currency exchange Exploitation of local workforce
To the host country

Employment opportunities No/lower business for local firms

Local firms will receive orders from multinationals Pollution from firms, higher than allowed in other countries
Competition will force better quality & efficiency in local firms Advertisements = imposing of western culture = reduced
Increased tax received by government cultural identity
Increase output, thus increased GDP Profits may be sent back to country of origin
Management expertise in community will improve Extensive depletion of limited natural resources

1.2.3 Privatisation
❖ advantages & disadvantages of privatisation in each situation.
- Privatisation: selling state-owned & controlled business organisations to investors in the private sector.

Advantages Disadvantages
Greater efficiency due to profit motive Does not consider the needs of the society
Quicker decision making than state-owned Difficult to achieve coordinated policy for the entire country
Direct involvement & control = higher motivation for managers The business is no longer accountable to the government
Unconstrained by the government on growth Can exploit customers w/ high prices
No politics involved; decisions are taken for commercial reasons Smaller business = reduced opportunities for economies of scale
Sale of business = government raises funds for other projects
Access to stock markets = increased capital investments

1.3 Size of business

1.3.1 External growth
❖ the different types of merger & takeover
https://youtu.be/PEjcLTjBXdk; https://youtu.be/Hf1izQ1R-Eg; https://youtu.be/P5VYUXuQmYg
- Merger: an agreement by shareholders & managers of two businesses to bring both firms together under a
common board of directors’ w/ shareholders in both businesses owning shares in the newly merged
business.
- Takeover: when a company buys more than 50% of the shares of another company & becomes the
controlling owner of it – often referred to as ‘acquisition’.
- Horizontal integration – integration w/ firms in the same industry & at same stage of production
- Vertical integration forward – integration w/ a business in the same industry but a customer of the
existing business
- Vertical integration backward – integration w/ a business in the same industry but a supplier of the
existing business
- Conglomerate integration – integration w/ a business in a different industry
- Hostile takeover: a business, who wants to remain independent, being taken over w/o consent.
- Friendly takeover: a business taken over w/ the agreement of both parties.
- Synergy: literally means that ‘the whole is greater than the sum of parts’, so in integration it is often
assumed that the new, larger business will be more successful than the two, formerly separate, businesses
were.
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❖ impact of a merger/takeover on the various stakeholders
Stakeholder Positive Negative
- Cheaper prices due to economies of scale - Customer choice may be reduced.
Customer/consumer
- Closer relationship w/ customers - Monopolies may occur limiting innovation
- New opportunities for training & promotion - Reduced job security as redundancies may occur.
Employee
- Access to new work practices & ideas - Changes in practices may cause dissatisfaction
- Increased economies of scale increase profits - Diluted share ownership
Shareholder - Greater share of the market increases the - Increased risk of investing in a business in
customer base instability
- Reduced employment increases welfare payment.
Government - Increased investment into key/growing industries
- Increased (monopolistic) power of businesses
- Less competition leads to focused marketing. - Increased strength of single competitor
Competition - Streamlines product portfolios w/ less diverse - Larger competitor may have a larger brand
options presence & investment into product development

- Large orders due to the increased business size - More risk of losing customer to competitor.
Suppliers - Less capital expenditure on administration due to - Increased customer power reduces unit prices
simpler buying channels reducing unit profits

❖ why a merger/takeover may / may not achieve objectives e.g., synergy.

- Compatibility & culture – there may be differences in culture & ethical views.
- Focus on objectives – there may be differences in objectives.
- Workforce dissatisfaction – the workforce may be dissatisfied because their needs may not be
considered, / they may not be consulted on the change process.
- Customer acceptance – the customers may not accept the brand because it may not meet expectations /
may face the impact of the merger/takeover.
- Exploitation of opportunities – the opportunities may not be exploited because a professional approach
may not be adopted by the management to track progress.

❖ the importance of joint ventures & strategic alliances as methods of external growth
- Joint venture: a business agreement between two / more organisations who develop a new
business/project but retain their own separate Identities.
- Strategic alliance: agreements between organisations to commit resources to achieve agreed, common
objectives.
- Some key reasons why joint ventures & strategic alliances are important for external growth are:
• Cost & risk of investment are shared – lower risk of business failure in the event of product failure.
• Exploitation of key strengths – each business will have a strength which complements the other & the
final product is more valuable than the sum of the two parts.
• Protection of the overall brand – a joint venture may minimise the parent companies' risk of brand
failure.
• Incompatible management styles – minimises the risk of organisational failure due to the businesses
focusing only on their areas of expertise.

1.6 External influences on business activity

1.6.1 Political & legal
❖ how a government might use the law to seek to control
- https://youtu.be/zDOZJpWXQr0; https://youtu.be/crMRgS2LyV0
- Recruitment, employment contracts & termination of employment
• A written contract of employment: pay, working conditions & disciplinary procedures.
• The length of the maximum working week is controlled.
• Holiday & pension entitlements are usually guaranteed by legal regulations.
• Protection of health & safety of employees
• Minimum pay / wage levels
• Unfair dismissal & redundancy arrangements
• Prevention of discrimination based on, i.e., disability, age, religion, gender, & sexual orientation.
• Parenting rights & workplace harassment/bullying
• Membership of trade unions
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 - Health & safety
• Equip factories & offices w/ safety equipment.
• Provide adequate washing & toilet facilities.
• Provide protection from dangerous machinery & materials.
• Give adequate breaks & maintain certain workplace temperatures.
- Marketing behaviour
• It is illegal to quote misleading prices.
• Goods are not faulty; are safe & fit for the purpose they are sold.
• Goods & services provided are as described.
• Weights, measures, & sizes are accurate.
• Food products are safe to eat & prepared in hygienic conditions.
• Advertising gives accurate descriptions & does not exploit anyone, i.e., children.
- Competition
• Prevent price fixing & price agreements.
• Prevent information-sharing agreements.
• Prevent producers refusing to sell to retailers unless minimum prices are set.
• Prevent sole supplier arrangements – suppliers only supply if no competitors are allowed.
• Predatory pricing
• Banning cartels (an association of manufacturers / suppliers w/ the purpose of maintaining prices at a
high level & restricting competition)
• Investigate monopolies to make sure that these are not acting against consumer interests.
• Investigate proposed mergers & takeovers to make sure they will not result in unfair monopoly power.
- Location decisions
• Control where business can locate.
• Restrictions on pollution i.e., noise pollution.
• Ensure businesses are not exploiting natural resources.
• Ensure proper disposal of waste & storage of harmful chemicals.

❖ how international agreements might have an impact on businesses.

International agreement Positive impact Negative impact
Carbon emissions More energy efficient = reduces costs Increases cost of other ways of energy usage
International trading Larger markets across the world = larger Increased competition from multinational
opportunities revenue streams businesses
Allows for comparison on accounting records Interpretation may vary between countries &
Accounting standards
globally may not reflect local practices
Increases the mental & physical safety of Increases the cost associated w/ health & safety
Labour issues
employees which increases motivation & other labour issues

1.6.2 Economic constraints & enablers

❖ how the state might intervene to help & constrain businesses (small & large)
Methods of intervention Helpfulness Constraints
Increased = limit sales of demerit goods /
Lowered = increased investment & profitability
Taxation services
Tax breaks for start-up businesses Limit inflationary business practises
Laws including
Can be relaxed to within international constraints Minimum standards increase business costs
environmental, employee &
to give an advantage to key industries which can decrease productivity & profit
consumer protection
Organisations to enable start-up advice, growth, May be difficult to access / may be too generic
Information support
& export for all industries
Strict rules & regulations to the awarding of
Direct financial support to essential services /
Grants & subsidies grants & subsidies, may exclude smaller
key industries w/ poor initial cash-flow
businesses w/ less experience
Awarding government Capital investment into infrastructure projects Often require long term investment & strict
contracts awarded to ‘local’ businesses adherence to profit reducing regulations

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 ❖ how the state might deal w/ market failure
- Market failure: when markets fail to achieve the most efficient allocation of resources & there is under- /
overproduction of certain goods / services. In these cases, it is unlikely that a privately-owned business will
be able to provide these facilities & make a profit:
• Education for all • Roads, railways, ports, & airports
• Streetlights • A legal system & police force
• Consumer protection & labelling • Defence & national security
• Medical & hospital services for all • Public open spaces
<

Market failure Solution Possible consequences

Set quotas + Reduced volatility
Fluctuating prices - Increased speculation
Increase/decrease taxation - Reduction of suppliers if costs rise / profits fall
Increase training opportunities / grants for + Long term increase in skilled labour pool
Shortage of appropriate training - Short-term fix only
labour - May cause social unrest due to exchanging
Offer favourable packages for skilled immigrants demographics

Import products/services from abroad + Reassured customer & businesses

Shortages of goods/services - Long term issues due to reduction of domestic
Reduce laws / restrictive economic barriers produce

Legislation & regulation of monopoly power + More consumer choice

Market dominance - Businesses may relocate to states w/ less
(monopoly power) restrictions
Restriction of takeovers/mergers - Reduction in business investment

+ Short term stability & confidence

Extreme market failure Business taken into state ownership - Shareholders lose investment & financial costs
of support
+ Increased productivity & profitability
Reduction in laws, control, & regulation to
Inefficiency - Longer term problems associated w/
minimise costs
deregulation & business self-regulation
<

❖ the key macroeconomic objectives of governments

- Macroeconomic objectives: concerned w/ large scale, country wide economic factors rather than
individual components.
https://youtu.be/GjX9f7Hem-4
- Economic growth: increase in a country’s productive potential measured by an increase in its real GDP.
• Advantages & disadvantages of high economic growth rate to an economy
<

Advantages Disadvantage
higher tax revenue = spending on public services It leads to the depletion of natural resources
Increases employment opportunities for the people Can lead to resource shortages
Businesses experience higher sales & profits Decrease in current consumption
Improvement in the standards of living

• Gross domestic product (GDP): the total value of goods &

services produced in a country in one year – real GDP has
been adjusted for inflation.
• Business investment: expenditure by businesses on capital
equipment, new technology & research & development
• Business cycle: the regular swings in economic activity,
measured by real GDP, that occur in most economies, varying
from boom conditions (high demand & rapid growth) to
recession when total national output decline.
https://youtu.be/RnbFk_YNooA
• Is a recession always bad?
▪ Recession: a period of six months / more of declining real GDP.
▪ Capital assets, i.e., land & property, may be cheaper & firm can invest in hope of economic recovery.
▪ Demand for ‘inferior’ goods could increase due to lower income.
▪ Risk of job losses may lead to better employer & employee relations, leading to increased efficiency.
▪ Closures = business ‘leaner & fitter’ = business can take advantage of future economic growth.

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 Key phase Conditions & characteristics

▪ Fast economic growth w/ rising incomes & profits.

▪ Inflation rises due to very high demand for goods & services,
Boom ▪ Shortage of key skilled workers lead to high wage increases.
▪ Economy’s goods become uncompetitive as profits are hit by higher costs.
▪ The government / central bank often increases interest rates to reduce inflationary pressure.

▪ The effect of falling demand & higher interest rates.

▪ Real GDP growth slows & may even start to fall.
Recession
▪ Incomes & consumer demand fall & profits are much reduced – some firms will record losses & some will go
out of business.

▪ Prolonged recession - real GDP falls substantially & house & asset prices fall.
Slump
▪ More likely to occur if the government fails to take corrective economic action e.g., 2009

▪ Recession eventually leads to a recovery when real GDP starts to increase again.
Recovery / ▪ Corrective government action starts to take effect.
growth ▪ Rate of inflation falls.
▪ The country’s products become competitive once more & demand starts to increase.

Type of producer Period of economic growth Period of recession

▪ May not reduce prices for fear of damaging long-
▪ Increase the range of goods & services.
Producers of luxury term image.
▪ Raise prices to increase profit margins.
goods & services – ▪ Credit terms to improve affordability.
▪ Promote exclusivity & style.
e.g., cars ▪ Offer promotions.
▪ Increase output
▪ Widen product range w/ lower-priced models
Producers of ▪ Add extra value to product – better
▪ Lower prices
normal goods & ingredients/improved packaging.
▪ Promotions
services – e.g., ▪ Brand image may attract exclusive tag.
▪ Do nothing – sales not much affected anyway
tinned food ▪ Do nothing – sales not much affected anyway
▪ Attempt to move product upmarket.
Producers of
▪ Add extra value to the product – e.g., higher ▪ Promote good value & low prices.
inferior goods &
quality. ▪ Free consumer tests
services – e.g.,
▪ Extend the product range to include more ▪ Increase range of distribution outlets
very cheap clothing
exclusive / better-designed products

- Price inflation – the rate at which consumer prices, on average, increase each year.
• Inflation: increase in the average price level of goods & services – results in fall in the value of money
https://youtu.be/Y9X_tJ4U7eI
• Deflation: a fall in the average price level of goods & services.
https://youtu.be/rdYO-GWWIv4
• How to measure inflation
▪ An index number can be used to record average changes in many items.
▪ Each month, government statisticians record the prices of items that feature in an ‘average’
household’s budget.
▪ These prices are compared to the previous month & the changes are ‘weighted’ to reflect the
importance of each item in household budgets.
▪ All the weighted price changes are then averaged & given an index number.
▪ This index number is easy to compare w/ past time periods, because the series of index numbers
will have started from a base period, given a value of 100.
• Causes of inflation.
▪ Demand-Pull Inflation – occurs when governments / consumers / businesses try to purchase more
output than the economy can produce.
▪ Cost-Push Inflation – due to decreases in supply, primarily due to increases in production cost.

Demand-pull inflation
▪ Unnecessary printing of more note & coins by the central bank
Causes ▪ Excessive government expenditure
▪ Supply shortages
▪ Reduce government expenditure & increase taxation (fiscal policy)
Solutions ▪ Central bank raises interest rates & reduce the supply of notes & coins in the economy (monetary policy)
▪ The government works on supply bottlenecks

▪ High interest rates will discourage investments.

Reduction in demand ▪ Aggregate demand will fall, & the firms may decide to relocate to other countries.
▪ Businesses may begin to offer less expensive goods
Cost-push inflation

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 ▪ Increase in wages.
▪ Increase in the world price of imported raw materials.
Causes
▪ Lower exchange rate pushing up prices of imported raw materials.
▪ Increase in the cost of production

▪ High exchange rate policy (revaluation of domestic currency)

▪ Discourage high wages by limiting trade union powers.
Solutions ▪ Come up w/ cheaper local resources.
▪ Reduce indirect taxation.
▪ Provide subsidies to firms
▪ High interest rates will discourage foreign direct investments.
Reduction in demand ▪ High exchange rate will make exports less competitive on the world markets.
▪ Workers become less productive when the wages are reduced
,

• Types of inflation
▪ Creeping Inflation – when prices rise 3% a year / less. It benefits economic growth & makes
consumers expect that prices will keep going up which boosts demand. Consumers buy now to beat
higher future prices.
▪ Walking Inflation – between 3-10% a year. It is harmful as it heats-up economic growth too fast.
People start to buy more than they need to avoid tomorrow's much higher prices. This increased
buying drives demand even further so that suppliers cannot keep up. More important, neither can
wages.
▪ Galloping Inflation – 10% / more. Money loses value so fast that business & employee income
cannot keep up w/ costs & prices. Foreign investors avoid the country, depriving it of needed capital.
The economy becomes unstable, & government leaders lose credibility.
▪ Hyperinflation – more than 50% a month (rare). In fact, most examples of hyperinflation occur when
governments print money to pay for wars.

Business strategies in period of inflation Business strategies in period of deflation

Try to reduce labour costs Sale goods on credit basis
Avoid excessive borrowing Borrow more money for expansion
Sale goods on cash basis Increase the repayment period to credit customers
Reduce the credit period to customers
Avoid unnecessary expansion programs
Try to reduce labour costs

- Low rate of unemployment

https://youtu.be/5Upb3buctBM
• Working population: all those in the population of working age who can work.
• Unemployment: when members of the working population can work, but are unable to find a job
• Factors that cause unemployment & solutions

Factors Solutions
Cyclical unemployment: unemployment resulting from
- Training is needed to give the unemployed workers new skills.
low demand for goods & services in the economy during
- The government to invest in declining industries
a period of slow economic growth / a recession.

- Increase government expenditure & reduce taxation (fiscal policy)

Structural unemployment: unemployment caused by
- Increase the supply of notes & coins & reduce interest rates (monetary policy)
the decline in important industries, leading to significant
- Maintain a competitive exchange rate so that the demand for exports does not
job losses in one sector of industry
fall (exchange rate policy)

Frictional unemployment: unemployment resulting - Improve the flow of information by setting up job centres / employment
from workers losing / leaving jobs & taking a substantial agencies.
period to find alternative employment. - Reduce the unemployment benefits

• Effect of high unemployment:

▪ Decrease in the output of goods & services in the economy.
▪ Lower living standards for the unemployed
▪ Increase in social problems e.g., crime & other social ills.
▪ The government must give the jobless people unemployment benefits.
▪ The skills of the unemployed people become increasingly outdated.
• Reducing demand pull inflation will lead to cyclical unemployment & reducing cyclical unemployment will
lead to demand pull inflation.
• Stagflation – a period where there is a high rate of inflation & high rate of unemployment.
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 - Exchange rate stability – the government will try to prevent wild swings in the external value of the
currency in terms of its price compared w/ other currencies.
https://youtu.be/vsZEaI80PD0; https://youtu.be/D2G51WsQNn4
• Exchange rate: the price of one currency in terms of another.
• Exchange rate depreciation: a fall in the external value of a currency as measured by its exchange
rate against other currencies. If $1 falls in value from €2 to €1.5, the value of the dollar has depreciated
in value.
• Exchange rate appreciation: a rise in the external value of a currency as measured by its exchange
rate against other currencies. If $1 rises from €1.5 to €1.8, the value of the dollar has appreciated.
• Imports: goods & services purchased from other countries.
• Exports: goods & services sold to consumers & business in other countries.
• Freely floating exchange rate – the exchange rate determined by the forces of demand & supply.
Equilibrium exchange rate is determined where the demand is equal to the supply of the currency.
• The effects of exchange rate changes on business

Effect on exporters Effect on importers Effect on domestic market

▪ Export price rises. ▪ Import price falls. ▪ Prices of imported goods fall.
Exchange rate ▪ Sales volume falls ▪ Import quantity rises. ▪ Lower cost of import materials
appreciates ▪ Sales value decrease depends ▪ Sales value increase depends ▪ Increased competition for
on price elasticity of demand on price elasticity of demand domestic producers

▪ Higher import prices

▪ Export price falls ▪ Import price rises.
▪ Higher cost of import raw
Exchange rate ▪ Sales volume rises. ▪ Import quantity falls.
materials.
depreciates ▪ Sales value change depends ▪ Sales value change depends
▪ Decreased competition for
on price elasticity of demand on price elasticity of demand
domestic producers

• Factors that determine the demand for & supply of a currency:

Demand for the currency Supply of the currency

Foreign buyers of domestic good & services Domestic businesses buying imports
Foreign tourists spending money in the country Domestic population travelling abroad
Foreign investors Domestic investors abroad

- Wealth & income transfers to reduce inequalities. Some governments – but not necessarily all –
attempt to reduce extreme inequalities of personal income & wealth, usually by using the tax system.
- Balance of payments – a long-term difference between the value of goods & services bought from other
countries (imports) & the value of the goods & services the country sells to other countries (exports)
• Balance of payments (current account): this account records the value of trade in goods & services
between one country & the rest of the world. A deficit means that the value of goods & services
imported exceeds the value of goods & services exported.
• Large & persistent deficit on BOP can lead to:
▪ A fall / depreciation in the value of its currency’s exchange rate
▪ A decline in the country’s reserves of foreign currency
▪ An unwillingness of foreign investors to put money into the economy.
• Ways of correcting a BOP deficit:
▪ Tariffs/Custom Duties – tax on imported goods to increase their prices & reduce their demand in
the domestic economy.
▪ Quotas – physical limit on the quantity of goods to be imported.
▪ Embargo – total ban of the imports
▪ Devaluation – an attempt by the government to reduce the external value of domestic currency.
▪ Subsidising local firms – this will make the production of domestically produced goods cheaper.
• The business importance of these problems is likely to be most serious if:
▪ The exchange rate depreciation (/ frequent fluctuations in the exchange rate) make importing &
exporting too risky.
▪ The government takes corrective actions by, e.g., limiting foreign exchange transactions & putting
substantial controls on imports, i.e., tariffs & quotas. However, the policy could lead to retaliation by
other countries by reduced export demand. Also, import controls are serious for firms that depend on
imported supplies.

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❖ typical conflicts in achieving objectives.
- Achieving low unemployment may mean high growth but also high inflation.
- Transferring wealth from rich to poor may mean it is not worth low-income groups working, so
unemployment rises.
- Achieving low inflation may mean low growth & high unemployment.
- Stabilising exchange rates may mean low growth.

❖ how these macroeconomic objectives can have an impact on business activity.

Objective Impact
- Easier recruitment practises
Low employment levels - Less upward wage pressure
- Increased consumer spending power

- Less pressure for higher wages

Low inflation - Stable pricing & cost structures
- Greater investment certainty
- Increased customer base & demand
Economic growth - Increased investment due to higher returns
- Increased pressure for higher wages

- Easier to import & export.

Stable exchange rates - Increased foreign competition.
- Stable planning

❖ how a government might place a different emphasis on macroeconomic

objectives from time to time
- Reducing / increasing corporation taxes / VAT/ GST – reduces / increases the selling prices & demand,
which may influence the rate of inflation & economic growth.
- Reducing / increasing government regulations – restricts / enables businesses, i.e., reducing labour
laws may increase employment therefore reaching the macroeconomic objective of increasing employment
levels.
- Joining/leaving trading blocs – can increase the ability of the country to meet international markets &
increase exports & possibly decrease imports.

❖ policy instruments used to achieve macroeconomic objectives.

- Fiscal policy: concerned w/ decisions about government expenditure, tax rates & government borrowing –
these operate largely through the government’s annual budget decisions.
https://youtu.be/We2pJBtkTsM
• Government budget deficit: the value of government spending exceeds revenue from taxation.
• Government budget surplus: taxation revenue exceeds the value of government spending.

- Monetary policy: concerned w/ decisions about the rate of interest & the supply of money in the economy.
- Exchange rate policies – altering interest rates can affect the value of a currency in relation to another.
Governments can also link their currency to a stronger currency, i.e., the US Dollar.

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❖ how changes in macroeconomic performance & policies may affect business
behaviour.
Macro-
economic Possible policy Effect of policy Possible business behaviour
objective

- Loans become cheaper. - More investment

Monetary – - Households spend more as borrowing - More borrowing
lower interest becomes cheaper & more spending money - Production increases to meet extra demand.
rates / increase is available. - More employees are hired.
money supply - Exchange rate rises as foreign money - Exporters face higher prices.
leaves banks - Importers face lower prices
Higher - Increased production to meet demand.
- Lower income tax so households spend
employment / - Producers of luxury goods increased
more, especially on luxury products
economic production
growth - Lower sales taxes so prices fall - Increase production to meet demand
Fiscal policy - Lower prices
- Lower profit taxes
- Production increases to meet demand
- Production increases, especially of
- Higher government spending leads to an
government contractors
increase in consumer demand &
- Businesses move to see government
government contracts
contracts
- Borrowing becomes expensive. - Production falls
Monetary – raise - Households spend less as borrowing gets - Marketing increases.
interest rates more expensive & less spending money is - Prices are reduced.
available - Search for new markets
- Prices fall to encourage purchases.
- Production falls
- Higher income taxes so households spend
- Marketing increases.
less
- New products
- Search for new markets
Lower inflation - Lower profits
- Higher sales taxes because price rises
- Cost cutting
Fiscal policy - Profits fall.
- Investment falls
- Higher profit taxes
- Cost cutting
- Relocation to lower tax country
- Profits fall.
- Decreased government spending causes
- Redundancies/rationalisation in government
less consumer demand & government
suppliers
contracts
- Search for new markets

1.6.3 Social
❖ the impact of & issues associated w/ corporate social responsibility (CSR)
https://youtu.be/aS3_tauT_WE
- Corporate social responsibility: this concept applies to those businesses that consider the interests of
society by taking responsibility for the impact of their decisions & activities on customers, employees,
communities, & the environment.
- Social audit: a report on the impact a business has on society – this can cover pollution levels, health &
safety record, sources of supplies, customer satisfaction & contribution to the community.
- These can include:
• Accurate accounting procedures that reflect the true value of assets & cash flows.
• Not paying incentives (bribes) to win contracts.
• Paying a fair wage & providing healthy & safe working conditions.
• Buying raw materials from sustainable sources.
• Acting to reduce pollution beyond the legal requirements.
• Making suppliers confirmed to an ethical code of conduct.
• Not outsourcing to poorly paid / child workers / where health & safety standards operate
• A social audit CSR report of stakeholder objectives, establishing CSR indicators, measuring these
regularly reporting on them.

Benefits Limitation
Can be a marketing advantage in brand image & reputation Expensive & raises costs & prices
Better financial performance as customers attracted & costs are May make businesses uncompetitive, especially in a global
looked at carefully marketplace

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 Stakeholders cannot agree on ethical / socially responsible
Lower costs – e.g., recycling / reducing waste
behaviour
Customer loyalty A luxury in a time of recession
It is a fashionable, cynical way to market a business

❖ why businesses consider the needs of the community including pressure groups.
https://youtu.be/ByC99NTqXVw
- Pressure groups: organisations created by people w/ a common interest / aim who put pressure on
businesses & governments to change policies so that an objective is reached.
- Pressure groups try to achieve these goals in several ways:
• Publicity through media coverage
• Influencing consumer behaviour
• Lobbying of government
- Pressure groups want changes to be made in three important areas:
• Governments to change their policies & to pass laws supporting the aims of the group.
• Businesses to change policies so that, e.g., less damage is caused to the environment.
• Consumers to change their purchasing habits so that businesses that adopt ‘appropriate’ policies see
an increase in sales, but those that continue to pollute / use unsuitable work practices see sales fall.

1.6.4 Technological (including the Internet)

❖ problems of introducing technological change.
- https://youtu.be/XI67trbbRoE
- Information technology: the use of electronic technology to gather, store, process & communicate
information.
- Innovation: creating more effective processes, products, / ways of doing things in a business.
- Computer-aided design: using computers & IT when designing products.
- Computer-aided manufacturing: the use of computers & computer-controlled machinery to speed up the
production process & make it more flexible.
https://youtu.be/IEdPVdNp2QQ
- There are also potential limitations/problems w/ applying technology to business.
• Costs – high capital costs, labour training costs regularly w/ further technological development, &
redundancy costs if staff are being replaced by the technology.
• Labour relations – These can be damaged if the change is not explained & presented to workers in a
positive way w/ justified reason. After job losses, remaining workers may suffer from reduced job
security & reduced motivation levels.
• Reliability – Breakdowns can lead to the whole process being halted. There may be teething problems
w/ new systems & the expected gains in efficiency may take longer to be realised than forecast.
• Data protection – The right to hold data on staff & customers is controlled by national laws & the
business must keep up to date w/ these legal constraints on its use of IT.
• Management – Managers may not be very computer literate, thus may take time in adjusting. Managing
the technological change process requires a great deal of management skill.
- The implementation process of technology

- Usage of technology of in different areas

- Product design based on market research information using IT & the internet.
- Computer-aided design & manufacturing using robotics & 3D printers.
Production
- Fracking to product previously unobtainable gas supplies
- Genetically modified plants & animals

- Enterprise resource planning

Operations - Electronic POS system to link sales, stock & ordering.
- Access to online information & data
Communications - Mobile computing, home working & video conference

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 - Databases to sell to identified groups / individuals.
Marketing - Email & social networks to communicate w/ customers directly.
- Ecommerce – global online sales outlets

1.6.5 Other businesses

❖ how businesses are constrained by & rely on other businesses
May only be able to provide a limited quantity of products & prices may be affected by
Suppliers
market conditions, e.g., scarcity.

Customers May have demands which increases costs & time of production & quality of product

Financial institutions May place restrictions on the amount & uses of the finance offered.

1.6.6 Demographic
❖ how a business might react to a given demographic change
- Demography: the study of population structure (age, gender, ethnicity, education level) & its changes
- Demographic change: describing the changes in the makeup of the population of a region / a country.

Demographic change Impact Reactions

Change in focus from fashionable to family related Changing product line to focus on quality &
Increasing age of population
products practicality.
Increasing role of women in Increased need for flexible working & maternity Greater product focus on female market w/
the workforce leave disposable income.
Change in demand for food, fashion styles & working Change in the product line to reflect the multicultural
Increase in multiculturalism patterns. Increased workforce w/ lower (/ higher) mix of the population & a change in workforce
financial expectations. remuneration & conditions.

1.6.7 Environmental
❖ how (physical) environmental issues might influence business behaviour.
• Sets laws regulating disposal of waste & use of natural materials.
Governmental
• Can Impose fines & restrictions on those who Ignore laws.
• Highlights positive & negative ethical & social issues that can influence customer behaviour.
Pressure groups
• Can be used for marketing & promotional activities if positively reviewed
• Targets i.e., carbon emissions can affect the use of polluting methods of power generation.
International targets
• Increases the manufacturing costs

2 People in organisations
2.3 Human resource management (HRM)
2.3.1 Approaches to HRM
❖ the difference between ‘hard’ & ‘soft’ HRM
https://youtu.be/-SCGHnqrMDM
- Hard HRM: an approach to managing staff that focuses on cutting costs, e.g., temporary, & part-time
employment contracts, offering maximum flexibility but w/ minimum training costs.
- The hard approach might save money on peripheral workers’ costs in the short term, but:
• It could increase recruitment & induction training costs in the long term as temporary workers must be
frequently recruited.
• Demotivated workers w/ little job security might be unproductive & this could reduce company efficiency
& profitability.
• Bad publicity regarding the treatment of workers – especially the ‘them & us’ division between core &
peripheral staff – might lead to negative consumer & pressure group actions against the company.
• Hard HRM ignores the research findings of Maslow, Mayo & Herzberg as workers are not offered job
security, esteem, / job enrichment.
- Soft HRM: an approach to managing staff that focuses on developing staff so that they reach self-fulfilment
& are motivated to work hard & stay w/ the business.

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❖ flexibility, e.g., zero hours contracts & part-time against full-time workers
https://youtu.be/esb9Hp6-Bww
- Part-time employment contract: employment contract that is for less than the normal full working week
of, say, 40 hours, e.g., eight hours per week.
- Temporary employment contract: employment contract that lasts for a fixed time, e.g., six months.
- Flexi-time contract: employment contract that allows staff to be called in at times most convenient to
employers & employees, e.g., at busy times of day.
- Outsourcing: not employing staff directly but using an outside agency / organisation to carry out some
business functions.
- Teleworking: staff working from home but keeping contact w/ the of ice by means of modern IT
communications.
- Zero-hours contract: no minimum hours of work are offered, & workers are only called in – & paid – when
work is available.
- Advantages & disadvantages of a part-time & flexible employment contract:
Advantages Disadvantages
For business
Employees can work at busy periods of the day but not during the There will be more employees to manage than if they were all full-
slower periods. time.
Zero hours contracts – no fixed cost element in a worker’s pay – a
wage is only paid if the worker is called in for a few hours. Effective communication more difficult – more staff in total &
impossible to hold meetings w/ all the staff at any one time. Greater
Real competitive advantages - can give good customer service w/o reliance on written communication.
cost increases.
More staff are available should there be sickness / other causes of
absenteeism. Demotivation - part-time staff may feel less involved. Difficult to
establish a teamwork culture if staff never meet due to different
Efficiency of employees can be assessed before offered a full-time working hours.
contract.
Teleworking - savings in overhead costs i.e., smaller office Workers may have multiple zero hours contracts w/ different
buildings. employers – may not be available immediately if called.
Lower overhead costs to a business.
For workers
Ideal for certain types of workers e.g., parents w/ young children, They may be paid at a lower rate than full-time workers
students / more elderly people who do not wish to work a full week. They will be earning less than full-time workers.
They may be able to work w/ different firms - greater variety to their Lower security of employment & other working conditions than full-
working lives. time workers.

- Differences between full time & part time contracts

Full-time contacts Part-time contracts

A contract for a full week’s work A contract for less than a full week’s work
Usually, 37-40 hours per week Often less than 20 hours per week
Stable, trained workforce Specific workforce for times
Highly skilled, difficult to recruit & motivated staff Projects & seasonal jobs
Employees likely to be motivated & loyal Employees like to be highly skilled & motivated
Expensive, especially in period of recession No security of employment / income

❖ the measurement causes & consequences of poor employee performance.

- Staff appraisal: a regular review to evaluate an employee’s skills, achievement growth / lack thereof.
Useful for feedback in relation to measuring & rewarding performance & success.
- Different methods of measuring employee performance are:
• Planned interviews – discussion w/ managers regarding targets, training, / other issues.
• Observation – managers observe employees & measure against pre-set targets & benchmarks.
• Productivity – like observation. However, the rate of work output is measured against pre-set targets.
- Benefits of staff appraisal.
• During appraisal interviews / observation, training need can often be identified.
• New ideas can come out from the discussion for the benefit of the business.
• It can allow pay levels to be adjusted.
• It can confirm the extent to which employees are meeting targets which can then be used as the basis
for bonus payments.

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 - Causes & consequences of poor employee performance:

Causes Consequences Effects

Poor employee motivation High labour turnover Increased recruitment & training
Lack of effective leadership Disciplinary action costs
Lack of skills/ experience Low output
Increased cost of defective products
Absenteeism Poor-quality output
Poor morale Loss of orders Dismissal & lack of workforce
High levels of wastage

https://youtu.be/610qIGxW_DM; https://youtu.be/iRcpBCL85oc
- Labour productivity: the output per worker in each time.
𝑡𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 𝑖𝑛 𝑡𝑖𝑚𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 𝑒,𝑔,𝑜𝑛𝑒 𝑦𝑒𝑎𝑟
- Labour productivity =
𝑡𝑜𝑡𝑎𝑙 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
- Absenteeism: measures the rate of workforce absence as a proportion of the employee total.
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑎𝑏𝑠𝑒𝑛𝑡
- Absenteeism (%) = × 100
𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠
- Labour turnover: measures the rate at which employees are leaving an organisation.
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑙𝑒𝑎𝑣𝑖𝑛𝑔 𝑖𝑛 𝑜𝑛𝑒 𝑦𝑒𝑎𝑟
- Labour turnover = × 100
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑑

❖ strategies for improving employee performance.

https://youtu.be/I5l8yX0J2iY; https://youtu.be/AWNau0xDwGY
- There are several reasons why labour productivity might increase over time:
• Improved staff motivation & higher levels of effort
• More efficient & reliable capital equipment
• Better staff training
• Increased worker involvement in problem solving to speed up methods of production, e.g., kaizen &
quality circles.
• Improved internal efficiency, e.g., no waiting for new supplies of materials to arrive.
- Methods for improving employee performance:

Empowerment Communication Feedback Procedures

Settings goals Verbal Celebratory Disciplinary
Access to resources Non-verbal Areas of improvement Promotional
Responsibility Two-way Comments Grievance

❖ Management by Objectives (MBO) – implementation & usefulness

- Management by objectives: a method of coordinating & motivating all staff in an organisation by dividing
its overall aim into specific targets for each department, manager, & employee.
- Implementation of MBO:
• Agreed between the employees & their manager / set by management w/o discussion w/ the employee.
• Individual / for a whole department.
• Direct from senior management / part of a departmental target.
- Objectives should be:
• SMART to be effective.
• In line w/ overall business objectives.
• Can be monitored & measured so that action can be taken if targets are likely to be missed.
• Recognised if met so that reward can be given to encourage employees.

Usefulness Disadvantages
Employees feel involved when objectives are discussed & agreed. Time consuming
Business may not want to discuss some overall objectives w/ all
Having specific objectives to achieve can be motivating.
employees
Employees are more likely to be committed to objectives that they Employees may suggest very easy targets to ensure that financial
have been involved in setting. rewards will be achievable.
Employees know what is expected of them & how they are Targets that are too difficult to achieve may demotivate – forecasts &
contributing to the business objectives. targets must be realistic.
Employees may be motivated by having their training needs & Can be inflexible due to changes in external environment, i.e.,
potential for promotion recognised. recession – changes may be required.
Discussion of training needs – employees feel inadequate /
unrealistic expectations of promotion.
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2.3.2 Labour legislation
❖ the need for labour legislation & the broad principles that often underlie it.
- The two main objectives are to:
• Prevent exploitation of workers by powerful employers by, e.g., laying down minimum levels of health &
safety & minimum wage rates.
• Control excessive use of trade union collective action.

Issue Content
Hours of work Maximum hours of work allowable per week
Remuneration issues including
National minimum wage: how & when employees should be expected to be paid & rate of overtime.
minimum wage
Prevent discriminations for reasons of gender, race, religion, sexual orientation, trade union
Discrimination issues
membership, political affiliation, / being HIV positive.
Health & safety Ensures a safe & healthy working environment
Employment contracts Required details of employment contract; how & when they may be terminated
Holiday entitlement Minimum holiday entitlement: incentives are allowed if minimum is met
Covers the right to be a member of trade union; bargaining agreements; type of actions workers can
Employment relations
take
Minimum age issues Limit the type of work that can be done below a stated age; all work is prohibited below a certain age

2.3.3 Cooperation between management & workforce

❖ how cooperation between management & the workforce can benefit both
- The benefits of cooperation
• Employees & managers might learn to respect & understand each other.
• It can produce a useful exchange of ideas.
• It helps to remove the feeling of ‘them & us.
• Less confrontation & fewer strikes
- Cooperation can be achieved:
• Using worker participation
• By recognising the value of input from employees, leading to a more motivated workforce

Cause of conflict Common management view Common employee view

Business change, e.g., relocation / new Change is necessary to remain competitive
Change can lead to job losses
technology & profitable
Business needs to cut overheads & be Always seem to fall on employees - reduced
Rationalisation & organisational change
flexible to deal w/ competition job security & lower motivation

2.3.4 Workforce planning

❖ reasons for & role of a workforce plan
- Workforce planning: analysing & forecasting the numbers of workers & the skills of those workers that will
be required by the organisation to achieve its objectives.
- Workforce audit: a check on the skills & qualifications of all existing workers/managers.
- What does workforce planning involve?
- Avoids having too many employees, resulting in wasted human resource.
- Improves the potential for the business to run efficiently because the right number of workers w/ the right
skills are employed.
- Provides a clear idea of what is to be achieved to determine accurately what workforce is needed.
- Determines whether the employees have the skills required to meet the business objectives.
- Factors that influence the number of employees recruited & the skill level of employees required.
• Forecast demand of the firm’s product.
• The productivity levels of the staff
• The objectives of the business
• Changes in the law regarding workers’ rights
• Labour turnover & absenteeism rate
- What steps can be taken if the business does not have enough employees w/ the right skills?
• Recruit more staff – permanent / temporary, full- / part-time.

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 • Retrain existing stuff.
- What steps can a business take if it has too many employees?
• Make some existing workers redundant.
• Do nothing - workers might leave / retire & reduce the workforce to the desired size naturally.
• Make sure that the employees needed by the business are kept - persuade them to stay.

2.3.5 Role of trade unions in HRM

❖ the benefits of trade union involvement in the workplace.
- Trade union: an organisation of working people w/ the objective of improving the pay & working conditions
of their members & providing them w/ support & legal services.
- Trade union recognition: when an employer formally agrees to conduct negotiations on pay & working
conditions w/ a trade union rather than bargain individually w/ each worker.
- Purpose & value of trade unions:
• Represented members at meetings w/ business representatives.
• Seek changes for businesses requiring its employees to work outside legal guidelines - e.g., to
regularly exceed the number of hours that should be worked.
• Work to resolve grievances between workers & their employers.

Benefits to employees Benefits to the employers

Skilled representation w/ negotiating experience External bodies can mediate when in dispute w/ employee bodies
Ensure members follow legislation & intervene when infractions
More power than on an individual level
made
Legal representation when in dispute w/ management Employers can discuss issues w/ a few impartial representatives,
Up to date information regarding employment legislation saving time due to not meeting all employees

- Collective bargaining: the process of negotiating the terms of employment between an employer & a
group of workers who are usually represented by a trade union official.
- Terms of employment: include working conditions, pay, work hours, shift length, holidays, sick leave,
retirement benefits & health care benefits.
- Single-union agreement: an employer recognises just one union for purposes of collective bargaining.
- No-strike agreement: unions agree to sign a no-strike agreement w/ employer in exchange for greater
involvement in decisions that affect the workforce.
- Industrial action: measures taken by the workforce / trade union to put pressure on management to settle
an industrial dispute in favour of employees.
- Factors determining the strength of:

Trade union Employer

Most workers belong to one union Unemployment is high
All workers agree to take industrial action Profits are low
Industrial action costing the employer large sums of money Threats of relocation to low cost countries
Rate of inflation increasing Demand for the product is elastic
Labour cost is a low proportion of total costs When the rate of inflation stable
Demand for the product labour helps to produce is inelastic Productivity of workers did not change
When productivity increases
<

- Types of industrial action:

By trade unions By employers

Strike – employees refuse to work Negotiations − to reach a compromise solution
Picketing – employees stand outside the workplace & prevent the Public relations – using the media to try to gain public support for
smooth functioning of the firm. E.g., may stop movement of lorries the employer’s position in the dispute
Work to Rule – employees refuse to do any work outside the
Threats of redundancies
precise terms of the employment contract.
Go slow – employees work at a very slow pace. Changes of contract
Closure – closure of the business / the factory; leads to redundancy
Non-cooperation – workers refusing to follow a new procedure/rule.
& no profit for the business owners
Overtime ban – employees refuse to work overtime
Sit-in/ Sit down strike – employees report for duty, but they just sit
in their offices

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 2.4. Organisational structure
2.4.1 Relation between objectives, people & organisational structure
❖ purpose & attributes of an organisational structure
https://youtu.be/d-0BAO_EhR4;
- Organisational structure: the internal, formal framework of a business that shows the way in which
management is organised & linked together & how authority is passed through the organisation.
- Organisational structure provides a framework for decision-making, allowing flexibility, growth,
development, & a structure for meeting the needs of a business. An organisational structure:
• Illustrates who is responsible for whom & who is accountable to whom within a business.
• Allows employees to know which task should be their priority when given work from more than one
person.
• Shows who are the decision makers in an organisation
• Shows the official chain of command.
• Illustrates the official channels of communication.
• Can also show the different functional departments / divisions within a large business.
• Gives employees some idea of the promotion / progression route within a business.

2.4.2 Types of structure: functional, hierarchical (flat & narrow), matrix

❖ advantages & disadvantages of the different types of structure
https://youtu.be/AQcjYAFEsfc;
- Functional structure
• Functional structure – organised in terms of functional areas / departments of the business. Each
department may have their own hierarchical structure outlining who should report to whom.
• There are eight functional areas in a normal business set up, namely:
▪ General management ▪ Finance
▪ Human resources ▪ Marketing
▪ Public relations ▪ Production
▪ Administration ▪ Purchasing

Advantages Disadvantages
Specialists will be employed for each functional area Communication between department can breakdown
Clear hierarchy & chain of command in each department Lack of coordination & a duplication of effort
Employees know contribution to business structure Decisions concentrated at the top which damages motivation level
Simple lines of control departments compete for resources, costly for the business
<

- Hierarchical structure
• Hierarchical structure – demonstrates the levels of authority in a business, w/ those w/ the most
authority at the top of the structure & those employees w/ least authority & responsibility please start the
bottom.

Advantages Disadvantages
The role of each employee is clear & well defined Remote one-way communication
Employees are given responsibilities, proper rules to follow & Managers are generally accused of having tunnel vision / narrow
procedures to follow vision
Specialisation & economies of scale can be achieved Lack of coordination can occur because of fewer horizontal links
Clearly defined chain of command
It is a proper departmental structure

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 a. Narrow & tall structure
• Narrow & tall structure – many levels, usually in bureaucratic & traditional organisations w/ a narrow
span of control

Advantages Disadvantages
There are different levels w/ delegated decision-making Some loss of control by senior managers
Employees can progress in towards higher levels of responsibility Poor decisions may be made at lower levels
Senior management delegate decision making to managers below Communication through several levels - slow & time consuming
The ideal span of control depends on the skill of the employees & Higher levels of management can become distance from lower
the type of work being undertaken. Highly skilled workers tend to levels- unaware of issues, lower motivation levels in lower line staff.
need less supervision than unskilled workers & therefore could work Some communication is ineffective - lack of contact &// some
under a wide span of control duplication of effort / lack of coordination

b. Flat structure
• Flat – fewer levels w/ a wide span of control, often in new business / those who have delayered to
save time / cost.

Advantages Disadvantages
Closer link between senior managers & lower levels There are limited opportunities for promotion
Information & decisions passed through fewer levels hence less time
Wider span of control - difficult to directly communicate w/ many staff
consuming
Decision-making responsibility rests w/ a smaller number of
Greater motivation as more trust is placed on employees
managers - great burden
Less supervision of employees - lower costs Quality maintenance is difficult

- Matrix structure
• Matrix structure: an organisational structure that creates project teams that cut across traditional
functional departments.

Advantages Disadvantages
Employees will find it difficult to prioritise that work - working on more
The best team will be chosen for a project
than one project at a time
Power struggle - conflict between different project leaders in terms of
Improves cooperation & communication between departments
priority
Effective use of skills within business Costly to implement
Problems of control - employees answerable to more than one
Flexibility - business is more responsive to changes
leader

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Vishakha Mirchandani
 ❖ why some organisations are structured by product & others by function /
geographical area.
a. Organisations structures by product
• Cost & profit centres for each product, w/ each product having its own organisational structure &
specialist teams to support it.

Advantages Disadvantages
People working in each division will be specialised in that specific
product There can be some duplication of effort. E.g., each product might
have a marketing department & the finance department
Costs & revenues can be clearly allocated to that product
<<

b. Organisation structures by geographical region

• Useful for businesses who provide products for different regions.

Advantages Disadvantages
More likely to understand the needs of local customers May not benefit from economies of scale
Local influences may lead to contradictions in marketing messages /
Specialised products can be produced / provided
brand image

❖ the reasons & ways structures change e.g., w/ growth / delayering.

- Factors influencing choice of organisational structure.
• Functional activities taking place - production finance human resource management & marketing. Each
department has a clear function & its own internal hierarchy.
• Product groups are geographical regions depending on the nature of the business involved. A multi-
product business might have a structure for each product, whereas a business operating in several
geographical regions may have separate structure for each region.
• Size of the business - larger businesses tend to need functional departments.
• Aims & objectives of a business, e.g., if the business objective is growth, the organisational structure
must allow growth to take place w/o sacrificing any level of efficiency.
- The reasons & ways structures change:

Change Reason Method of change

Internal
Change in the style of Changing to a more Democratic style to increase Delayering is one method, as well as changing lines
management worker input & motivation of communication
Reducing the number of supervisory managers &
Delayering Decrease costs & increase speed of communication
increasing the autonomy of workers
An increase in the number of departments &
Expansion into new Increasing the layers of management & changing the
products leads to an increase in the scale of
geographically markets structure from matrix to a geographical structure
operation
External

Increase in demand leads to an increase in Changing to a product oriented / geographical

Growth of market
production to maximise profit opportunities structure to maximise product availability & suitability

https://youtu.be/sRQcrFQw8YU; https://youtu.be/xUISnC0P9CE; https://youtu.be/Ob4P79graGY

- Delayering: removal of one / more of the levels of hierarchy from an organisational structure.

Advantages Disadvantages
Reduces business costs May make managers redundant - redundancy costs
Shortens chain of command & improves communication Increases workload for managers - stress
Increases motivation due to less remoteness from top Production in the sense of security of the whole workforce - fear of
management redundancies - Maslow’s needs
Increases span of control & opportunities for delegation

- Consequences of poor organisational structure

• Low motivation & morale • Duplication of activities
• Ineffective decision making • Poor implementation of organisational
• Lack of co-ordination & control objectives
• Poor communication • Inability to respond to changing conditions.

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2.4.3 Formal & informal organisations
❖ features of a formal structure.
- Informal organisation: the network of personal & social relations that develop between people within an
organisation.

Advantages Disadvantages
Lighter workload for management Resistance to change
Workgroup satisfaction Interpersonal an intergroup conflict
Improved communication
Forces management to plan
Greater cooperation

- Features of a formal structure:

• Clear & distinct levels of hierarchy, responsibility, & authority
• Processes & procedures in place to ensure consistency & order.
• Reduced responsibility at lower levels of hierarchy
• Delegation of tasks whilst retention of control & responsibility
• High levels of control & authority in position of trust
- Chain of command: this is the route through which authority is passed down an organisation – from the
chief executive & the board of directors.

2.4.4 Delegation & accountability

❖ relationship between delegation & accountability
https://youtu.be/9tipp7Jm2Vw; https://youtu.be/Fhv32O_fg1A
- Delegation: passing authority down the organisational hierarchy.
- Delegation & accountability
At each level in the organisation tasks are delegated from chief executive officer at the top of the
organisation down to the employees on the very bottom level, but if anything happens that causes the
organisation to perform less well it is the chief executive who will ultimately have to answer to the
shareholders.

❖ processes of accountability in a business

❖ advantages & disadvantages of delegating
Advantages Disadvantages
Senior managers more time to focus on strategic roles Inadequate training - low rate of success
Shows trust in subordinates - motivate & challenge Unsuccessful if insufficient authority is given to subordinate
Develops & train staff for more senior positions Managers may only delegate boring jobs - demotivating
Staff achieve fulfilment through their work (self-actualization)

❖ the impact of delegation on motivation

- Delegation can be a part of job enrichment & exposes employees to a wider range of more complex tasks.
- Employees feel trusted & might begin to believe that they could be promoted. This increases their self-
esteem.
- Delegated tasks can also lead to an employee gaining respect of their colleagues, therefore meeting their
need for the esteem of co-workers.

2.4.5 Control, authority, & trust

❖ relationship between span of control & levels of hierarchy
https://youtu.be/XwwsY84EcB8;
- Level of hierarchy: stage of organisational structure at which personnel have equal status & authority.
- Span of control: the number of subordinates reporting directly to a manager.
- The greater the number of levels of hierarchy, the longer the chain of command. This will affect:
• Communication effectiveness
• Spans of control – smaller in tall organisations.

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 • Delegation – when spans of control are narrow, managers are more able to control the work of the few
people, so delegation is likely to be limited.
• Motivation levels of junior staff – as far from senior management, delegation will be limited.
• Business costs – managers are expensive to employ & they take up very costly office accommodation.

❖ difference between authority & responsibility

- Responsibility - clear accountability for tasks regardless of who carries out / gives orders for the task.
- Authority - the power to give orders & make decisions regarding tasks.
- Authority & responsibility
- Authority can be passed down & responsibility cannot. Thus, the authority to perform a task can be passed
to a lower-level employee but the final responsibility for the successful execution of the work remains w/
the manager who delegate work. It is the manger’s responsibility to ensure that the employee has the
required skills & experience.

❖ conflicts between control & trust that might arise when delegating.
- Delegation requires an element of trust. Trust on the part of the manager that their employee will carry out
the work as required. Trust on the part of the employee that the manager will not interfere once the work
has been delegated. When a manager performs a particular task, themselves they have complete control
about how & when it is done & the standard to which it is done. They must accept that they lose some
control over the work if it is delegated to one of the employees in the hierarchy. If the manager checks
constantly how the work is done, the employee may sense lack of trust & may no longer be willing to
undertake the task. However, if the manger does not keep checking, how do they know that the work is
being done & is being completed to the required standard. This a dilemma faced by people who delegate
some of their work to others.

2.4.6 Centralisation
❖ advantages & disadvantages of centralisation for stakeholders
https://youtu.be/ZsJ6Rbg6SWU; https://youtu.be/tnLOEmJlsmo; https://youtu.be/vPLaoJaPYa4;
https://youtu.be/M1sV6YhxQD8
- Centralisation: keeping all the important decision-making powers within head of ice / the centre of the
organisation.

Advantages Disadvantages
Greater control - employees & use of resources No new ideas are brought in the management system
Decision will be made consistently across all departments / Prevents personal development for managers lower down the
divisions hierarchy
Image can be maintained due to consistency Delays in decision making
Easier communication due to limited involvement of employees Business may not quickly adjust to unexpected change
Employees working towards common goal

- Decentralisation: decision-making powers are passed down the organisation to empower subordinates &
regional/product managers.

Advantages Disadvantages
Decisions are made by managers who are ‘closer to the action’ Loss of control
Managers feel more trusted & get more job satisfaction due to
Development of narrow departmental view
delegation
Decisions can be made much more quickly
The business can adapt to change more quickly

2.4.7 Line & staff

❖ distinctions between line & staff management; conflict between them
https://youtu.be/ViGC-ewNAIA
- Line managers: managers who have direct authority over people, decisions, & resources within the
hierarchy of an organisation.
- Staff managers: managers who, as specialists, provide support, information, & assistance to line
managers.

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 Example of line manager Example of staff manager
departmental manager IT specialist referred to marketing department
Supervisor IT specialist is not managed / controlled by the marketing manager
Line worker IT specialist offers advice only & is not able to instruct
<<

- Functional Authority – it is a right to give orders in a department other than your own. E.g., on specific
projects some specialists can be hired. For instance, calling a finance person to supervise a project.

2.5 Business communication

2.5.1 Purposes of communication
❖ situations in which communication is essential.
https://youtu.be/8hsxaP3MJ-E;
- Effective communication: the exchange of information between people / groups, w/ feedback.
- Key features of effective communication
• Sender (/ transmitter) of the message
• Clear message
• Appropriate medium (way in which the message is sent)
• Receiver
• Feedback to confirm receipt & understanding.
- Reasons why effective communication is important to a business:
• Staff motivation
• The number & quality of ideas generated by the staff.
• Speed of decision-making
• Speed of response to market changes
• Reduces the risk of errors.
• Effective coordination between departments

To communicate w/ employees To communicate w/ customers To coordinate business activities

Advertising informs & encourages new & Communication between different
Give instructions
existing customers to purchase products departments
Allow employee input into decision making & Process orders & allow dialogue for special Communication w/ external suppliers to
work practises orders ensure a constant supply of raw materials
Ensure customer feedback is received & Share organisational aims & objectives to
Increase motivation & morale
action to allow further business opportunities unify business practises

2.5.2 Methods of communication

❖ standard methods of communication: interpersonal, general to & within groups;
spoken, written, electronic, visual.
- Communication media: the methods used to communicate a message.
- Information overload: so much information & so many messages are received that the most important
ones cannot be easily identified & quickly acted on – most likely to occur w/ electronic media.
- What can affect the choice of methods of communication?
• The importance of a written record
• The advantages to be gained from staff input / two-way communication.
• Cost - electronic media can often require expensive capital resources.
• Speed - electronic means can be quick.
• Quantity of data to be communicated.
• Whether more than one method should be used for clarity & to be sure that the message has been
received
• Size & geographical spread of the business

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❖ strengths & weaknesses of the different methods of communication
Method Advantages Disadvantages
Written communication
- Provides records & references. The
- It may create mountains of papers.
receiver can re-read.
Letters – they are used when applying for a - May be poorly expressed by ineffective
- Message can be carefully drafted &
job, requesting for something, informing writers.
directed to large audience through mass
employees of any impending redundancies - It may long time to receive & properly
mailing.
etc understood.
- It promotes uniformity in policy &
- Information can be misinterpreted
procedures.

Reports – formal means of communication,

- Reports can be very detailed & can
they are used in schools’ colleges to give
include diagrams to illustrate some
information about the progress of the - Some information might not be read if
information.
student. Some are issued by companies i.e., the report is too long.
- Provides a permanent record of
annual reports. Some are used when a - Information can be misinterpreted
information.
manager wants a stubborn employee to
- Information is provided in a logical way
narrate his / her case

- There is no guarantee that the intended

recipients will see the information.
- The information is available to many
Notice boards – used for a planned social - The reactions of people to the
people at the same time.
event / meeting. It also includes posters information will be unknown.
- It is cheaper to use
- The information cannot be targeted at a
specific group of people.

- May provide no immediate feedback.

Some open their emails after a long
- A fast way of communicating regardless
time
of where in the world the sender &
- Information overload where too many
Emails – it is a quick means of recipient.
emails are sent.
communicating both internally & externals - Supporting documents can be attached
- It may long time to receive & properly
so that a lot of information can be
understood.
transmitted quickly
- Can lead to cyber related crimes.
- The illiterate cannot use the internet

- A lot of information can be made

available on a website. - The information made available on a
- If the website is very professional & website is accessible to everyone who
Websites – many businesses convey sophisticated the business can project a visits the site. Thus, competitors can
information about their activities on a good image have information which can be used to
business website. The business can display - A website is a relatively low-cost form of their advantage.
mission, products offered, jobs, prices on the communication for businesses once the - There is the potential for malicious
website. site has been established. individuals to gain access to the website
- It allows businesses to contact people & to add harmful information /
who they are not yet in formal contact comments
w/

- Faster communication w/ people - There is a danger that information might

outside the business be released through social media that
Social media – may include Facebook, - Immediate reaction from people can be was not intended for public knowledge.
twitter. Many people invite people to follow obtained through responses posted on - The target market of the business might
them on social media so that up-to-date social media. not be in the section of the population
information can be given out about business - Such interaction between the business that habitually uses social media.
activity & its customers might allow the - Someone within the business will have
business to be more responsive to the to allocate time to manage the face-
needs of its customers book / twitter communications
Oral Communication – includes one to one conversation, interviews, appraisal sessions, group meetings / team briefings.
- It allows two-way communication &
feedback. - Body language of both the sender &
- It encourages motivation. receiver may have a negative impact.
Meetings - It is fast & feedback can be received - It may be unsuitable for information
instantly. which is technical in nature.
- The message can be reinforced w/ the - Meetings can be time consuming
proper use of body language.
- It allows two-way communication &
- There is no record of what was said.
feedback.
- The body language of the people
- It is fast & feedback can be received
involved cannot be seen.
instantly.
Telephone/ Mobile phone - There is no guarantee that the person
- Employees can be in contact 24 hours a
on the other end of the phone is
day, 7 days a week.
listening & paying attention to what is
- Messages can be send/ received, &
being said
they will act as a record

- Easy to understand & retain the

Visual Communication – usually includes
information. - It is not always clear, & they may be
diagrams, pictures, charts, & pictorial
- May be more interesting than simple misinterpreted by the receiver.
representation of the message.
written communication.

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 - Saves time because do not need to
travel to meetings. - It is difficult to judge the body language
- The costs involved in travelling to of those participating.
meetings are saved. - Any time lag can disrupt the fluency of
- People working in different parts of the the discussion.
Video Conferencing – can be held between world can hold regular meetings in this - High Installation costs
two / more people in a variety of locations way. - It can be difficult to assess who wants to
- The cost of equipment is small have an input if the group is large.
compared to the costs saved. - Physical sampling of products of new
- It allows for some eye contact to be products i.e., new chocolate bar / a new
made & for body language & tone of blend of tea is not possible
voice to be observed

2.5.3 Channels of communication

❖ how communication works within an organisation
- Channels of communication often follow the chain of command. There can be times when the usual
channel of communication will not be followed – e.g., if an employee wishes to make a formal complaint
about his / her line manager. Most businesses require communication to occur both vertically &
horizontally.

❖ Comparison & differences

- One way communication – information moves in one direction only, usually from the top to the bottom of
the organisation.
• Bureaucratic businesses w/ tall structures generally rely on one way communication: decisions are
made at the top of the organisation & cascade down to the employees at the bottom of the structure.
• Employee involvement, responsibility & trust is minimal.
- Two-way communication – information moves both up & down the organisation & originates at all levels.
• Often found in flatter structures which rely on the skills & ability of their employees, two-way
communication allows for decisions to be made at any level of the organisation & can be cascaded
both up & down in the hierarchy of the business.
• Employee involvement, trust & responsibility is critical within this type of organisation.
- Vertical communication – communication between different levels of the hierarchy
• Communications are likely to stay within one functional area.
• Typically found in organisations that have separate cost centres & operations.
- Horizontal communication – communication at the same level of hierarchy
• Communications are likely to cross between different functional areas.
• Typically found where there is close cooperation & collaboration between all departments.

❖ problems associated w/ different channels of Communication.

Vertical Horizontal One-way Two-away
The outlook & objective of
Does not allow the receiver to Time consuming - time spent on
No inter-department cooperation different departments could
question the message discussing problems
conflict

Different departments may not Inappropriate for some

No assurance that message has
Ideas can remain one understand the culture, ways of messages that give clear
been received understood &
dimensional working, objectives, problems, / information that cannot be
acted upon
technical language of the others argued w/

Formal procedures put in place Employee motivation & lack of Too much feedback - waste of
may be overlooked interest time

2.5.4 Barriers to communication

- Communication barriers: reasons why communication fails.

Feature Problems
• The sender may use to technical language / may use ‘jargons’ which are difficult to understand.
• The sender may speak too quickly which makes it difficult to interpret what he is saying.
• The sender initiates a wrong message.
Sender
• The message send by the sender may be too long & due to this the main point to be emphasized may get lost.
• The sender may have a wrong opinion / perception of the receiver & may not put effort to put across the
message in an effective way.

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 • The message may be lost while transmitting.
• Using an inappropriate medium may result in the less effective communication.
Medium
• A longer channel of communication will result in distortion of the message & it may lose its original meaning.
• There is lots of physical disturbances in channel of communication used.
• The receiver might not be paying attention & thus the message may lose its impact.
Receiver • In many cases, the sender might not be trusted by the receiver & may not act in the intended way.
• The receiver may not have the necessary skills to understand the message.

<
Feedback • The feedback may be missing / distorted.

2.5.5 The role of management in facilitating communication.

❖ communication networks
- Formal communication networks: the official communication channels &
routes used within an organisation.
- Chain network – one person, at the top, starts of the communication message
& this is passed on to the next person on the lower level. This is designed for
authoritarian leaders.
• It does not encourage either two-way communication / horizontal
communication.
• Individuals at the end of the chain can feel isolated & demotivated.
• Gives the leader control & allows an overview, from the top of the
organisation, of the communication system.
- Vertical network - the boss/owner communicates w/ subordinates directly.
• Individually – there is no group network here.
• Used in a small department / any situation w/ a narrow span of control.
- Wheel network - leader is at the centre, there could be two-way
communication between the leader & each of the other parts of the wheel.
• Horizontal communication is poor. The leader is in control & can limit formal
contact between the others.
• This network might represent the situation of a regional manager
communicating to each of the branch / site managers.
- Circle network – each person / department can communicate w/ only two
others. Tt is a decentralised network – there is no obvious leader.
• It might be difficult for all members of the circle to agree a new strategy
between them, because of the slow rate of communicating w/ the whole
group.
• These methods do not allow the receiver to question the message, to ask
for further explanation / to discuss it w/ the sender.
• There is no assurance for the sender that the message has been received,
understood, & acted upon.
- Integrated / connected network – allows full two-way communication
between any group members – / w/ all of them.
• It is typical of team meetings / brainstorming sessions.
• It allows a participative style of decision-making.
• It could assist in solving complex problems where input from all group
members is needed.

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 ❖ the role of informal communications within a business
- Informal communication: unofficial channels of communication that exist between informal groups within
an organisation.

Advantages Disadvantages
Employees may understand instructions better when explained by
Maintaining secrecy is impossible
other workers informally
Informal system covers the gap / shortcomings of formal
It is very much difficult to control the information
communication system
Improved relationships – Issues between the workers & the The original information may be transformed to wrong information
management can be solved (i.e., spread rumour)
Increases efficiency - employees discuss their problems openly & No one can be held responsible as not possible to find the supplier
solve it, work is done properly of wrong information in case of an enquiry
Problems can be easily & quickly identified. New ideas, suggestions,
opinions may come out through such communication as people can Can be time wasting
express their feelings w/o fear
Flow of information is fast & is suitable for emergencies Can create conflicts between employees
<

❖ ways in which communication can influence the efficiency of a business.

- Managers can make sure that the people who need information have the correct information.
- Effective communication can minimise the time wasted in decision making.
- Time & money can be saved by ensuring that the most appropriate means of communication are used.
- Interdepartmental communication can prevent the duplication of effort & increase the level of coordination.
- Giving relevant information to employees can raise their level of motivation because they feel involved in
the business.

❖ ways of improving communication in each situation.

- Ensure message is clear & precise.
- Keep the communication channel as short as possible.
- Ensure channels of communication clear to all involved.
- Build in feedback to the communication process.
- Establish trust between senders & receivers.
- Ensure that physical conditions are appropriate.

Feature Steps to overcome barriers

• Message should be as brief as possible & to the point.
• Main points of the message should be highlighted.
Sender • Language used should be understood by the receiver.
• Avoid using technical jargons.
• Use of appropriate facial expression while delivering verbal messages.

• Select appropriate channel for communication.

Medium • Medium used should be free from distortions i.e., telephone failure etc.
• Use the shortest possible channel to avoid distortion.
• Feedback should be asked from the receiver.
Receiver • Trust between the sender & receiver is an important requirement.
• Receiver should pay attention to the message received.

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 3 Marketing
3.4 Marketing planning
3.4.1 Market planning
❖ the detailed marketing plan; associated benefits
- Marketing plan: a detailed, fully researched written report on marketing objectives & the marketing
strategy to be used to achieve them.
- Each of these must fit together w/:
• Marketing objectives
• Marketing budget
• Each other to create an integrated marketing mix.
- The key contents of a typical marketing plan are:
• Purpose of the plan & the ‘mission’ of the business
• Situational analysis – where the firm is now.
• Marketing strategy – where it aims to get to, in marketing terms – marketing objectives & how it plans
to achieve these targets.
• Marketing mix – turning the strategy into the appropriate marketing tactics to be followed.
• The budget required to implement the plan effectively.
• Executive summary & a time frame for implementation of the plan.
- The detailed marketing plan:

Stage Components
• Organization, market, & competition
Analysis of current environment
• Ability to identify starting position
• Dependent on corporate objectives
Setting marketing objectives
• Provides a target for all stakeholders
• Identifies specific market segments.
Deciding target markets
• Reduces wastage on advertising spend
• Related to budgets & existing abilities.
Implementing marketing strategy
• Minimises risk of cost exceeding revenue & failure
• Identifies any areas of strength / weakness to be exploited / fixed.
Monitoring & measuring progress
• Ability to measure progress of campaigns

- The benefits & limitations of a detailed marketing plan:

Benefits Limitations
Marketing activities contribute to achieving corporate objectives complex, costly, & time-consuming
small business may not have either the money / the skilled
marketing activities are integrated
management
resources are used efficiently in a planned way In a fast-changing market, the plan could become out-of-date
marketing managers may become wedded to the plan that they have
employees are informed & committed to the plan
devoted so much time & energy to.
the review & monitoring process prepares the organisation for may prevent them from seeing that unseen changes in the external
change environment

- Marketing planning – an evaluation

• A marketing plan is just one key component of a complete business plan. – convince banks & investors
for finance
• Needed to help introduce a new strategy that could determine a business’s future success.
• These provide direction & purpose to future marketing decisions that everyone in the department & the
organisation can understand & support.

3.4.2 Elasticity
❖ usefulness of the concept of elasticity in its various forms
https://youtu.be/DFsgMfmwnsI; https://youtu.be/A6b7KGQ-X4g; https://youtu.be/ZTcsyyFdVGM;
https://youtu.be/KVKzw_2iebc; https://youtu.be/TsqR8Qm1OXk; https://youtu.be/6qH0N1Ircfc
- Price elasticity of demand measures the responsiveness of demand following a change in price.
Page 28 of 66
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 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
- Price elasticity of demand =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
- Income elasticity of demand measures the responsiveness of demand for a product following a change
in consumer incomes.
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
- Income elasticity of demand =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑖𝑛𝑐𝑜𝑚𝑒𝑠
- Promotional elasticity of demand measures the responsiveness of demand for a product following a
change in the amount spent on promoting it.
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
- Promotional elasticity of demand =
%𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑜𝑚𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑠𝑝𝑒𝑛𝑑𝑖𝑛𝑔
- Cross elasticity of demand measures the responsiveness of demand for a product following a change in
the price of another product.
- Cross elasticity of demand for good A following a change in the price of good B
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑔𝑜𝑜𝑑 𝐴
=
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝐵

Price electricity Income plasticity Promotional elasticity Cross elasticity

Decides the affect a price Decides the effect a change in Decides the affect promotion Decides the effect of competitors
change will have on revenue income will have on revenue will have on revenue price change will have on revenue
Helps to set a price that will Allow the business to be Allow the business to maximise Allow the business to select the
gain maximum revenue responsive to market conditions return on marketing expenditure most proper pricing strategy
<

Unit
Perfectly inelastic demand Inelastic demand Elastic demand Perfectly elastic demand
elasticity
Zero Between zero & one One Between one an Infinity Infinity
<

3.4.3 Product development

❖ product development as a process from original conception to launch & beyond.
https://youtu.be/DF7fwdlt-c0
- New product development (NPD): the design, creation & marketing of new goods & services.

develop the idea -

having
considered the
market, design,
Consider existing create new ideas production
final testing by post launch -
products & for products - possibility &
best selling in the monitoring the
market threats & from suggestions, current products, product launch
market & market stages in the life
opportunities w/ market research / the business must
research cycle
objectives R&D ensure that all
costs can be
covered before
prototype & initial
testing

❖ sources of new ideas for product development

- Company’s own research & development (R&D) department
- Adaptation of competitors’ ideas
- Market research, i.e., focus groups.
- Employees
- Salespeople
- Brainstorming in groups
- University & government research centres

❖ the importance of Research & Development

https://youtu.be/44XkPcc1xL4
- Research & development: the scientific research & technical development of new products & processes
- Importance of research & development:
• Design faults can lead to a business being taken to court.
• Falling behind competitors who invest in products & technology.
• Persistent poor quality can ruin a business’s reputation.
• No unique selling point in comparison to competitors

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 Spending on R&D Not spending on R&D
Unique selling point
Adapt other businesses’ ideas.
Advantages Business can charge premium prices.
Less risky
Earn higher profit margins
Risky investment
Disadvantages Can lead to legal battles if product is copied
Never be foreseen w/ great accuracy

- How can government encourage R&D?

• Providing some legal security to inventors & designers by allowing them to ‘patent’ / ‘register’ a design.
This provides protection to the inventor from unauthorised copying of the new idea / design.
• They can provide financial assistance to businesses engaging in R&D. This is usually done either by
providing tax-reduction incentives, / by offering grants to firms / university departments w/ close links to
industry, to be spent on specific projects.
- Factors that influence the level of R&D expenditure by a business:
• The nature of the industry
• The R&D spending plans of competitors:
• Business expectations
• The risk profile / culture of the business
• Government policy towards grants to businesses & universities for R&D
- Why new products fail?
• Changes in economic conditions • Insufficient / inappropriate marketing efforts
• Inadequate market research • Distribution problems
• Misleading market research findings • Unexpectedly high costs
• Defects in the product • Inadequate sales force
• Activities of competitors

3.4.4 Forecasting
❖ the need to forecast marketing data
- Sales forecasting: predicting future sales levels & sales trends.
- The potential benefits of sales forecasting:
• The production department would know how
• Finance could plan cash flows.
many units to produce.
• Detect business opportunities / threats & what
• The marketing department would be aware
marketing mix may be appropriate for these.
of how many products to distribute.
• Help pinpoint a product position on the product
• Human resources workforce plan would be
life cycle.
more accurate.
• Enable the business to analyse the actions of
• Enable a business to determine what
competitors.
changes are taking place in the market.

❖ methods of forecasting (qualitative & quantitative)

- Qualitative
• Sales-force composite: a method of sales forecasting that adds together all the individual predictions
of future sales of all the sales representatives working for a business.
• Delphi method: a long-range qualitative forecasting technique that obtains forecasts from a panel of
experts.
• Jury of experts uses the specialists within a business to make forecasts for the future.
• Consumer survey – a form of market research & the questions may either be quantitative in nature
(e.g., asking for likely future levels of demand) / qualitative (e.g., asking for reasons behind future
demand choices)
- Quantitative
• Correlation – this method attempts to explain the most important factors causing changes in sales
data.
If a marketing manager considered that the level of advertising expenditure had led, in the past, to
significant changes in sales, then a causal relationship might be established.
• Extrapolation – basing future predictions on past results. When actual results are plotted on a time-
series graph, the line can be extended, / extrapolated, into the future along the trend of the past data.

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 • Moving Averages – more complex than simple graphical extrapolation. It allows the identification of
underlying factors that are expected to influence future sales. These are:
▪ The trend: the underlying movement in a time series.
▪ Seasonal fluctuations: the regular & repeated variations that occur in sales data within a period of
12 months.
▪ Cyclical fluctuations: these variations in sales occur over periods of time of much more than a year
& are due to the business cycle.
▪ Random fluctuations: these can occur at any time & will cause unusual & unpredictable sales
figures – examples include exceptionally poor weather / negative public image following a high-
profile product failure.

Advantages Disadvantages
It is useful for identifying & applying the seasonal variation to
It is a complex calculation.
predictions.
Forecasts further into the future become less accurate as the
It can be reasonably accurate for short-term forecasts in reasonably
projections made are entirely based on past data. External
stable economic conditions
environmental factors can change.
It identifies the average seasonal variations for each time, & this can Forecasting for the longer term may require the use of more
assist in planning for each quarter in future. qualitative methods that are less dependent on past results.

❖ calculation & use of moving average method to forecast sales.

- Inspect past data for regular time related fluctuation.
- Decide upon a time – most often four quarters.
- Calculate the four quarter totals.
- Centre the data by adding the quarterly totals to an eight-quarter total.
- Divide by 8 to give the sales trend / moving average for each quarter.
- Deduct the trend from the sales for each quarter.
- Add all the seasonal variations & divide by their number to achieve the average seasonal variation per
quarter.

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3.4.5 Coordinated marketing mix.
❖ the need for & development of a coordinated marketing mix
https://youtu.be/JC8lGW1T1bY; https://youtu.be/_f65-t9vjuI; https://youtu.be/Djx7pAX4vZ0;
https://youtu.be/tAwN1SlkrAg; https://youtu.be/Bb-dX_0Oo_M
- Price – needs to reflect the expectations of the target market.
- Product – needs to reflect the needs of the target market.
- Place – needs to be sold in appropriate locations for the target market.
- Promotion – needs to be advertised in appropriate locations & media, considering the requirements of the
customer.
- The plan should be integrated w/:
• Finance – to obtain the necessary resources.
• Operations – to discuss the viability of locations abroad & to adapt the product for foreign markets.
• Human resources – to ensure adequate staffing is available.

❖ development of marketing strategies that are focused towards achieving specific

marketing objectives.
- The 4Ps must be integrated & reinforce each other.
- The integrated 4Ps must specifically relate to achieving the marketing objectives.
- The marketing mix must take account of position in the product life cycle & market conditions.
- There should be research & development for new products to replace older ones.
- Marketing strategies should be within their set budgets.
- Flexibility to respond to change should be built in

3.5 Globalisation & international marketing

3.5.1 Globalisation
❖ economic globalisation within the context of the broader concept of ‘globalisation’
https://youtu.be/w3ohMzkTdpk; https://youtu.be/-loRR8XBeDw; https://youtu.be/r4US7okMBb8;
- Globalisation: growing trend of worldwide markets in products, capital, & labour, unrestricted by barriers.
- Multinational companies: businesses that have operations in more than one country.
- Free international trade: international trade w/o restrictions i.e., ‘protectionist’ tariffs & quotas.
- Tarif: tax imposed on an imported product.
- Quota: a physical limit placed on the quantity of imports of certain products.
- Economic globalisation includes:
• Decreasing barriers to trade
• Increasing ease of moving capital in money across countries
• Increased incentives for foreign direct investment
• Growth of multinational businesses in all countries as there is greater freedom for capital to be invested
from one country to another.
• Freer movement of workers between countries.

❖ the implications for marketing of increased globalisation & economic collaboration

https://youtu.be/MuZXCvA24_8; https://youtu.be/nFHMm0nElDw
- Trading Bloc – refers to an agreement between states, regions, / countries, to increase trade between the
participating regions by removing barriers to trade. It is a grouping of countries w/ formal agreements on
trade. They make it easier for member countries to access the market & very difficult / expensive for non-
members to sells their goods on the market. Examples of trading blocs:
- ASEAN – Association of South East Asian Nations
- APEC – Asia Pacific Economic Co-operation
- NAFTA – North American free trade agreement
- EU – European Union
- BRICS: the acronym for five rapidly developing economies w/ great market opportunities – Brazil, Russia,
India, China, & South Africa.

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 These are major economic power that are not yet fully developed but are developing at a faster rate. Their
income (GDP) is growing rapidly. They account for over 40% of the world population, 25% of the world
income & production, & have large trade surpluses & foreign reserves. As their economies continue to
grow & attract greater trade, their markets will become increasingly important for the world economy & as
key market opportunities for foreign businesses. They therefore represent major marketing opportunities as
wealth grows & an increasing market share w/ disposable income to spend will be looking for more
opportunities to buy goods & services.

Benefits Limitations
large increases in money moving between countries & in foreign Businesses from other countries have freer access to the domestic
direct investment by governments & transnational corporations market, so they will be increased competition
large increases in trade between countries Inefficient domestic firms will shutdown
Businesses are now at risk of foreign takeovers e.g., Land Rover &
increasingly similar products & services being sold across the world
Jaguar by Tata.
a large increase in outsourcing to different countries for components Anti-globalisation pressure groups may comment negatively about a
/ services multinational company
large increases in international travel & instant communication Decrease in profitability for domestic firms when more imports flood
across the world local markets
increasingly similar cultures & attitudes across the world
converging income levels across the world

3.5.2 Strategies for international marketing

❖ the importance of international marketing for a specific business/situation
- International marketing: selling products in markets other than the original domestic market.
- Why a business may sell its products in other countries.
• To maximise profits
• When the home market is saturated
• To reduce risk of failure
• Poor trading conditions in the home market
• Legal differences creating opportunities abroad. Fewer restrictions abroad can create opportunities for
local firms to export goods to those countries.
• To escape competition in the home market
• To meet management goals of growth

Free trade Protectionism & trade blocs

reduction in tariffs increase in restrictions, barriers, & tariffs
enlarged markets increase in bureaucratic procedures
economies of scope & scale reduction of customer choice
faster economy growth

- Why international marketing is different?

• Cultural differences
• Legal differences
• Economic & social reasons
• Political differences
• Differences in business practises

❖ international markets – identification, selection & entry

https://youtu.be/SGoGJEe-ERk; https://youtu.be/drK_S95gCJU; https://youtu.be/9t61OlAIdDc
- Choice must be based on:
• Business objectives of growth, product development & sales
• The business’s attitude to risk
• Availability of resources including finance & personnel.
• Product type - e.g., aircraft have fewer sales possibilities than jackets.
• Market research into:
▪ The size & growth of the market
▪ Economic arrangement including tariffs, exchange rates, laws & regulations, & incentives available.
▪ Market competition
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 ▪ Costs of marketing & distribution
▪ Possibility of partnership agreements
▪ Political & cultural agreements
- Market research should be done. SWOT analysis is carried out to get a clear picture of the market.

Strengths Weaknesses (controllable)

• Strong ethical position • Inefficiency due to large size market &
• Excellent research facilities lack of control
• Expansion in new markets • High advertising budget
• Brand loyalty • Inexperienced workers
Opportunities Threats (uncontrollable)
• Increasing incomes & population • Risk of economic downturn
• Growth of the market • Emergence of competitors
• Buying other companies • Increase in inflation & interest rates.
• Foreign government policy • Restrictive laws from governments
<

Method of entry Advantage Disadvantage

• The business will be able to avoid trade barriers. • The business will be able to avoid trade barriers.
• The business may be able to get government • The business may be able to get government
support especially if they have invested in critical support especially if they have invested in critical
Foreign direct investment
areas / if they are socially responsible. areas / if they are socially responsible.
– refers to constriction of
• There is no agent / joint venture partner to consult • There is no agent / joint venture partner to consult
production facilities / offices
in other countries. w/ / take joint decisions w/. Thus, all profits after w/ / take joint decisions w/. Thus, all profits after
tax belong to the organisation. tax belong to the organisation.
• Lower costs e.g., the decrease in transport & • Lower costs e.g., the decrease in transport &
labour costs. labour costs.
• The company has complete control over the
• The business lacks important knowledge about the
distribution of goods.
Exports (directly): goods & local market.
• Agents may be having other deals w/ other
services sold to consumers • More hustles of arranging transport & storage
companies & as a result may not be fully
& business in other facilities.
committed.
countries. • The business must employ sales personnel to
• Saves on costs since no commission is given to
deals w/ foreign buyers
the interim
• The agents have full knowledge about the local
• Commission should be paid to the agents.
market hence make more sales per given period.
• The agents may be having products from other
• Transport & administrative procedures become the
Exporting (indirectly) firms to sell as well & they may not be fully
responsibility of the agent.
committed.
• Less costly as fewer staff is involved in selling
• Lack of personal touch w/ the foreign customers.
goods abroad.
• Share of profits / revenue must be paid to
• Few start-ups cost. franchisor each year.
• Fewer chances of new business failing as an • Initial franchise fee can be expensive.
Franchise: a business that
established brand product are being used. • Local promotions may still have to be paid by the
uses the name, logo, &
• Advice & training offered by the franchisor. franchisee.
trading systems of an
existing successful • Supplies obtained from established & quality- • The franchisee is forced to get raw materials from
business. checked suppliers. certain suppliers only.
• Franchisors agrees not to open another branch in • Strict rules over pricing & layout of the outlet
the area reduces the owner’s control over their own
business.
Joint venture: two / more
• There may be conflicts between the venture
businesses agree to work • Risk is shared between the business & venture
partners.
closely together on a partners.
• There is loss of control.
particular project & create a • Sharing of skills, knowledge, & resources
• One business may not have the incentive to be
separate business division • Trade barriers are not relevant
to do so. efficient

• This means there is a low initial cost.

Licensing – it involves a • The business loses control of the marketing
• Much of the risk is borne by the licensee.
contractual agreement to process.
• Trade barriers are avoided.
distribute the product / • The business must pay a fee to the licensee.
• Licensee may have full knowledge of the local
services in return for a fee. • The contract can be terminated at any time.
market

Acquiring existing foreign • Risk of failure is reduced. • Lot of paperwork is involved when merging two
business – the business • Customer relationships are maintained. firms.
can merge / take over a • A faster way to penetrate foreign markets. • More capital is required when buying a business
foreign company • Skilled & experienced staff can be retained which is already performing well.
<

- Challenges faced when trying to enter foreign markets.

• Political differences – changes in the governments can cause instability in the country, i.e., wars, acts
of terrorism, threats of civil violence.

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 • Economic differences – some economies have falling GDP & inflation making it difficult for firms to
survive.
• Social differences – the structure of the population may differ greatly between the mother country &
the host country.
• Legal difference – products allowed in one country may be illegal in other countries.
• Cultural Difference – related to religious beliefs & moral values.

❖ pan-global marketing & maintain local differences.

https://youtu.be/IjQlJDCvLYM
- Pan-global marketing: adopting a standardised product across the globe as if the entire world were a
single market – selling the same goods in the same way everywhere.

Advantages Disadvantages
saves on costs since the same product can be produced for all legal restrictions can vary across nations. It is illegal to use
markets promotions involving gambling in certain countries
brand names do not always translate effectively into other
a common identity for the product can be established. languages. They might even cause offence / unplanned
embarrassment for the company
setting of the same price in different countries may not lead to profit
maximisation
firms must develop different products to suit cultural / religious
variations.

- Global localisation: adapting the marketing mix, including differentiated products, to meet national &
regional tastes & cultures.

Advantages Disadvantages
local needs, tastes & cultures are reflected in the marketing mix of there will be additional costs of adapting the products to suit cultural
the business variations
profit & sales maximisation the business can no longer benefit from the economies of scale
products are made in such a way that they meet certain minimum
quality standards in each country

Factors encouraging pan global marketing Factors encouraging maintaining local differences
large size & global presence small size & limited international markets
a technical product w/ high development costs that can be spread little experience in international marketing
experience of being involved in international marketing varying regulations & cultural attitudes & product area
consumer behaviour/segment similar across the world local distribution methods
standard distribution method

❖ choosing a strategy, in each situation, to develop a global market.

select
possible
use the implement
Analyse countries & investigate
set clear market global
business conduct then select monitor &
marketing researcher to marketing
resources, thorough entry review in
objectives in site target mix strategy
global market methods to
line w/ market & w/ local relation to
marketplace research, markets in
corporate segments in addaptations, objectives
including the including chosen
objectives selected all within
competition legal, political countries
countries budgets
& cultural
factors

❖ factors influencing the method of entry into international markets.

- Exporting – small businesses benefiting from low trade barriers, home production advantages & easy
distribution.
- Licencing – businesses w/ strong property rights & clear knowledge base
- Franchising – service industries
- Joint ventures – businesses w/ weak expertise in some areas that may be provided by partner business.
- FDI – large businesses, often multinational, seeking tax advantages & avoidance of tax barriers, &
pursuing a long-term strategy.

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 4 Operations & project management
4.2 Operations planning
4.2.1 Enterprise resource planning (ERP)
❖ main features of an ERP programme
https://youtu.be/A98X_bvX2QA
- Enterprise resource planning: the use of a single computer
application to plan the purchase & use of resources in an
organisation to improve the efficiency of operations.
- ERP deals w/:
• Supply chain management – ordering of raw materials.
• Production – transforming inputs to outputs.
• Customer relations management – dealing w/ customers’
enquiries, orders & delivery.
- Every business involved in production will be able to find out:
• What has been ordered?
• How many components / raw materials / what type are needed.
• Whether raw material is in stock?
• The progress of an order.
• Stocks available to meet orders.
• Whether payment has been requested / paid.

Advantages Disadvantages
Reduces costs at all stages of the supply chain – materials &
The costs of the database & computer systems must be considered
products are electronically tracked at all stages.
Supply only according to demand The multiple ways of operating in different departments now must be
Just-in-time ordering of inventories reduced to one common system
Improved delivery times & better customer service. It is estimated that in most businesses the full implementation of
Departments linked more closely together by the system ERP can take one to three years & a lot can happen in business
Management information increased during this time

❖ how ERP can improve a business’ efficiency

Process Benefits to efficiency
All departments know exactly how much Inventory is held.
Customer orders can be linked to Inventory to minimise Inventory costs.
Inventory control
ERP system keeps track of the order & can Inform the customer.
Products delivered as soon as they are produced

Precise costs of each order can be calculated.

Costing & prising Prices can be customised for each Individual order.
Reduces the administrative costs of pricing.
Enables planning of production to ensure that operations are working at / close to full capacity.
Capacity utilisation
By ensuring efficient use of all equipment production costs fall.
Indicates changes in orders so all departments know simultaneously.
Responses to change Management can react quickly & flexibly to changes.
Reduces the cost of identifying & reacting to change
Management knows about events as they happen.
Management information Decisions can be based on accurate, up-to-date Information.
Reduces the cost of obtaining information.

4.4 Capacity utilisation

4.4.1 Measurement & significance of capacity
❖ how capacity utilisation can be measured.
https://youtu.be/CbZrPY4hh9Y; https://youtu.be/2oo1GdYH1sY; https://youtu.be/ScgBG5fuaDY;
https://youtu.be/kWYTiiRka5Y
- Capacity utilisation: the proportion of maximum output capacity currently being achieved.

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 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑜𝑢𝑡𝑝𝑢𝑡 𝑙𝑒𝑣𝑒𝑙
- Rate of capacity utilisation (%) = × 100
𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑜𝑢𝑡𝑝𝑢𝑡 𝑙𝑒𝑣𝑒𝑙
- In manufacturing businesses, it enables the business to know exactly what orders there are, what orders
might be coming in, when the orders must be fulfilled & what materials are needed for them. Because all
departments have this information, production can be planned to ensure that the equipment is being used
as near to full capacity as possible as often as possible, w/ all the materials ordered & stocked to make this
possible. All of this reduces the cost of production, so efficiency is increased.
- When utilisation is at a high rate, average fixed costs will be spread out over many units – unit fixed costs
will be relatively low. When utilisation is low, fixed costs will have to be borne by fewer units & unit fixed
costs will rise.

❖ implications of operating under / over maximum capacity.

- Excess capacity: exists when the current levels of demand are less than the full capacity output of a
business – also known as spare capacity.
- Rationalisation: reducing capacity by cutting overheads to increase efficiency of operations, i.e., closing a
factory / of ice department, often involving redundancies.
- Full capacity: when a business produces at maximum output.
- Implications of under-capacity operation:

Positive Negative
Ability to take & meet sudden large orders quickly Higher unit fixed costs = pressure to increase prices
Flexibility in production Under- / unemployed resources, leading to poor motivation
Unsold output, leading to higher inventory costs
Inefficiency in production, leading to higher costs

- Implications of over-capacity operation:

• Some customers are disappointed / receive late delivery.
• Quality may fall.
• Employees & managers may become stressed.
• Regular machinery maintenance may be difficult.
• Costs increase because of steps taken to increase production.

4.4.2 Increasing capacity utilisation.

❖ choosing methods of improving capacity utilisation
Long-term over-capacity problems
Method Advantage Disadvantage
• Less control over quality of output
Subcontract – paying • No major capital investment is required.
• May add to administration & transport costs.
another business to • Should be quite quick to arrange.
• May be uncertainty over delivery times &
undertake part of the tasks • Offers much greater flexibility than expansion of
reliability of delivery.
required to produce a facilities – if demand falls back, then the
product / service. • Unit cost may be higher than ‘in-house’
contracts w/ other firms can be ended
production due to the supplier’s profit margin
• Long-term increase in capacity • Capital cost may be high.
• Firm is in control of quality & final delivery times. • Problems w/ raising capital.
Capital investment in
expansion of production • New facilities should be able to use latest • Increases total capacity, but problems could
equipment & methods. occur if demand should fall for a long period.
facilities
• Other economies of scale should be possible • Takes time to build & equip a new facility –
too customers may not wait
<,

Short-term under-capacity problems

Method Advantage Disadvantage
• No part-time working for staff • unsuitable for perishable stocks or those
• Job security for staff that go out of date quickly.
Maintain output & • No need to change production schedules / • stockholding costs can be very substantial.
produce stocks orders from suppliers. • demand may not increase as expected –
• Stocks may be sold at times of rising the goods may have to be sold at a
demand substantial discount.
• Staff may be demotivated by not having
• Production can be reduced during slack
full-time, permanent contracts.
Introduce greater periods & increased when demand is high.
• Fully flexible & adaptable equipment can
flexibility into the • Other products can be produced that may
be expensive.
production process follow a different demand pattern.
• Staff may need to be trained in more than
• Avoids stock build-up
one product – may add to costs

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 Long-term under-capacity problems
Method Advantage Disadvantage
• Redundancy costs for staff payments
• Staff uncertainty over job security
Rationalise existing.
• Possible threats of industrial action
operations & cut • Reduces overheads.
• Capacity may be needed later if economy
capacity, e.g., by • Higher capacity utilisation
closing factory/offices picks up / if firm develops new products.
• Business may be criticised for not fulfilling
social responsibilities

• May prove to be expensive.

• Will replace existing products & make
• May take too long to prevent cutbacks in
business more competitive.
Research & development capacity & rationalisation.
• If introduced quickly enough, might
into new products • Requires long-term planning as new
prevent rationalisation & the problems
products introduced in haste, w/o a clear
associated w/ this
market strategy, may be unsuccessful

4.4.3 Outsourcing
❖ benefits of outsourcing in each situation.
https://youtu.be/RW5VltZI5Fg; https://youtu.be/DcQraUl1Zjg
- Outsourcing: using another business (a ‘third party’) to undertake a part of the production process rather
than doing it within the business using the firm’s own employees.

Advantages Disadvantages
Reduction & control of operating costs – cheaper to ‘buy in’ Loss of jobs within the business – a negative impact on staff
specialist services as & when they are needed. motivation.
Increased flexibility – fixed costs are converted into variable costs. Customer resistance
Improved company focus – management can concentrate on the Quality issues – internal processes will be monitored by the firm’s
main aims own quality-assurance system.
Security – using outside businesses to perform important IT
Access to quality service / resources that are not available internally.
functions may be a security risk
Freed-up internal resources for use in other areas.

4.5 Lean production & quality management

4.5.1 Lean production
❖ links between lean production & inventory control, quality, employees’ roles,
capacity management & efficiency
- https://youtu.be/6QRX4OD6ttk; https://youtu.be/PEZGGsi_dDE
- Lean production: producing goods & services w/ minimum waste while maintaining high quality.
- The seven main sources of waste in industry are:
• Excessive transportation of components & products.
• Excessive inventory holding.
• Too much movement by working people, e.g., to get supplies of components.
• Waiting time – delays in the production process.
• Overproduction – producing ahead of demand.
• Over-processing – making goods that are too complex as they could have been designed more simply.
• Defects – products that do not come up to quality standards & have to be rejected / corrected.

Advantages Disadvantages
Waste of time & resources is substantially reduced / eliminated. Employees may require training which can be costly to the business
The business may not be able to increase the supply of goods when
Unit costs are reduced, leading to higher profits.
demand increases
Working area is less crowded & easier to operate in. Lean production leads to job loses which may damage reputation
There is less risk of damage to stocks & equipment. Sometimes employees may be unwilling to take on responsibility.
New products launched more quickly. Employees may be resistant to change.

- Lean production & links w/ production processes

• Inventory control – low inventory levels using just-in-time.
• Quality – continuous quality assurance using total quality management.

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 • Employees’ roles – highly skilled, teamwork, flexible in roles, responsible for quality using cell
production.
• Capacity management – flexible production when require meeting orders using flexible specialism &
time-based management.
• Efficiency – lower costs, lower waste, planned movements of materials.
- Lean production methods that increase efficiency
• Cell production: splitting flow production into self-contained groups that are responsible for whole work
units. The cell is responsible for dealing w/ material/component orders, word rotas, quality & use of
equipment. This motivates employees, gives them control & enables better quality.

• Flexible specialism – flexibility in equipment & employees enables a basic product to be produced w/ a
range of options. Changing from one design of product to another requires flexible working in three
main areas:
▪ Flexible employment contracts that allow non-core workers to be called in / not employed as demand
conditions change.
▪ Flexible & adaptable machinery – often computer-controlled – that can be quickly switched from one
design to another.
▪ Flexible & multiskilled workers able to perform different jobs
on different product ranges.
• The great benefits of this flexible approach will be seen in quicker
responses to consumer demand changes, wider ranges of
products offered to customers, reduced stock holdings as goods
can be made to order, & higher productivity.
• Simultaneous engineering: product development is organised
so that different stages are done at the same time instead of in
sequence. This enables a business to bring a new product to the
market to meet the customers’ demands much more quickly.

4.5.2 Kaizen
❖ Kaizen (continuous improvement) in the context of lean production
https://youtu.be/kuLKWKqQQTM; https://youtu.be/F42aOtPkdWM
- Kaizen: Japanese term meaning continuous improvement.
- Kaizen involves all workers being continuously responsible for making improvements in production
processes that lead to greater efficiency, higher quality & less waste. It relies on workers taking on this
responsibility & managers being prepared to allow them to do so.

Benefits Costs
Improvement in productivity Training employees & managers in new attitudes
Less wastage Setting up teams & empowering employees
A lower breakeven level of output Dealing w/ employees who do not want greater involvement
More responsiveness to customer needs Making sure that all staff are involved
Greater employee motivation & involvement

4.5.3 Just in Time (JIT)

❖ JIT in the context of lean production
https://youtu.be/AH5Bn8iguNM; https://youtu.be/FMidebp7kaA
- Just-in-time: this inventory-control method aims to avoid holding inventories by requiring supplies to arrive
just as they are needed in production & completed products are produced to order.
- Just-in-time production can be applied as a tool of lean production to reduce the waste of materials by
ensuring the business holds as little stock as possible & that as soon as products are completed, they are
immediately delivered to customers.

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❖ implications & justification of adopting a JIT approach.
- Just in time will require:
• Relationships w/ suppliers must be excellent.
• Production staff must be multiskilled & prepared to change jobs at short notice.
• Equipment & machinery must be flexible.
• Accurate demand forecasts.
• Excellent employee–employer relationships.
• Quality must be everyone’s priority.

Benefits Limitations
The business can save rent & insurance costs The firm is vulnerable to action taken by employees
As inventory is obtained when needed, less working capital tied up in Production is very reliant on suppliers, & if deliveries are not on time
stock the whole schedule can be delayed.
There is less likelihood of products becoming obsolete / out of date No spare finished product available to meet unexpected orders
Avoids the build-up of unsold finished products that can occur w/ There is little room for mistakes as minimal inventory is kept for
sudden changes in demand reworking faulty product

4.5.4 Quality control & assurance

❖ quality in terms of what the customer demands
https://youtu.be/ghR_yZfOqDk; https://youtu.be/JD2Mc6oDcII; https://youtu.be/mN8oudE9HUo
- Quality product: a good / service that meets customers’ expectations & is therefore ‘fit for purpose’.
- Quality standards: the expectations of customers expressed in terms of the minimum acceptable
production / service standards.
- A quality product does not have to be made w/ the highest quality materials to the most exacting standards
– but it must meet consumer requirements for it. This means it is vital to know what the customer is
demanding & to produce this at minimum cost to the business.
- The advantages of producing quality products & services are:
• Easier to create customer loyalty.
• Saves on the costs associated w/ customer complaints, e.g., compensation, replacing defective
products & loss of consumer goodwill.
• Longer life cycles
• Less advertising may be necessary as the brand will establish a quality image through the performance
of the products.
• A higher price – a price premium – could be charged for such goods & services. Quality can, therefore,
be profitable.

❖ the importance of quality assurance

https://youtu.be/P6FcEmQ2BF0; https://youtu.be/0hzqHwu1i_I
- Quality assurance: a system of agreeing & meeting quality standards at each stage of production to
ensure consumer satisfaction.
- It is often based on the idea that each production process acts as a supplier to an internal customer – the
next stage. This means that faults are picked up during production & quality control is built into production.
Quality assurance is closely linked to Kaizen & is essential for lean production.

Advantages Disadvantages
Greater employee involvement & motivation Greater demands on employees may reduce motivation
Lower costs as defects can be corrected as they occur (right first Not all products need a high standard of quality, so time is
time) wasted.
Employees are in the best position to detect & correct faults Cost of training & time for checking at each stage
Business gains accreditation for quality awards Conflicts w/ focus on levels of output

- ISO 9000: this is an internationally recognised certificate that acknowledges the existence of a quality
procedure that meets certain conditions.
- To obtain the ISO 9000 certificate the firm must demonstrate that it has:
• Staff training & appraisal methods
• Methods for checking on suppliers.
• Quality standards in all areas of the business

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 • Procedures for dealing w/ defective products & quality failures.
• After-sales service

❖ methods of quality control: inspection, testing, random sampling, involving the

workforce in quality control.
https://youtu.be/tZ6g9UztPb8; https://youtu.be/18cN8MZvJRA; https://youtu.be/oi1cARLWI5c;
- Quality control: this is based on inspection of the product / a sample of products.
- There are methods to effective quality control:
• Prevention – the product follows the requirements of the customer & allows for accurate production.
• Inspection – quality is checked by inspecting products at the end of the production process.
• Random sampling – quality checks are used during the production process & statistical techniques are
used to record & respond to results.
• Correction & improvement – correcting faulty products & correcting the process.

Advantages Disadvantages
Not every product is checked – the method relies of statistical
Not every product has to be checked
techniques
Experts check quality Negative for employees as the focus is on detecting faults
No responsibility on employees for quality, so they are less likely to
Regular production problems can be highlighted & corrected
monitor their production
Faulty products are removed Wastage as faulty products are only found when finished

❖ the link between quality & training

- All successful methods of quality assurance / quality control rely on employees who are checking quality
being properly trained & equipped.
- Quality control requires employees to understand sampling methods & statistical tests.
- Quality assurance & TQM requires employees to understand the organisation’s quality standards.
- Total quality management requires understanding of kaizen & internal customers/suppliers.
- Training must be updated as production methods, customer requirements & quality standards change.

4.5.5 Total Quality Management

❖ aims & effectiveness of TQM.
https://youtu.be/2PlRGWsJ-EA; https://youtu.be/_DfQ5UORamg
- Total quality management: approach to quality that aims to involve all employees in quality-improvement.
- Quality circles: voluntary groups of workers who meet to discuss work-related problems & issues.

Benefits Conditions determining success

Improves quality through joint discussion of ideas & solutions. Circle members must be committed to improving quality.
Improves motivation through participation. Training given in holding meetings & problem-solving.
Makes full use of the knowledge & experience of the staff. Full support from management.
Team should be empowered to implement the recommendations.

- Internal customers: people within the organisation who depend upon quality of work done by others.
- Elements of TQM are:
• Top management commitment & involvement – leadership through quality
• Customer involvement – focus groups
• Design products for quality – designing for robustness.
• Design production processes for quality
• Control production processes for quality
• Developing supplier partnerships
• Customer service, distribution & installation
• Building teams of empowered employees – quality circles

Benefits Costs
Improved customer satisfaction Training of staff which may be expensive
Repeated sales due to brand loyalty Inspection costs may increase
It will be easy for the business to introduce new products in the Stopping production to trace & correct quality problems will disrupt
future output

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 All a higher price to be charged Resistance to implement TQM from staff
The firm will gain a competitive advantage over its rivals Market research to establish expected customer requirement needs
High profits to be done.
Avoiding heavy penalties when customers complain
Cut on costs of remaking the product
Promotes teamwork

❖ the potential of Kaizen in TQM

- TQM incorporates Kaizen as a part of its plan. TQM demands that all employees:
• Are committed to continuous improvement.
• Share problem solving.
• Are educated & trained to take responsibility for quality.
- These are vital components of the kaizen approach to continuous improvement. Methods used to enact
this include quality change of internal supplier / customer relationships & quality circles where group of
employees meet to discuss quality improvement ideas.

4.5.6 Benchmarking
❖ the importance of benchmarking in quality control
https://youtu.be/8mY2YrYAE-U
- Benchmarking: involves management identifying the best firms in the industry & then comparing the
performance standards – including quality – of these businesses w/ those of their own business.
- Successful benchmarking results in an improvement in quality. Being at least equal to the best will mean a
business can present its products as market leader & gain a reputation for reliability & quality.
- Stages in the benchmarking process
• Identify the aspects of the business to be benchmarked – ask to customers & find out what they
consider to be most important.
• Measure performance in these areas e.g., Reliability records; delivery records & possibly the number
of customer complaints
• Identify the firm in an industry that are the best – get information from management consultants /
government benchmarking schemes.
• Use comparative data from the best firms to establish the main weaknesses in the business –
obtain data from published accounts, contacting suppliers / customers.
• Set standards for improvement – use / modify standards set by the best firm.
• Change process to achieve the standards set – introduce a new way of doing things.
• Re-measurement – The changes to the process need to be checked to see if the new, higher
standards are being reached.

Advantages Disadvantages
It can be expensive when the firm fails to recover all the cost
Encourages the generation of new ideas
incurred in the comparison exercise
If workforce is involved in the comparison exercise, then employees The business is relying on copying ideas from other firms which then
may be motivated by their participation in the program discourages innovation
Increased market share when the identified problems are solved Benchmarking exercise may be misleading if the information
It is a faster & cheaper way of solving problems obtained is not relevant / up to date.

4.6 Project management

4.6.1 The need for projects & project management
❖ projects as a response to the need for change
- Project: a specific & temporary activity w/ a start & end date, clear goals, defined responsibilities & a
budget.
- Project management: using modern management techniques to carry out & complete a project from start
to finish to achieve pre-set targets of quality, time & cost.
- Examples of Projects
• Building a new factory
• Organising a staff training day

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 • Rationalising business operations
• Designing a new piece of computer software.
- Project management skills required.
• Good communications skills to communicate to people what is being done & what must be done.
• Good people skills to pick the right team & to keep the team working well together.
• Good planning skills to establish what can be done by when & by whom.
• Good management skills to review progress & keep project moving forward.
- Business environments are always changing, & projects are often a result of the need to react to change –
e.g., prices change so that a business decides it is worthwhile opening a factory in another country. This
becomes a project.

❖ reasons & impact of project failure, including examples.

- Here are several reasons why projects may - Project failure includes one / more of the
fail: following:
• Changes in the business environment • The project is not complete at all.
• Poor project management / interference by • The project is not completed in the time
other managers allowed.
• Weaknesses in the project management • The project costs more than the amount
team budgeted.
• Cost overruns because prices rise • Quality is not what was planned for.
unexpectedly. - Possible implications of failure include:
• Loss of focus on the business benefits • Loss in reputation & possible future business
• Warning signs on lateness / cost overruns • Penalty payments for lateness / inadequate
are ignored. quality
• Inadequate / misleading communication w/ • Loss of profit if cost overrun.
customers

4.6.2 Network diagrams

❖ main elements of a network diagram: activities, dummy activities, nodes
https://youtu.be/pRF1GWR1OXQ; https://youtu.be/o5bUSzbl8T4; https://youtu.be/poOyKIt7M1g;
https://youtu.be/NLVlozz_OGs
- Critical path analysis: a planning technique that identifies all tasks in a project, puts them in the correct
sequence & allows for the identification of the critical path.
- Network diagram: the diagram used in critical path analysis that shows the logical sequence of activities &
the logical dependencies between them – so the critical path can be identified.
- Activity – one of the specified tasks involved in completing a project.
- Node – identifies the start & finish of an activity. Each is given an identifying number.
- Dummy activity – an activity that has a duration of zero & indicates when an activity cannot start until two
other activities w/ the same starting & ending nodes have finished.
- Non-critical activity – an activity within a project that can be delayed w/o delaying the overall project.

❖ construction of a network from given data.

https://youtu.be/zgITFKJUCyM; https://youtu.be/pCnF3dUODCE
- How to contrast a network diagram:
• Draw a start node.
• Draw activities as line, each one starting & ending at a node.
• Make sure that activities that require a completed previous one follow from the correct node.
• Check for any dummy activities & how these as a dotted line.
• Show a finishing node to draw all activities to the conclusion.

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4.6.3 Critical Path Analysis (CPA)
❖ finding the minimum project duration & the critical path & how it might be used in
project management.
- Critical path: the sequence of activities that must be completed on time for the whole project to be
completed by the agreed date. In the example above, the critical path goes via the dummy activity.
- Critical activities can be identified by nodes which have EST which is equal to LFT (EST=LFT). In the
example above, activities A, B, C, D & H are critical activities.
- Minimum project duration – the shortest possible time in which a project can be completed. In the
example above, the minimum project duration is 30 days.
- Earliest start time – the earliest possible time an activity can start relative to the beginning of the project.
Work from left to right & enter the ESTs. Add the EST of the previous node & add the activity duration.
Take the highest EST where there are two routes to a node.
- Latest finish time – the latest possible time an activity can finish relative to the beginning of the project.
Work from right to left & enter the LFTs, starting w/ the EST in the finishing node as the LFT at that point.
Deduct the activity duration from the previous LFT. Use the lowest LFT at each node.

❖ calculation of total & free float & interpretation of the results of the analysis of a
network
- Total float – the maximum time an activity can be delayed w/o delaying the overall project.
- Total float = 𝐿𝐹𝑇 − 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 − 𝐸𝑆𝑇
- e.g., total float for activity E = 24 − 4 − 18 = 2, this means that activity E can be delayed for 2 days & the
projects will still finish in 30 days.
- Free float – the maximum time an activity can be delayed w/o delaying the next activity in the sequence.
- Free float = 𝐸𝑆𝑇(𝑛𝑒𝑥𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦) − 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 − 𝐸𝑆𝑇(𝑡ℎ𝑖𝑠 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦)
- E.g., free float for activity E = 24 − 4 − 18 = 2, meaning that activity E can be delayed for 2 days until day
20 because H must start on day 24.

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❖ CPA as a management tool
- Calculate project duration, enabling deliveries for supplies & other resources to be planned.
- Shows when activities are scheduled to happen, enabling resources to be available at exactly those times,
prioritising the critical activities.
- Use EST & LFT to monitor progress & transfer resources from non-critical to critical activities if necessary,
to prevent lateness.
- Use total float & free float to help decide which activities might need to be focused on. Those w/ high floats
can spare resources more critical activities.
- Decide which tasks can be carried out simultaneously.
- Indicate when there might be resource constraints, especially labour. It may be impossible to carry out
several activities at the same time, but will there be enough resources to do this? CPA can show how to
use a minimum of resources for the project.
- Programmed into software packages to enable lean production, & good supplier & customer relations.
- Use ‘what if’ analysis to judge the effect of different possible scenarios, i.e., the effect of taking more time
for one activity.

❖ Limitations of CPA
- it relies on accurate data; these may not be available, especially as many projects are new.
- It encourages rigid thinking & does not guarantee success.
- It needs constant review, monitoring & management to be effective.
- It encourages a focus on timing & speed rather than quality of flexibility.

Finance & accounting

5.3 Costs
5.3.1 Approaches to costing: full, contribution
❖ Important concepts
- Cost centre: a section of a business, i.e., a department, to which costs can be allocated / charged.
- Profit centre: a section of business to which costs & revenues can be allocated – profit can be calculated.
- Overhead costs
• Production overheads – these include factory rent & rates, depreciation of equipment & power.
• Selling & distribution overheads – these include warehouse, packing & distribution costs & salaries of
sales staff.
• Administration overheads – these include of ice rent & rates, clerical, & executive salaries.
• Finance overheads – these include the interest on loans.
𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑖𝑛𝑔 𝑡ℎ𝑖𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
- Unit cost =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

❖ differences between full & contribution costing

- Full costing: a method of costing in which all fixed & variable costs are allocated to products, services, /
divisions of a business.
- Contribution / marginal costing: costing method that allocates only direct costs to cost/profit centres, not
overhead costs. uses & limitations of the full costing method.
- Contribution per unit = 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
- Total contribution = 𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑡𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡

Uses Limitations
There is no attempt to allocate each overhead cost to cost/profit
Full costing is relatively easy to calculate & understand
centres based on actual expenditure incurred.
Arbitrary methods of overhead allocation can lead to inconsistencies
Full costing is relevant for single-product businesses
between departments & products.
All costs are allocated (compared w/ contribution costing) so no The full unit cost will only be accurate if the actual level of output is
costs are ‘ignored’. equal to that used in the calculation.
Full costing is a good basis for pricing decisions in single product It is essential to allocate on the same basis over time – otherwise
firms comparisons cannot be made
The cost figures arrived at can be misleading

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❖ the nature of the technique of contribution costing
- As a rule of thumb, a product that makes a positive contribution to fixed costs should continue to be
produced so long as there is spare capacity in the firm, it does not take the place of a product w/ a higher
contribution & there is not another option that has a higher contribution. There are many firms that have
excess capacity & hence use contribution-cost pricing to attract extra business that will absorb the excess
capacity.

❖ the difference between contribution & profit

- Contribution cost per unit = 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
- Profit per unit = 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡
𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑖𝑛𝑔 𝑡ℎ𝑖𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
- Unit cost = / 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 + 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

❖ limitations of contribution costing

Uses Limitations
Overheads not allocated – avoids inaccuracies Focus on contribution – opportunity cost for higher profits
Decisions are made based on contribution to overheads – full cost Contribution costing does not consider that some products &
may be inaccurate departments may incur much higher fixed costs than others
Qualitative factors may be important too, i.e., the image a product
Excess capacity is more likely to be effectively used
gives the business.

❖ situations in which contribution costing would be & would not be used.

- Contribution costing can be used in the following situations:
• ‘One-off’ special orders – a firm may be willing to supply a batch of products at a lower price if it has
the spare capacity if regular customers do not find out & fixed costs have been covered by the other
products. What are the dangers in accepting an order below full cost, even if it positively contributes to
fixed costs?
▪ Existing customers may learn of the lower prices being offered & demand similar treatment.
▪ When high prices are a key feature in establishing the exclusivity of a brand, then to offer some
customers lower prices could destroy a hard-won image.
▪ Where there is no excess capacity, sales at contribution cost may be losing sales based on the full
cost price.
▪ In some circumstances, lower-priced goods / services may be resold into the higher-priced market.
• ‘Make / buy’ decisions – business can often choose to manufacture all its products / to buy some of
them from other manufacturers. This choice depends upon contribution costing to compare the price of
production & the cost of purchasing.
• Deciding whether to stop a production of a product – if a product produces positive contribution, it
aids to cover fixed costs.
• When entering a new market – decide on selling price for penetration costing & ensure it covers
production costs.
- Fixed costing can be used in the following situations:
• When a business that produces a range of products / services needs to calculate the price it should
charge for specific product / service. the business needs to know the full cost of each product.
• Allocate / apportion overhead / fixed costs to each product / service, this can help w/ decision making &
measuring efficiency.

5.3.2 Solutions to costing problems.

❖ solution of numerical problems involving costing methods.
❖ using contribution costing to help w/ ‘accept/reject’ order decisions.

5.6 Budgets
5.6.1 The purposes of budgets
❖ measuring performance
https://youtu.be/ntSZl24-12g; https://youtu.be/8_1bVLKI6c0; https://youtu.be/3VnOhCr6FHE
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Vishakha Mirchandani
 - Budget: a detailed financial plan.
- Budget holder: individual responsible for the initial setting & achievement of a budget.
- Delegated budgets: delegate authority over the setting & achievement of budgets to junior managers.

Budgets Explanation
Sales Plans the volume & value of sales over specified period.
Production Plans production levels & input costs over a specified period.
Marketing Plans the finance required for marketing strategies over a specified period.
Financial Plans the need for external sources of finance over a specified period.
Project Plans the tasks, timings, & costs of a project over a specified period.
Capital expenditure Plans the level of capital expenditure over a specified period.
Master The total of all budgets aggregated into one main budget over a specified period.

❖ benefits & drawbacks from the use of budgets.

Budgets can be useful for ... Budgets can present problems if ...
allocating resources based on unrealistic assumptions
monitoring & evaluating business performance managers unskilled in budgeting
identifying problems before they happen they are over optimistic
improving decision-making there is no previous experience of a project
motivating employees there is a lack of data available
managing money affectively unrealistic target set
planning manage are stick rigidly to budgets & cannot adapt to change

❖ how budgets might be produced

1. The most important organisational objectives for the coming year are
established.
2. The key / limiting factor that is most likely to influence the growth /
success of the organisation must be identified, it is most likely to be
sales. Therefore, the sales budget will be the first to be prepared.
3. The sales budget is prepared after discussion w/ all sales managers
of the business.
4. The subsidiary budgets are prepared, which will now be based on
the plans contained in the sales budget.
5. These budgets are coordinated to ensure consistency.
6. A master budget is prepared that contains the main details of all
other budgets & concludes w/ a budgeted income statement &
Statement of financial position.
7. The master budget is then presented to the board – hopefully for the
directors’ approval.

❖ use of flexible budgets & zero budgeting.

- Incremental budgeting: uses last year’s budget as a basis & an
adjustment is made for the coming year.
- Zero budgeting: setting budgets to zero each year & budget holder
must argue their case to receive any finance.
- Flexible budgeting: cost budgets for each expense can vary if sales
/ production varies from budgeted levels.

❖ purposes of budgets for allocating resources, controlling, & monitoring of a business.

- Resource allocation – setting of budgets is likely to encourage a detailed plan of what resources will be
needed & how resources are to be allocated to achieve the best outcome for the business.
- Controlling & monitoring
• Inefficient use of resources can be identified & corrected.
• Progress towards achieving corporate / department objectives.
• Over-spending budget holders can be identified & the cause of any over-spend can be investigated (not
all over-spending is unnecessary; circumstances may have changed since the budget was set).
• The performance & progress of a departments / division can be measured against the budget.
• Departments requiring additional funding can be identified.

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❖ role of budgets in appraising business
https://youtu.be/NdnJJgOpwkQ
- Variance analysis: calculating differences between budgets & actual performance, & analysing reasons
for such differences.
- During the period covered by the budget & at the end of it the actual performance of the organisation
needs to be compared w/ the original targets, & reasons for differences must be investigated.
- Analysing these variances is an essential part of budgeting for several reasons:
• It measures differences from the planned performance of each department both month by month & at
the end of the year.
• It assists in analysing the causes of deviations from budget. E.g., if actual profit is below budget, was
this due to lower sales revenue / higher costs?
• An understanding of the reasons for the deviations from the original planned levels can be used to
change future budgets to make them more accurate.
- The success of a business can be measured by how well it meets the targets contained in its budgets.
These budgets may be closely related to business objectives. A business that exceeds the expectations in
the budgets would be judged to be successful, while one that continually fails to meet the expectations
outlined in its budgets would need to investigate the reasons for the underperformance. It might be that the
budgets were set at an unrealistic level.

5.6.2 Variances: adverse, favourable

❖ the meaning of variances
- Adverse variance: exists when the difference between the budgeted & actual figure leads to a lower-than-
expected profit.
- Favourable variance: exists when the difference between the budgeted & actual figure leads to a higher
than-expected profit.

❖ calculation & interpretation of variances [but not price/volume variances]

- Variance = 𝑎𝑐𝑡𝑢𝑎𝑙 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 − 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒
- Expense variances: negative (–) = favourable
positive (+) = adverse
Actual expense higher than budgeted = lower profits than budgeted
- Sales variances: negative (–) = adverse
positive (+) = favourable
Actual sales higher than budgeted = higher profits than budgeted

Causes of adverse variances Causes of favourable variances

Lower sales revenue = fewer units sold / lower selling price Higher sales revenue = higher economy growth / problem w/
(competition) competitors’ products
Higher raw material costs = higher output / cost per unit increased Lower raw material costs = lower output / lower cost per unit
Higher Labour costs = higher wages (shortage of workers) / more
Lower Labour costs = lower wages / less time taken
time taken
Higher overheads = increased rents (more than budgeted) Lower overheads = reduced advertising rates

5.7 Contents of published accounts

5.7.1 The income statement
❖ amendment of an income statement from given data.
https://youtu.be/IDbQW-xpl_Q; https://youtu.be/or3bOLtAV4s

❖ the impact on the income statement of a given change.

5.7.2 The statement of financial position

❖ amendment of a statement of financial position from given data.
https://youtu.be/CNiUSRw2RGE; https://youtu.be/Syu2sKv05rQ

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 ❖ the relationships between items in the income statement & the statement of
financial position
https://youtu.be/6_sS389oMYk;

Cause of change Impact on statement of financial position Impact on income statement

Reduced inventories under current assets Reduced closing inventory under cost of goods sold.
Sale of inventories for cash (sold for
Increased cash / account receivable under current Increased sales revenue
same price is valued in accounts)
assets Increased gross & net profits

Value of inventories will fall. Reduced closing inventory under cost of goods sold.
Sale of inventories for cash - sold at
Cash balance of trade receivables will increase Increased sales revenue
higher price & valued in accounts
under current assets Increased gross & net profits
Decreased value of non-current assets. Increased expenses
Depreciation of equipment
Decreased shareholders’ equity Reduced profits
Increased non-current assets.
Intangible assets are valued
Increased shareholders’ equity
Account payable accreditors ask for Decreased account payables under current assets.
speedier payment Decreased cash
Additional share sold & share Increased shareholders’ equity
capital is raised to buy property Increased noncurrent assets
<

❖ the impact on the statement of financial position of a given change in valuing non-
current assets / inventories.

5.7.3 Inventory valuation

❖ the difficulties of valuing inventory
- The price paid for inventory (historical cost) would give a factually correct value but that one was in the
past. The current value may be higher / lower.
- Damaged stock is unlikely to sell unless repairs undertaken. This adds to the cost of inventory. Therefore,
the cost of repair must be added to the price paid for the items.
- Inventory is valued on one day. The value may be different on every other day due to purchases / sales of
inventory having taken place.
- Some items might be never sold, & their value is of little / no benefit to the business.
- Incomplete goods / work in progress may have a different value at every stage of production.
- The date inventory is checked may not represent other times of the year due to seasonal fluctuations in
sales / unusual circumstances.

❖ the net realisable value method [Note: LIFO & FIFO will not be examined]
- Net realisable value: the amount for which an asset (usually an inventory) can be sold minus the cost of
selling it – it is only used on Statements of financial position when NRV is estimated to be below historical
cost.
- NRV = 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑟𝑒𝑝𝑎𝑖𝑟
- Only the lower cost between the historical value & the NRV will be used in the statement of financial
position.

5.7.4 Depreciation
❖ the role of depreciation in the accounts
https://youtu.be/IKihYinXmIg;
- Depreciation: the decline in the estimated value of a non-current asset over time. Assets decline in value
for two main reasons:
• normal wear & tear through usage
• technological change, making asset, / the product it is used to make, obsolete.
- Net book value: the current Statement of financial position value of a non-current asset = original cost –
accumulated depreciation.

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❖ the impact of depreciation (straight line method only) on the statement of financial
position & the income statement
- Straight-line depreciation: a constant amount of depreciation is subtracted from the value of the asset
each year.
𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡−𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
- Annual depreciation expense =
𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 (𝑦𝑒𝑎𝑟𝑠)
- The value of non-current assets in the statement of financial position will decrease each year according to
the depreciation charge of that period. At the same time, the depreciation value will be included as an
expense in the income statement & will be deducted from the profit. This process will help spread out the
cost of the non-current assets throughout its useful life instead of expensing it in the year of purchase
which will overstate expenses & understate profits.
- It is important to remember that depreciation does not affect cash flow of the business. Cash outflow only
occurs when purchasing the non-current asset.

5.8 Analysis of published accounts

https://youtu.be/GoKIZqSFMIE; https://youtu.be/bmBsYrTzCpw

5.8.1 Profitability ratio

❖ return on capital employed.
https://youtu.be/Jbywtc7VqiE; https://youtu.be/wrk_XZJYXy4; https://youtu.be/dY4wX-7-dtI;
https://youtu.be/ROqkmlVuXKU
- Profitability ratios – used to measure the performance of a company – &, therefore, by implication the
performance of the management team too.
- Return on capital employed (ROCE) – the rate at which assets / capital employed generate profits.
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
- Return on capital employed (%) = × 100
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
- Capital employed: the total value of all long-term finance invested in the business.
- Capital employed = 𝑛𝑜𝑛 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 + 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 𝑛𝑜𝑛 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝑒𝑞𝑢𝑖𝑡𝑦

5.8.2 Financial efficiency ratios

❖ inventory turnover, days’ sales in receivables
https://youtu.be/OkNNZ1j3ywI; https://youtu.be/rOd4JnPE2wc; https://youtu.be/oIN86FQGmg4
- Financial efficiency ratios – indicate of how efficiently a business is using its resources & collecting its
debts.
- Inventory turnover ratio – records the number of times the inventory of a business is bought in & resold
in a period. The higher the number, the more efficient the managers are in selling inventory rapidly.
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
- Inventory turnover ratio (times) =
𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
𝑡𝑟𝑎𝑑𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑣𝑒𝑖𝑣𝑎𝑏𝑙𝑒
- Day’s sales in receivables = × 365
𝑟𝑒𝑣𝑒𝑛𝑢𝑒
- Day’s sales in receivables ratio – measures how long, on average, it takes the business to recover
payment from customers who have bought goods on credit – the trade receivables. The shorter this time is,
the better the management is at controlling its working capital.

5.8.3 Gearing ratio

❖ gearing ratio, interest cover.
https://youtu.be/3offFagEWKg; https://youtu.be/zTy-pAJcdMA; https://youtu.be/nwrutKvKE98
- Gearing ratios – examine the degree to which the business is relying on long-term loans to finance its
operations. It reflects a business’s financial strategy.
- The greater the reliance of a business on loan capital, the more ‘highly geared’ it is said to be.
𝑛𝑜𝑛−𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑙𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑙𝑜𝑎𝑛𝑠
- Gearing ratio = × 100 = × 100
𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠’ 𝑒𝑞𝑢𝑖𝑡𝑦 + 𝑛𝑜𝑛−𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
- Interest cover ratio – how many times a firm could pay its annual interest charges out of current net /
operating (before tax & interest) profit.

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 - The higher this figure is, then the less risky the current borrowing levels are for the business. If the result is
around 1, however, it means that all the operating profits are being used to pay back interest costs – bad
news for shareholders & for the firm’s capital investment plans.
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 𝑎𝑛𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡)
- Interest cover =
𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑

5.8.4 Investor ratios

❖ dividend yield, dividend cover, price/earnings ratio
https://youtu.be/8_EF-duWgeg;
- Shareholder ratios – used by existing / potential shareholders to assess the rate of return on shares & the
prospects for their investment.
- Share price: the quoted price of one share on the stock exchange.
- Dividend: the share of the company profits paid to shareholders.
- Dividend yield ratio – measures the rate of return a shareholder gets at the current share price.
𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
- Dividend yield ratio (%) = × 100
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒
𝑡𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
- Dividend per share =
𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑠𝑠𝑢𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠
- Dividend cover ratio – the number of times the ordinary share dividend could be paid out of current profits
after tax & interest – the ‘profit for the year’. The higher this ratio, the more able the company is to pay the
proposed dividends, leaving a considerable margin for reinvesting profits back into the business.
𝑝𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
- Dividend cover ratio =
𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
- Price per earnings ratio – reflects the confidence that investors have in the prospects of the business. In
general, a high P/E ratio suggests that investors are expecting higher earnings growth in the future
compared w/ companies’ w/ a low P/E ratio
- Earnings per share: This is the amount of profit (after tax & interest) earned per share.
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒
- Price/earnings ratio =
𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑝𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
- Earnings per share =
𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠

5.8.5 Practical use of ratio analysis

❖ how each of these ratios is used, reasons for the results obtained & strategies that
businesses might adopt to improve ratio results
Ratio Notes
- The higher the value of this ratio, the greater the return on the capital invested in the business.
Return on capital - The result can also be compared w/ the return from interest accounts e.g., Bank (5%).
employed - Can be raised by increasing the profitable, efficient use of the assets owned by the business, which were
purchased by the capital employed

- The ‘normal’ result depends on the industry.

Inventory turnover
- Little relevance for service-sector firms, as they are not selling products.
ratio
- Efficient management – i.e., Jit system – will give a higher ratio

- There is no right / wrong result – it will vary between businesses & industries.
Days’ sales in trade - High days’ sales in trade receivables ratio may be deliberate to attract sales.
receivables ratio - Reduced by giving shorter credit terms – 30 days instead of 60 days – / by improving credit control by
refusing credit terms, interest charges, etc.

- Share price rises & unchanged dividend = the dividend yield will fall.
- Increased dividend & same share price = dividend yield will increase
Dividend yield ratio
- Use reserves for dividends when profits are low = higher ratio
- Lower annual dividends for higher retained earnings for future investments
- Higher dividends + same profits = lower ratio
Dividend cover ratio
- Low results = low retained earnings (future expansion plans)
- Shows how much investors are currently willing to pay for each $1 of earnings.
Price/earnings ratio
- Shareholders in this company will wait 20 years at present earnings levels to receive payback on their
(P/E ratio)
investment in shares

- A result of over 50%, using the ratio above, would indicate a highly geared business.
- Higher risk due to higher borrowing, higher interest charges, lower dividends, cash outflow
Gearing ratio
- Low gearing = safe business = limited growth = lower returns for investors
- Reduced by using non-loan sources of finance, i.e., Issue of shares / retained profits

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❖ comparison of ratios results between businesses.
- Comparisons can be made w/
- Other businesses in same industry
- Other investment alternatives i.e., bank interest rates (5%)
- Industry averages
- Previous years (trends can be identifies)

❖ limitations of these accounting ratios

https://youtu.be/UuahUYKvV1k;
- The accuracy & usefulness of all the ratios can be influenced by different accounting techniques to
calculate the profit i.e., different methods to calculate depreciation.
- Comparisons w/ companies in a different industry are unlikely to be of value.
- Comparing ratios of businesses of different sizes can be misleading.
- Financial statements may have been adjusted to present a particular financial condition to stakeholders.
- Economic conditions may have had an impact on the ratios for the particular year, leading to unrealistic
figures, affecting trends.
- Ratios are quantitative & ignore qualitative aspects of business i.e., ethics & environmental friendliness.
- Do not provide solution to business problems.
- Some ratios have multiple formulas, different formulas will lead to different results.

5.9 Investment appraisal

5.9.1 The concept of investment appraisal
❖ the need for investment appraisal
- Investment appraisal: evaluating the profitability / desirability of an investment project.
- Investment – spending money now w/ the aim of getting a return in the future that is larger than the
original spending. In the business sense it usually means spending money on a major project.
- The need for investment appraisal:
• To compare the expected outcomes of competing options
• To estimate the costs, i.e., the costs of new premises, equipment, / training.
• To estimate the revenue in terms of timescale & size of any return
• To assess the possible risk involved / to compare the risks of two / more investment opportunities.

❖ the significance of risk in investment decisions

- Potential risk can be minimised / avoided if businesses fully explore the implications of their decisions
before embarking on any one course of action.
- The business is only able to estimate the costs & revenues associated w/ the project. Investment appraisal
is an attempt to formalise those estimations & compare alternatives.
- A sudden economic downturn can change everything that has been predicted – anticipated sales may not
occur, & costs may prove to be higher than expected if a period of higher inflation occurs.
- Investment decisions will be based on past information which cannot guarantee that the same trend will
continue in the future.

5.9.2 Basic methods: payback, accounting rate of return (ARR)

❖ the meaning, calculation, & interpretation of payback & ARR
https://youtu.be/teg0avCfFfI; https://youtu.be/rZgaogeoynU; https://youtu.be/9ASz21HLqzY;
https://youtu.be/qYsZcElRiX4; https://youtu.be/-ICsKIB6AzI; https://youtu.be/kEsZKO87TlU
- Payback period: time it takes for the net cash inflows to pay back the original cost of the investment.
𝑎𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤 𝑛𝑒𝑒𝑑𝑒𝑑
- Payback period = 𝑥 𝑦𝑒𝑎𝑟𝑠 + × 12 𝑚𝑜𝑛𝑡ℎ𝑠
𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑖𝑛 𝑛𝑡ℎ 𝑦𝑒𝑎𝑟

Benefits Limitations
simple does not take account of overall profitability
easy to compare many projects does not consider cash flows after the payback period
can easily use a range of forecast figures for ‘what if’ analysis should be used w/ other methods
gives an idea of how long it might take to repay if financed by a loan

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 - Accounting rate of return measures the annual profitability of an investment as a percentage of the initial
investment.
𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤) 𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤)
- ARR(%) = × 100 = × 100
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡−𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
- average capital cost =
2

Benefits Limitations
easy to compare ARR & interest rates more uncertainty further into the future
includes cash flows over the life of the project assumes cash flows have the same value in the future as they do
easy to compare w/ expected rate of return now (the time value of money)
easy to compare projects does not consider timing of net cash flows so be used w/ payback

5.9.3 Discounted cash flow methods: discounted payback, net present

value (NPV), internal rate of return (IRR)
❖ the meaning, calculation, & interpretation of discounted payback & NPV
https://youtu.be/aj20v1P5vRQ; https://youtu.be/r3apah6l5zU; https://youtu.be/vEDEE_h2bMc;
https://youtu.be/2GUVGx2KL-w;
- Net present value (NPV): today’s value of the estimated cash flows resulting from an investment.
- Net present value = 𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠 − 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
- Discounted payback – recognises the money received in 3- / 4-years’ time will not have the same value
as if the money were in our possession today.
- The present value of a future sum of money depends on two factors:
• The higher the interest rate, the less value future cash has in today’s money.
• The longer into the future cash is received, the less value it has today.
- The three stages in calculating NPV are:
• Multiply discount factors by the net cash flows. Cash flows in year 0 are never discounted, as they are
today’s values already.
• Add the discounted cash flows.
• Subtract the capital cost to give the NPV.
- If discount factor is 10%, decimal form for each year can be found using 1 ÷ (1.10)𝑛 , where 𝑛 = 𝑦𝑒𝑎𝑟

Benefits Limitations
Considers timing & size of cash flows Complex to calculate & explain
Rate of discount can be varied for different situations Result depends on rate of discount - subjective
Considers time value of money & opportunity cost Comparisons can only be made if initial cost is same

❖ the meaning & interpretation [but not the calculation] of IRR

https://youtu.be/b3sZIjkRpak
- Internal rate of return (IRR): the discount rate that gives a net present value of zero for a particular
project. Example:

Benefits Limitations
Different projects costing different amounts can be compared Calculation is tedious w/o a computer
Can be compared w/ the weight of interest / criterion rate of a
Exact results can be misleading & may represent false accuracy
business
Avoids the need to choose an actual rate of discount
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<

5.9.4 Qualitative factors in investment appraisal

❖ qualitative factors that might influence an investment decision in each situation.
https://youtu.be/tM5cDJOLqI0
- Attitude to risk – are the owners of a business ‘risk averse’ / risk takers?
- Impact on stakeholders
- Changes in the internal & external environment in which the business operates.
- Ease & availability of finance
- The fit w/ objectives & strategies
- Pollution – e.g., if a project will pollute the environment, it would hopefully not be pursued even though it
may be highly profitable.
- Employment levels – social considerations are sometimes judged to be important e.g., the negative
impact of employment levels if workers are replaced w/ machinery.
- Is the quality of the product likely to be the same?
- Will staff training be required?

❖ comparison of the investment appraisal methods, including their limitations.

6 Strategic management
6.1 What is strategic management?
6.1.1 Understanding what strategic management is.
❖ the meaning of corporate strategy, tactics, & strategic
management
https://youtu.be/icqu2Kl1Imc; https://youtu.be/VcWI3WVXmFk
- Corporate strategy: a long-term plan of action for the whole
organisation, designed to achieve a particular goal.
- Tactic: short-term policy / decision aimed at resolving a particular
problem / meeting a specific part of the overall strategy.
- Strategic management: the role of management when setting long-term
goals & implementing cross-functional decisions that should enable a
business to reach these goals.
- The three levels of strategic management

• specific strategy for functional areas i.e., marketing

Functional strategy
• decisions on the specific methods of achieving a particular objective
• general strategy for division / area of the business
Business strategy
• decisions made to complement the corporate strategy
• overall purpose & general direction
Corporate strategy
• is the base for all further strategies & decisions

Strategic decisions Tactical decisions

Long-term Short- to medium-term
Difficult to reverse once made – committed resources Reversible, but there may still be costs involved
Taken by directors &// senior managers Less work taken by managers & subordinates delegated authority
Cross-functional – will involve all major departments of the business Impact of tactical decisions is often only on one department

❖ the need for strategic management

- defines & shares business aims & ethics.
- identifies strengths, weaknesses, opportunities, & threats.
- enables measurement of progress.
- enables informed decisions & planned actions.
- relates actions to resources.
- coordinate activities of departments & functional areas.
- detect & respond flexibly to changes.

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 - evaluate & review progress towards objectives.

❖ Chandler’s assertion that strategy should determine organisational structure.

- According to Chandler, strategic management – the External environment
determination of the basic long-term goals & objectives of an & its changes
enterprise, & the adoption of courses of action & the
allocation of resources necessary for carrying out the goals.
- Organisation structure – the design of organisation
opportunities innovation in threat from
through which the enterprise is administered. in the market technology competition
- Key findings:
• Strategic management should be decided at the top /
centre of an organisation.
• Individual business units then decide tactics to carry out Corporate strategy developed
the strategy.
• Structure follows strategy.
- Structure: Organisation structures change to
• Corporate strategy was set by top management. reflect strategy

• Product / geographic business units adopted their own

tactics.
• Central management coordinated.

❖ how business strategy determines competitive advantage in an increasingly

competitive world
- Competitive advantage: a superiority gained by a business when it can provide the same value product/
service as competitors but at a lower price / can charge higher prices by providing greater value through
differentiation.
- Strategic planning can provide planned methods to appropriate objectives linked to a full understanding of
market conditions, internal resources, & possible actions. Moreover, the business will be better prepared
for unforeseen circumstances than competitors, giving them a competitive edge. This is important because
the marketplace is dynamic, especially due to globalisation.

6.2 Strategic analysis

- Strategic analysis: the process of conducting research into the business environment within which an
organisation operates, and into the organisation itself, to help form future strategies.

6.2.1 SWOT analysis

❖ undertake & interpret SWOT analysis in each situation.
- https://youtu.be/4Yav51Jz9s0; https://youtu.be/7JmDXDZYx0s
- SWOT analysis: a form of strategic analysis that identifies & analyses the main internal strengths &
weaknesses & external opportunities & threats that will influence the future direction & success of a
business.

Strengths Weaknesses
• Internal factors. • Internal factors.
• Can be controlled to gain competitive advantage. • Can be identified & influenced.
• Acts as a building block for expansion/growth. • Should be removed/fixed/minimised to reduce weakness /
a loss of competitiveness.

Opportunities Threats
• Outside the business’s control. • Unable to be controlled.
• Can be taken advantage of. • Actions can be taken to minimise.
• Will help the business/product succeed. • May hinder the progress of a business/product if ignored.

Advantages Disadvantages
It is relatively quick, cheap, & easy to understand. It may become outdated quickly.
It can generate specific objectives & actions as part of strategic Simple conclusions may be misleading - the situation may be more
planning. complex.
It is subjective & depends on the person undertaking it.
<

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 ❖ development of the outcome of a SWOT analysis into strategic objectives
Problem / decision Relevant data are Potential solutions Most appropriate
identified factors identified listed solution/choice made

• The main reason • All relevant internal • Allows for a variety • This will be
for a SWOT & external factors of choices that developed into an
analysis to be listed & ranked may solve the objective that can
utilised problem / dilemma be actioned.
<

6.2.2 PEST / External Environment analysis

❖ undertake & interpret PEST analysis in each situation.
https://youtu.be/-8y1aX0yNbw; https://youtu.be/sP2sDw5waEU
- PEST analysis: the strategic analysis of a firm’s macro-environment, including political, economic, social,
& technological factors.

Political & legal (government actions) Economic

• health & safety laws • taxes
• competition policy • changes in household income
• change of government • tariff

Social Technological
• ageing population • cell phone / tablet developments
• changing attitudes to drugs / car use • 3D printers
• family size • more efficient machinery
,

Advantages Disadvantages
relies heavily on secondary data can become outdated easily
relatively quick & easy to use does not respond easily to market changes
easy to present & understand simplicity can be misleading
can explain & give details to a SWOT analysis relies on assumptions about future changes
may be subjective due to the views of the author
<

6.2.3 Business vision/mission statement & objectives

❖ evaluation of the role of business vision/mission statements & objectives in strategic
analysis
https://youtu.be/GMjHDTPBiV0
- Mission statement: a statement of the business’s core purpose & focus, phrased in a way to motivate
employees & to stimulate interest by outside groups. An effective mission statement should answer
three key questions:
• What do we do?
• For whom do we do it?
• What is the benefit?
- Vision statement: a statement of what the organisation would like to accomplish in the long term.

Advantages Disadvantages
define the real purpose of the business can be very general – difficult to develop objectives
enable specific objectives to be set to achieve the vision/mission takes up time & resources for little benefit if not used in planning
provide motivation & clarity for employees can limit strategic planning - e.g., the shoe manufacturer has
enable a strategic planning framework to follow been limited to footwear

Role of vision/mission statements & objectives in strategic analysis

Defines the overall purpose of the organisation • identify the reason for the business products / services
Sets the framework for strategic planning • allows a benchmark & aim for all organisational outcomes
• employees can know the guiding principles.
Shares the vision w/ internal & external stakeholders
• customers know what to expect from a particular business
,

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6.2.4 Boston Matrix
❖ undertake & interpret Boston Matrix analysis on the product portfolio of a business.
https://youtu.be/BmambeXCfyg; https://youtu.be/JShTYqdA_d4; https://youtu.be/rW5SOENyq5g
- Boston Matrix: a method of analysing the product portfolio of a business in terms of market share &
market growth. This analytical tool has relevance when:
• analysing the performance & current position of existing product portfolios
• planning action to be taken w/ existing products.
• planning the introduction of new products.

High market share Low market share

Rising star Problem child
• Potential high level of competition. • Possibly new products.
High market
• Growth phase. • Insufficient marketing / exposure.
growth
• Potential falling unit costs. • Negative cash flow; future potential excellent.
• Potential large revenue & profit. • Launch/introduction phase

Cash cow Dog

• Steady in positive revenue stream. • Sales revenue likely to be low.
Low market • Likely to be a mature product; future decline. • products in decline phase (extension strategy)
growth • Past marketing & R&D spending. • Outdated products / high competition.
• Customer loyalty & advertising to maintain. • May be profitable if production efficient.
• Used to fund/compensate other products • May be discontinued in future.

Advantages Disadvantages
It is simple & easy to use & pinpoints the position of products Market situations may change quickly
It indicates possible appropriate actions to maintain cash flows & Using it might lead to simplistic thinking – the model indicates
decide on portfolio composition possibilities. It does not lay down set answers to situations.

6.2.5 Porter’s Five Forces

❖ use Porter’s Five Forces analysis as a framework for business strategy.
https://youtu.be/YAKEjmiqA7c; https://youtu.be/8l-P6X-8ag8; https://youtu.be/cm9SsMa56r4
- Porter’s Five Forces analysis – analysis framework to analyse the level of competition from five external
influences to influence business marketing strategy.
- The four forces / factors outlined influence how competitive a market is likely to be:
• Threat of new competitors – new competitors arriving in a market will increase the competition &
reduce the possible profits for existing businesses by increasing marketing costs &// by price reductions.
• Threat of substitute products – substitute products will reduce prices & increase the price elasticity of
demand for all existing products.
• Bargaining power of customers – many customers will mean a more attractive market than if there
are a few customers who have a high potential buying power.
• Bargaining power of suppliers – if suppliers of materials, components, communication, / distribution
systems have power, their prices will be high & so will business costs. This makes competition much
less likely.

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 Forces Action to take if high
Increase brand loyalty.
Threat of new competition Develop new products.
Develop dedicated distribution
Develop new products.
Threat of substitute products
Re-market existing products
Produce products w/ no substitutes.
Bargaining power of customers
Forward vertical integration
Backward vertical integration
Bargaining power of suppliers
Cooperation w/ others to buy bulk

Reasons for Problems

Assess existing position / potential for entry into a new market Market changes quickly leading to redundant analysis
Assess the chances of survival / growth Difficult to reduce all influences on five forces
Highlights external threats and opportunities Competition & customers are not simple
Best for simple markets

6.2.6 Core Competencies

❖ Prahalad & Hamel’s Core Competencies as a framework for business strategy.
https://youtu.be/M9Rot4AWOWY
- Core competence: an important business capability that gives a firm competitive advantage.
- Core product: product based on a business’s core competences, but not necessarily for final consumer /
end user.
- To be of commercial & profitable benefit to a business, a core competence should:
• Provide recognisable benefits to consumers.
• Not be easy for other firms to copy, e.g., a patented design.
• Be applicable to a range of different products & markets.
- The use of core competencies
• Focus efforts on customer requirements.
• Utilise business strengths.
• Develop complementary resources.
• Identify reasons for purchasing decisions.
• Outsource non-core activities.
- Three factors used to decide on core competencies.

Market access Uniqueness Customer perception

Focused brand identity Difficulty in copying Customer awareness
Marketing / customer relationship skills Level of product differentiation Customer trust
<

- Downside/criticism of core competencies:

• Over-enthusiastic outsourcing has damaged business competitiveness.
• Difficulty to identify core competencies that are genuinely unique.
• Possible for a business to become overconfident about its core competencies.

6.3 Strategic choice

6.3.1 The Ansoff Matrix
❖ the structure & how it analyses the link between business strategy & risk.
https://youtu.be/OhqMt_3A2WY; https://youtu.be/B3AGqrdDR4Q; https://youtu.be/CMFXsJxi05U
- Ansoff’s matrix: a model used to show the degree of risk associated w/ the four growth strategies of
market penetration, market development, product development & diversification.

Existing Product New Product

Product Development: the

Less Risk

Market Penetration:
Existing
Market

development & sale of new

achieving higher market
products/new developments
shares in existing markets
of existing products in
w/ existing products.
existing markets

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 New Market

More Risk
Diversification: the process
Market Development: the
of selling different, unrelated
strategy of selling existing
goods / services in new
products in new markets
markets

Less Risk More Risk

Advantages Disadvantages
it is simple & easy to draw up it is simplistic & ignores many relevant factors
clear choices & associated levels of risk are shown indications of risk are general guidance only
it allows strategic choice w/ strategic planning framework

❖ use of it to analyse & evaluate different business strategies in each situation.

Methods Factors for success Advantages Disadvantages
Market Penetration
• increasing frequency of purchase • already know & • lead to increased
• an unsaturated market
• finding different new customers understand the market. competition.
• low competition
• brand loyalty & repeat purchases • may increase • reliance on limited
• growing size of market
• taking sales from competitors efficiencies market
Product Development
• customer knowledge but
• extensive R&D costs for
• Altering existing products to appear • thorough market research untested product
new products
new. • strong brand identity & customer • expands the product
• market research also
• producing new products loyalty range utilising existing
required
customers
Market Development
• product knowledge but • large market research
• a new use of the product
• thorough market research unknown customer base costs
• a new area for sales
• core competencies are linked to the • expands the customer • increased spending on
• targeting a different type of
product base meaning less advertising an unknown
customer / consumer
reliance brand
Diversification
• a real driving force for diversification
exists, i.e., a failing existing market, • potential new markets & • No experience of
• The use of R&D linked to market / management growth objectives. revenue streams customers / markets
research. • Total market research & advice from • expanded product & • huge investment into
• Integration w/ another business product/market experts customer portfolio product development &
• flexible organisation culture & high spread risk market research
resource availability

6.3.2 Force Field Analysis

❖ Force Field Analysis as a means of making strategic choices in each situation.
https://youtu.be/ltzNGzfzuzM; https://youtu.be/oLU8COXdIVI; https://youtu.be/X9ujAtYAfqU
- Force-field analysis: technique for identifying & analysing the positive factors that support a decision
(‘driving forces’) & negative factors that constrain it (‘restraining forces’).
- Conducting a force-field analysis:
• Analyse the current situation & the desired situation.
• List all the factors driving change towards the desired situation.
• List all the constraining factors against change towards the desired situation.
• Allocate a numerical score to each force, indicating the scale / significance of each force: 1 = extremely
weak & 10 = extremely strong.
• Chart the forces on the diagram w/ driving forces on the left & restraining forces on the right.
• Total the scores & establish from this whether the change is really viable – is it worth going ahead? If
yes, then the next stage is important.
• Discuss how the success of the change / proposed decision can be affected by decreasing the strength
of the restraining forces & increasing the strength of the driving forces.
- Possible management strategies include:
• Staff could be trained (increase cost by 1) to help eliminate fear of technology (reduce staff concern
about new technology, −2).
• Show staff that change is necessary for business survival (add a new force in favour, +2).

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 • Show staff that new IT equipment would introduce new skills & interest to their jobs (add a new force in
favour, +1).
• Raise wages to reward staff for higher productivity (higher cost, +1, lower cost by loss of staff, −2).
• More energy efficient IT machines could be selected (environmental impact of new technology, −1).

Advantages Disadvantages
it is simple to carry out & easy to understand some forces may be omitted
it identifies clearly the forces acting on a decision scores are subjective & could be inaccurate
it enables drivers to be strengthened & restrains to be reduced simplistic edition of scores ignores other factors

6.3.3 Decision trees

❖ construction of simple decision trees from information given.
https://youtu.be/1Px2U0rprSs; https://youtu.be/k29jDYV7JvQ; https://youtu.be/n4oYw0kEsvA;
https://youtu.be/90UehqeK6sY
- Decision tree: a diagram that sets out the options connected w/ a decision & the outcomes & economic
returns that may result.
- Decision trees enable a choice between possible actions to be made, especially when there are:
• alternative choices
• numerical costs & benefits of the choices
• probabilities of success / failure for each choice
- Working from left to right, a decision tree is drawn by setting out:
• a square decision note showing that decision to be taken.
• option choices indicated by lines ending in a decision note / outcome.
• outcomes indicated by a circle (chance node) followed by probabilities of possible outcome.
• the expected money value (EMV) of the outcome

❖ calculation of the expected monetary values from decision trees & use of the results
to assist in selecting the most appropriate strategy.
- Expected value: the likely financial result of an outcome obtained by multiplying the probability of an event
occurring by the forecast economic return if it does occur.
- The following decision tree shown deals w/ whether to buy a new / a second-hand packaging machine:
• Calculations are made from right to left.
• Expected value = 𝐸𝑀𝑉 × 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 (𝐴)
• Add the expected values for each option (B)
• Add the expected values for each outcome (chance node – C)
• Expected value minus cost of each option (D)
• Highest possible return (E)

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<

- The new machine has a higher return ($235,000) then second hand one ($176,000), so the analysis
recommends this option. There may be other quality factors involved that also affect the decision. In this
case, these may be the condition of the second-hand machine, maintenance levels & relative lifespans.
Other factors may include:
• availability of finance
• how the options relate to business objectives
• accuracy of monetary information & probabilities
• external economic environment

❖ the usefulness of decision trees and an assessment of the accuracy of the data
Advantages Disadvantages
They demand detailed & thorough research into costs & benefits. The use of data may disguise poor / faulty research.
They set out choices & their value in money terms clearly. They require reliance on accurate data & forecasts.
They take account of the risk & probability of an outcome. They may become out of date.
They demand clear thinking & analysis. They may not consider all relevant factors.

6.4 Strategic implementation

❖ understand the meaning of strategic implementation.
- Strategic implementation: the process of planning, allocating & controlling resources to support the
chosen strategies.
- It involves ensuring that all the following factors are in place:
• an appropriate organisational structure to deal w/ the change.
• adequate resources to make the change happen.
• well-motivated staff who want the change to happen successfully.
• a leadership style & organisational culture that allow change to be implemented w/ wide-ranging
support.
• control & review systems to monitor the firm’s progress towards the desired final objectives.

6.4.2 Business plans

❖ key elements of business plans
https://youtu.be/SMcMwpL8C8E; https://youtu.be/O0lXFwG5o3w
- Business plan: a written document that describes a business, its objectives & its strategies, the market it
is in & its financial forecasts.
• business name, history, legal structure & basic introduction to product / services
Executive summary
• a brief statement of objectives & aims
• detailed outline of the main / core products / services
Product / service
• focus on how the product / service meets a market need & any differentiation
• size of market, competition, target customer & trends.
Market analysis
• Indication / outcome of market research
• the marketing mixes.
Marketing plan
• explanation of how the customer needs will be met
• patents / licences held.
Production plan
• goals & outline of premises, equipment, employees, & suppliers required

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 • the people in the business & their roles
Organisational plan
• organisational structure
• cash flow & profit & loss forecasts
Financial plan
• outlines current & future borrowing needs & returns
• reason for investment
Summary of long-term ambitions
• future objectives & plans for growth & expansion

❖ the value of business plans for large & small, established & start-up businesses.
- Whatever the size of the business, the plan enables:
• Close checking that an idea will be successful, indicating how to overcome possible problems.
• Successful applications for a loan, grant, subsidy, / other finance
• Detailed examination of the financial & organisational implications of a proposal based on research.
• Detailed assessment of the internal & external resources needed for success.
• A focus & sense of direction
• Constant review of progress
- Disadvantages of business plans:
• The cost of producing them & the possibility of inaccurate forecasts.
• They may become inflexible if they are followed slavishly w/o being adapted to changing conditions.

❖ key elements & purpose of corporate plan

- Corporate plan: this is a methodical plan containing details of the
organisation’s central objectives & the strategies to be followed to
achieve them.
- Key elements of a corporate plan:
1. The overall objectives of the organisation within a given time
frame. These could be:
• profit target
• sales growth
• market share target.
2. The strategy / strategies to be used to attempt to meet these
objectives.
3. The main objectives for the key departments of the business derived from the overall objective.

Advantages Disadvantages
Managers have clear focus on future targets & methods to be used Made obsolete by rapid unexpected internal / external changes
Can be used to communicate this to staff Consideration on how to respond to unforeseen events
Comparisons can be made to measure business performance Plans should be adaptable & flexible
Managers consider internal & external strengths & weaknesses Time consuming

Internal External
Operating capacity – sufficient if expansion plans approved? Macro-economic conditions – expansion on hold during recession.
Culture of the organisation Central bank & government economic policy changes.
Managerial skill & experience – if diversification is chosen. Technological changes – could make best plans outdated rapidly.
Staff numbers & skills – workforce planning key in success of plan Competitors’ actions
Financial resources – can the proposed strategies be afforded?
<

6.4.3 Corporate culture & strategic implementation

❖ different types of corporate culture i.e., power, entrepreneurial & task
https://youtu.be/5PeRdftWwEQ; https://youtu.be/iEgb1u-bhDY; https://youtu.be/MfL_0ko4T3o;
- Corporate culture: the values, attitudes & beliefs of the people working in an organisation that control the
way they interact w/ each other & w/ external stakeholder groups.
- Role culture: each member of staff has a clearly defined job title & role. Typically:
• Most associated w/ bureaucratic organisations
• Power & influence come from a person's position in the organisation.

Advantages Disadvantages
Will defined organisational structure Operate within the rules, show little creativity
Everyone has a clear delegated authority

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 - Person culture: when individuals are given the freedom to express themselves fully & make decisions for
themselves.

Advantages Disadvantages
Most creative Conflict between individual goals & those of the whole organisation

- Power culture: concentrating power among just a few people. Typically:

• Leadership is autocratic.
• Decision-making is centralized.
• Organisation structure is narrow & tall.
• Communication channels are defined in a hierarchy.

Advantages Disadvantages
Decisions are made quickly & clearly Creativity is limited, little group / teamwork.
Decisions are put into practise exactly Some employees are unmotivated as they have little control.
Appropriate for Less suitable for
Products w/ a long life Markets w/ an emphasis on high & new technology for new products
Prospects for expanding internationally
A great deal of competition
<

- Entrepreneurial culture: this encourages management & workers to take risks, to come up w/ new ideas
& test out new business ventures. Typically:
• Leadership is democratic / laissez-faire & empowering.
• Decision-making is delegated.
• Organisation’s structure is flat, wide / a matrix, & able to change.
• Communication channels are informal & fast.

Advantages Disadvantages
Many ideas, quick to react to change Time & resources are wasted & unworkable ideas
Many employees are highly motivated Little control over employees
Appropriate for Less suitable for
An emphasis on high & new technology for new products Products that have a long life
High growth
A great deal of competition

- Task culture: based on cooperation & teamwork. Typically:

• Leadership is democratic & empowering.
• Decision-making is delegated.
• Organisation structure is flat, wide / a matrix.
• Communication channels are informal.

Advantages Disadvantages
Creativity is high Slow decision making & team rivalry
Many employees are motivated by responsibility & team working Changing teams is costly & disruptive
Appropriate for Less suitable for
Markets that have an emphasis on high & new technology for new Markets that are growing, / face a lot of competition
products Products are long lived
Where there is a change of international expansion

❖ strong and weak culture

Strong culture Weak culture
employees understand and follow culture employees do not understand culture; need procedures and rules
employees agree on values and behaviours different ideas about culture; conflict
<

❖ importance of corporate culture in strategic implementation in each situation.

-
The culture of an organisation gives it a sense of identity & is based on the values, attitudes & beliefs of the
people who work in it − especially senior management. Values, attitudes, & beliefs have a very powerful
influence on the way staff in a business will act, take decisions, & relate to others in the organisation. They
define what is ‘normal’ in an organisation. So, it is possible for the same person to act in different ways in
different organisations. What we do & how we behave – in society in general & in business in particular –
are largely determined by our culture.
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6.4.4 Developing a change culture.
❖ importance of developing a change culture to allow effective implementations.
https://youtu.be/XjGYTXleY28; https://youtu.be/cYsdcMPN_rA; https://youtu.be/BZM5nRT30ac
- Businesses employees, markets, suppliers, competitors, & the economic environment are always
changing. It is vital that a business also changes to adapt w/ this process, whether dealing w/ foreseen /
unpredicted change. Flexibility must be built into the existing corporate culture. Processes for effective
implementation of new strategies are crucial - the corporate culture should include culture of change to
deal w/ unforeseen situations.
- Possible reasons for changing culture:
• Respond to new market conditions.
• Prevent bankruptcy.
• Changing methods of production
• Raise more finance by changing legal status / structure of business.
• Recently privatised business would need a more profit-oriented & customer-based approach.
• Cope w/ merger/takeover
- Problems of changing culture:
• It can take several years for the culture to be completely accepted by staff & ‘converted’.
• Resistance from employees due to insecurity & fear of the impact on them
• A slow uptake of new products, techniques & markets that may cost a business market position.
• Increased costs associated w/ a slow & difficult change.

6.4.5 Managing & controlling strategic change.

❖ the importance of leading & managing change.
https://youtu.be/9yysOwXbzRA?t=550
- W/o effective management, leadership & communication, the employees will be unlikely to accept change.
- W/o acceptance & management, strategic change is unlikely to achieve organisational objectives.
- This will overcome resistance natural in any change situation by engaging in effective communication.
- Effective leaders & management can communicate the reasons & need for change involving all employees.
- Reasons for resistance to change:
• Fear of the unknown
• Fear of failure
• Losing something of value
• False beliefs about the need for change
• Lack of trust
• Inertia – many people suffer from reluctance to change & try to maintain the status quo.

❖ techniques to implement & manage change successfully.

- Change management: planning, implementing, controlling, & reviewing the movement of an organisation
from its current state to a new one.

understand
Understand recognise the lead change, project
the stages of project
what change major causes not just groups /
the change champions
means of change manage it teams
process

- Project champion: a person assigned to support & drive a project forward, who explains the benefits of
change & assists & supports the team putting change into practice.
- Project champions are effective in implementing change. Champions must have real status w/ the
workforce, a commitment to change & people skills to allow interaction w/ different types of employees.
- Project groups: these are created by an organisation to address a problem that requires input from
different specialists.

❖ techniques to promote change.

- Create urgency – all employees need to know there is a need for change & expected to come.
- Create a change team – prepare committed & respected managers are leaders at all levels.
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 - Create a vision – decide on new values & beliefs contained in vision/mission statements & objectives.
- Communicate the vision – use all the communication channels in all functional areas.
- Empower people & remove obstacles – identify reasons for resistance to change & minimise these using
leaders / project champions. Restructure & reward those working for change.
- Create short term gains – small steps for change mean all employees can see benefits & progress.
- Build on change – continue the process of change after each small step.
- Anchors change into corporate culture – build change into whatever culture there is by getting leaders
to support change, telling success stories, inducting staff into change & rewarding change.

Create urgency create a change team create a vision Communicate the vision

empower people & anchor change into

create short term gains build on the change
remove the obstacles corporate culture

❖ development of a strategy to manage change in each situation.

- Allow time for preparation & acceptance.
- Ensure sufficient resources available.
- Clear, communicated vision.
- Involve all layers of hierarchy.
- Provide training & support for new methods & procedures.
- Allow time for preparation & acceptance.
- Managers can help employees talk about their fears.
- Managers can give reasons for change.

6.4.6 Contingency planning & crisis management

❖ importance of contingency planning & crisis management
https://youtu.be/w2kOqmaSJj8
- Contingency plan: preparing an organisation’s resources for unlikely events.

Identify the potential

assess the likelihood of minimise the potential plan for the continued
disasters that could affect
these occurring impact of the crisis operation of the business
the business

Advantages Disadvantages
quick response uses valuable time & resources in preparing & training
reassure stakeholders cost of reviewing procedures
helps senior managers generate favourable public relations may lead to less planning to avoid disasters
maintains confidence likely never to be used, so could be a waste of resources
<

Revision & how to answer questions.

- https://youtu.be/uRfTzecyOfY - https://youtu.be/WzEuiHbW9gY
- https://youtu.be/3715wJqyPzM - https://youtu.be/T32Yotp3J-0
- https://youtu.be/6ZJsFnrSKA4 - https://youtu.be/2Y3zfbe5fBU
- https://youtu.be/KGETsGWUUEs - https://youtu.be/s1uWf8PXz_Y
- https://youtu.be/yBIL4gNVqcA - https://www.caiebusiness.com

Credits
- Z Notes – Business 9609 AS Level - https://znotes.org/caie/as/business-9609/theory
- CIE Notes - https://www.cienotes.com/as-and-a-level-business-studies-notes-9609/
- Notes for CIE - https://sites.google.com/site/notesforcie/as/business-studies
- Cambridge International AS and A Level Business: Coursebook with CD-ROM Third Edition
Publisher: Cambridge University Press
Author: Alistair Farquharson and Peter Stimpson
ISBN: 9781107677364

Page 65 of 66
Vishakha Mirchandani
 - Exam Success in Business for Cambridge AS & A Level
Publisher: OUP Oxford
Author: Peter Joyce, John Richards
ISBN: 9780198412809
- Cambridge International AS and A Level Business Studies Revision Guide
Publisher: Hodder Education
Author: Sandie Harrison, David Milner
ISBN: 9781444192056
- Cambridge International AS and a Level Business Studies
Publisher: Hodder Education Group
Author: Malcolm Surridge, Andrew Gillespie
ISBN: 9781444181395
- Compiled by: Vishakha Mirchandani ([email protected])

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Vishakha Mirchandani