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2 Business Structure
Trading links
International trade has grown rapidly in the recent years More countries trading together means can be beneficial: Improve their political & social aspects and resolve differences between them Wider choices for consumers may lead to better standards of living Countries may obtain any raw materials that are not available in their own countries Imports may create competition for domestic firms and encourage them to be more efficient Countries can specialise in the products they are best at making and benefit from the economies of scale However, these are the drawbacks: Loss of output & jobs from domestic firms (cannot compete with imported goods) Strategic industries (foodstuffs, electricity, coal, etc.) should not be dependent on other countries because if there were a conflict between countries or another factor leading to loss of imports then the country would lose the supply of important goods New/small businesses (infant industries) may not compete with imported goods Importers may dump goods (price lower than cost), which is unfair Too much imports could lead to a current account deficit & depreciation in currency

Multinational business business organisation that has its headquarters in one country, but with operating branches, factories and assembly plants in other countries Whats good about becoming a multinational? Closer to main markets (lower transport costs, better information of market) Lower costs or production (lower local wages, cheaper rent and site costs, better government grants and taxes)

Avoid import restrictions Access to local natural resources Problems that multinationals might face: Communication problems (language barriers) Culture & legal difference (so need to adapt) Biggest type of organisation so need to ensure that the objectives are coordinated between all plants of the business Benefits to host countries: Create employment & training opportunity (improved labour skills) Local firms may benefit from supplying materials to the multinationals May improve infrastructure for the country Encourage local firms to improve standards to compete with bigger businesses Increased government tax revenue from the profits made GDP may increase and this causes economic growth Possible limitations to host countries: Exploitation of workers with low wages, unfair working conditions, long working hours, etc. Pollution and depletion of natural resources of host countries Local firms may go out of business Profits may be sent back to home country, rather than kept for reinvestment in the host nation

Privatisation selling state-owned and controlled business organisations to investors in the private sector Arguments for privatisation: The profit motive of private-sector businesses will lead to greater efficiency Decision making in state bodies can be slow & bureaucratic Market forces will be allowed to operate, failing businesses would go out and successful ones would expand (no limits on growth) Sale of nationalised industries can raise finance for government Private businesses will have access to private capital markets (leads to increased investment in the economy)

Arguments against privatisation: The state should take decisions about essential industries which are based on societys needs not just interest of shareholders (some unprofitable companies may be kept open) It is more difficult to achieve coordinated policy to benefit the whole country with many privately run businesses Many strategic industries could operate as private monopolies if privatised and they could exploit consumers with high prices

Nationalisation selling privately owned and controlled business organisations to the state or public sector Arguments for nationalisation: Weaknesses of free market (free market price too uncertain or volatile) Public ownership meets social & economic needs Loss-making services might still be opened if the social benefit is great enough

Arguments against nationalisation: Lack of profit motives may lead to inefficiency Only produce what they think people need (may not always be correct) Government may make business decisions for political reasons (e.g. opening a new branch in a certain area to gain popularity)

Public-private partnerships (PPP)

PPP government services or business ventures that are funded and managed through a partnership of government and one or more private-sector companies Government funded: government finances the business and private sector manages and controls Private sector funded: often involve large sums of capital investment (so government does not have to collect greater tax revenue to finance the business). State controls & manages the services

1AL.3 Size of business

External growth
Business expansion achieved by means of merging with or taking over another business from either the same or a different industry

Merger an agreement by shareholders and managers of two businesses to bring both firm together under a common board of directors with shareholders in both businesses owning shares in the newly merged business Takeover when a company buys over 50% of the shares of another company and becomes the controlling owner of it. Also called acquisition

Advantages of merging/integrating: Two firms may be able to share research facilities & ideas that will benefit both businesses (only if firms use the same kind of technologies) Larger firms may benefit from economies of scale The new business can save on marketing & distribution costs using the same outlets and sales teams Disadvantages of merging/integrating: The firm may become too big and faces diseconomies of scale There may be little mutual benefit from shared facilities or marketing systems if the firms have products in different markets The business & management culture of the firms may be different and conflicts could occur (e.g. environmental issues, CSR and etc.)

1AL.6 External influences on business activity

Economics constraints and enablers

Market failure when markets fail to achieve the most efficient allocation of resources and there is under- or overproduction of certain goods or services (you should already know the solutions for all of them!)

Macroeconomic objectives of governments

1. Low unemployment workers in the working population are willing & able to work but are unable to find a job Costs of unemployment: The economy could produce more goods & services, which would then be available for consumption Government has to pay unemployment benefits from the tax revenue while the money could be used in better ways to improve the country Serious unemployment could lead to social problems such as crime Unemployment reduces demand for goods & services and this will reduce the incomes for those working Loss of income leads to lower standards of living Unemployment causes the skills to become obsolete

Cyclical unemployment resulting from low demand for goods and services in the economy during a period of slow economic growth or a recession (AD falls, firms produce less, less workers needed) Government needs to avoid substantial swings in the business cycle (stabilise inflation & exchange rate so that domestic and international demands do not fluctuate much) Structural unemployment caused by the decline in important industries, leading to significant job losses in one sector of industry (changes in consumer tastes e.g. switching from high-street banking to online banking, change in the structure of industry, improvement in technology e.g. employers are looking for multi- skilled workers) Government needs to provide training and education for the unskilled workers NOT to prevent changes in the economy Frictional unemployment resulting from workers losing or leaving jobs and taking a substantial period of time to find alternative employment Government can improve the labour market by providing more information about job opportunities (more employment agencies and reduce unemployment benefits for people who are slow to find a new job)

2. Low inflation an increase in the average price level of goods &services which results in a fall in the value of money Causes of cost-push inflation (rise in cost of production): Lower exchange rate prices of imports rise Labour cost rises (higher wage demands) Transportation costs rise (oil prices rise)

Demand-pull inflation: Economic boom Demand rises and the economy has no spare capacity to meet the increased needs

Impacts on business activity Benefits of low inflation (approx. 2%): Inflation means a fall of real money value. The value of business liabilities or debts would fall The value of fixed assets (building and land) could rise, this increases the value of the business on the balance sheet & make the firm more financially secure

Since stocks are bought in advance and then sold later, there is an increase in profit due to inflation

Drawbacks of high inflation (5-6%): Higher wage demands from workers (adds to costs) Consumers demand may fall Government needs to raise interest rates to reduce AD and try to control the rising inflation, this would increase the size of debt a business has to pay Cash-flow problems may occur because businesses have higher costs Inflation adds uncertainty about the future If inflation is higher than other countries, then the country will loss international competitiveness (exchange rate falls because nobody wants to buy the products and thus the currency) Businesses may not offer extended credit periods because money is losing value

Business strategy during inflation

Cutting back on investment spending Cutting profit margins to stay as competitive as possible Reducing borrowing Reducing time period for debtors to pay Reducing labour costs

Deflation is not good either! Demand would fall because consumers would think that prices will continue to fall and delay making purchases Businesses would not want to borrow because they are repaying debts with the money with higher value, therefore investment may fall Businesses would refuse to hold lots of stocks because they lose values as time passes, they would reduce orders and this leads to a loss of national output

2AL.3 Human resource management (HRM)

Measures of employee performance
Labour productivity the output per worker in a given time period (indicates efficiency) Total output in time period Total staff employed at that time

Improve by: Increase staff motivation More efficient & reliable capital equipment Better staff training Increase worker involvement in problem solving to speed up production Improve internal efficiency (e.g. no waiting for supplies of materials to arrive)

Absenteeism rates measures the rate of workforce absence as a proportion of the employee total Number of staff absent X 100 Total number of staff May be caused by poor working conditions (lead to illness, stress, loss of motivation) Staff absenteeism may lead to poor customer services. It is expensive to employ extra staff just to cover for the staff away from work or to ask others to work overtime. Firms need well-focused and motivated staff to avoid these extra costs

Labour turnover measures the rate at which employees are leaving an organisation good indicator of staff discontent Number of staff leaving in 1 year X 100 Average number of staff employed

Other measures of workforce performance Wastage levels (wasted or damaged products as a proportion to total output) Reject rates or consumer complaints over total customers served Days lost due to strikes within the business

Improving employee performance

Regular performance appraisal against pre-set targets if constantly failing then disciplinary procedures or further training may be needed Offering training opportunities to stretch and challenge every worker may help to increase efficiency Quality circles involve everyone in suggesting solutions to problems Team work give complete section of work to each team (improve motivation) Offering financial incentives

Management by objectives (MBO)

Dividing the organisations overall aim into specific targets for each division, department and individual. Targets are set during the annual appraisal process with workers agreement Benefits: Staff involvement is a key feature of job enrichment aids motivation All staff will know exactly what they have to do, this helps them to prioritise their time and work more efficiently Everyone is working towards the same overall objectives increased coordination Setting targets means that managers are able to monitor everyones performance and measure success or failure Problems: Setting targets for everyone can be time-consuming Objectives can be outdated very quickly fixing targets & monitoring progress against them can be useless if the businesss environment changes Setting targets does not guarantee success, there must be sufficient resources and staff training as well

Co-operation between management and workforce

Approaches to labour-management relations: 1. Autocratic management style workers employed on short-term contracts, little job security. If any workers do not agree with the conditions, managers will simply sack them and replace with another person. Leads to low labour costs. BUT: No job security = less motivation Staff are not trained to be multi-skilled No clear objectives between labour & management No staff involvement or participation, no job enrichment

2. Collective bargaining between trade unions and employers when unions and national employers negotiate wage levels and working conditions for the whole industry. Unions are powerful because they may call for strike actions, which bring the entire industry to a halt. DISADVANTAGES: National agreements may not be affordable/suitable for small businesses Industrial actions (strikes) cause disruption and lost output & sales Powerful unions may resist to changes, this leads to lack of investment and development of key industries (adversely affects union members) Less negotiation & confrontation leads to increase competitiveness 3. Cooperation between labour and management Involving workers in important decisions and issues Less confrontation, fewer strikes and more cooperation Based on mutual respect, understand and common aims Leads to a competitive, efficient and productive business May cost more or be time-consuming but good for long-term success

Trade unions
An organisation of working people with the objective of improving the pay and working conditions of their members and providing them with support and legal services Reasons for joining a trade union: 1. Stronger position for workers in collective bargaining and negotiations than they are if they negotiated individually because trade unions represent all their members in a business 2. Individual industrial action (one worker going on strike) is not very effective 3. Provide legal support to employees who claim unfair dismissal or poor conditions of work 4. Unions ensure that all legal requirements are met (health & safety rules, etc.)

1. National bargaining trade union leaders discuss over pay and working conditions at a national level with employers associations. Agreements would then be applied in all businesses in the association. However, these agreements may not reflect the need of all businesses because of their different cost structures and profit margins


2. Business bargaining When a firm negotiates with union officials to establish pay and conditions for all the branches of the business in that country. Deals may not reflect the problem one factory has in recruiting staff 3. Plant bargaining each factory agrees a deal between union officials and local management. This is more customised for each factory and avoids all the problems above

Single-union agreement
An employer recognises just one union for purposes of collective bargaining When workforce in a business are members of different unions: Collective bargaining more difficult and time-consuming Inter-union disputes over which grades of workers should get the highest pay rise Also reduces flexibility of a workforce if members of one union are prevented from doing the work of other workers belonging to another union and reduces productivity Problems solved when employers sign recognition deals with just one union

The use of a third party in industrial disputes to encourage both employer and union to discuss an acceptable compromise solution (a third party will listen to both sides and help them to come to a compromise agreement)

Resolving an industrial dispute by using an independent third party to judge and recommend an appropriate solution (make decision for them)

2AL.4 Organisation structure

Organisational structure The internal, formal structure of a business that shows the way in which management is organized and linked together and how authority is passed through the organization It indicates formal relationship between different people and departments It shows the chain of command (the way in which authority is passed down the business) It shows the span of control (number of subordinates reporting to each manager) Helps individuals to see their position in an organisation Allows staff to be aware of their responsibilities

See who has authority over them, and to whom they are accountable for

Hierarchical structure
The order of management in an organisation lowest to highest showing chain of command and the way authority is organised/distributed levels of accountability Advantages: Roles and relationships made clear Accountabilities and controls are established Information and communication channels are established Authority and responsibility levels established Line management authority made clear Very appropriate for some organisations (e.g. Army) with many levels and narrow spans of control Supportive of bureaucratic organisations requiring detailed control

Disadvantages: One-way communication (not efficient) Few links between departments (may lead to lack or coordination) Inflexible (change resistance) because all managers are trying to defend their own position in the hierarchy and the importance of their own department

Matrix structure
An organizational structure that creates project teams that cut across traditional functional departments - an emphasis away from functions towards projects or tasks; reduce layers in hierarchy; combine line departments with project task teams Advantages: Encourages team approach Staff are assigned by ability and skill, not rank or position Allows total communication between all members of the team and traditional departmental barriers broken down More varied work Greater motivation for staffing multi-disciplinary teams Reduces bureaucracy and control Staff focus on what is good for the business as a whole not just only for their department Allow people to share ideas and find the best solution


Disadvantages: Less direct control from the senior managers Senior managers may not want to work with more junior staff Can cause conflicts within teams Level of hierarchy a stage of the organisational structure at which the personnel on it have equal status and authority Chain of command the route through which authority and power, and information are passed down a business the flow of authority, power, and information Span of control The number of staff that a manager has authority over or the number of people directly under the control of a manager. Wide Span of control: Greater delegation required so more responsibility for subordinates and less central control There are less layers of management to pass a message through, so the message reaches more employees faster It costs less money to run a wider span of control because a business does not need to employ as many managers Communication + coordination problems (more people under control so more complex) Limited opportunity of close consultation with staff (can cause demotivation) Increased stress + workload for managers/supervisors Narrow Span of Control A narrow span of control allows a manager to communicate quickly with the employees under them and control them more easily Feedback of ideas from the workers will be more effective It requires a higher level of management skill to control a greater number of employees, so there is less management skill required Delegation passing on authority down the organisational hierarchy Advantages:

Senior managers can focus more on more important roles Shows trust in subordinates and increase motivation level Develops and trains staff for more senior positions Helps staff to achieve fulfilment through their work (self-actualisation)

Disadvantages: Delegation would be unsuccessful if task is not well defined or if inadequate training is given Delegation would be unsuccessful if insufficient authority is given to subordinate Staff will be demotivated if managers only delegate boring tasks to them Centralisation keeping all of the important decision-making powers within the head office or the centre of the organisation Advantages: Rapid decision-making (no discussion) Same policies throughout the business reduce conflict & confusion Senior managers take decisions in the interest of the whole business not just one division of it Central buying allows greater economies of scale Decentralisation decision-making powers are passed down the organisation to empower subordinates and regional/product managers Advantages: More local decisions can be made that reflect different conditions More junior managers can develop and prepare for more challenging roles Delegation & empowerment can lead to motivation Decision making in response to changes should be quicker as head office will not have to be involved every time

Factors influencing the organisational structure

1. Size of the business the bigger the more formal & complicated the structure will be. Clear relationships and positions need to be made in large firms 2. Style of management 3. The need to reduce costs e.g. during recession a firm might consider delayering to reduce levels of hierarchy and overheads leads to shorter chain of command 4. New technologies IT can replace certain types of employee

Line and staff relationships

Line managers managers who have direct authority over people, decisions and resources within the hierarchy of an organisation. They have responsibility for achieving specific business objectives


Staff managers managers who, as specialists, provide support, information and assistance to line managers (specialists employed to give advice to senior line managers) can be economists, scientific experts or market researchers. They perform supporting roles but do not take decisions Some line managers might resent experts coming into the organisation and, as they see it, telling them how to do their jobs

2AL.5 Business communication

Purposes of effective communication
Effective communication can lead to solutions to problems (if all staff are involved and asked for their ideas) Leads to faster decision making and faster response to market changes Reduces risks or error incorrect understandings can lead to incorrect responses Effective communication would lead to coordination of departments, motivated staff, good customer service and a sense of overall direction of the business

Methods of communication
Electronic media the process of sending information from sender to receiver through the internet (plus feedback) Strengths: Accuracy of orders e.g. automatic ordering systems via computer links Reduced stock levels JIT based IT systems Quicker e.g. than arranging meetings Less time-consuming than face to face contact Encourages response Weaknesses: Capital cost on hardware Staff training required Risk of communication overload e.g. too many e-mails Requires suppliers/customers to have compatible systems Diminishes personal contact

Oral communication can be one-to-one conversations, interviews, group meetings or team briefings Strengths: Direct and allows feedback

Can be varied to suit needs of receiver Easy to understand Can be questioned quickly Weaknesses: Need to listen carefully Affected by noise No permanent accurate record Can be quickly forgotten

Written communication letters, memos, notices on boards, reports Strengths: Permanent record available More structured Easy to distribute Cannot be varied Can be referred to again Weaknesses: Message identical to each receiver No body language shown Feedback is slower No immediate response Can be misinterpreted Time-consuming

Factors influencing choice of media

1. 2. 3. 4. Importance of the message (may need permanent records if important) Cost (electronic media needs expensive capital resources) Speed Quantity of data to be communicated (oral would be inappropriate for long and detailed messages) 5. Size and geographical spread of the business (regular meetings may be impossible for multinationals)

Barriers to communication reasons why communication fails 1. Inappropriate media used 2. Receiver forgot


3. 4. 5. 6.

Misleading or incomplete message Jargons & language that can be hard to understand Information overload Channel of communication is too long (the route through which a message is sent from sender to receiver) 7. Sender is not trusted 8. Unmotivated workers = poor receivers 9. Poor sender (not ensure the clarity of the message or understanding) 10.Noise in the factories

Informal communication Unofficial channels of communication that exist between informal groups within an organisation

3AL.4 Marketing planning

Marketing plan
A detailed report of a firms marketing objectives, budget and marketing strategy Contents: Purpose and mission provides information and purpose of the plan (e.g. to prepare for the launch of new product or new business proposal) Situational analysis where are we now? (Current strengths, existing product range and market shares, existing and potential competitors, consumer tastes, external problems and opportunities) Required a lot of research & time- consuming but essential. If not taken, business could aim to reach inappropriate objectives which would be even more harmful to it Marketing objectives where do we want to be? Can be expressed in terms of total sales (value or volume), market share, profitability or sales growth rate. Gives sense of direction and can be broken to specific targets. Allows final review of marketing strategy to be compared against targets Marketing strategy how the firm intends to achieve its objectives? Overall approach: mass or niche market? existing or new market? develop a new product? Once determined, tactics can be established Marketing mix tactics Product: brief summary of existing products, outline of key features, USP, branding, packaging and labelling details Price: factors affecting costs, PED, competitors price, market conditions


Promotion: how the product will be promoted? Advertising, sales promotion, PR and personal selling. The scale and type are dependent on the image being created, price being charged, budget available Place or distribution: getting the product to consumers. Covers the details of channel to be used, outlets or retailers Marketing budget Finance available for promotional expenditure planning on expected expenditure & revenue (how to spend effectively?) Summary and timescale gives a short summary of the plan and the timescale over which it will be introduced

Reviewing the plan How successful was it? Results need to be regularly checked against objectives during the process. If strategies are not working, then changes to overall plan could be made. Final results can be used to aid future plan

Evaluation Benefits: Potential entrepreneurs need to convince financial investors that the proposal is potentially profitable more chances of receiving financial support Reduce risks of failure helps establish strategies and marketing mix Provides direction and purpose for the business, progress can be monitored More accurate budget could be allocated

Limitations: Complex Costly and time-consuming Required skills Plans could go out of date and be useless (external environment changes)

Promotional campaigns
AIDA a model that explains the successive stages a customer passes through in buying a product: Attention Interest Desire Action DAGMAR a process of establishing goals for a promotion campaign so that it is possible to determine whether it has been successful or not: Defining Advertising Goals for Measured Advertising Results (pass customers through the stages: Unaware Aware Comprehension Conviction (belief) Action)


Importance of coordinated marketing mix

1. Integrating with other departments finance (to obtain essential resources), human resources (to obtain adequate staffing), operations (to discuss about the product and its adaptations) 2. The four elements of the marketing mix must be integrated with each other

Product development
New product development (NPD) the design, creation and marketing of new goods and services The process: 1. Generating new ideas Can come from companys own R&D department Adaptation of competitors ideas need to be careful not to violate copyright/patent laws Market research, such as focus groups discussion about new products that consumers would like to see on the market Employees workers know a lot about existing products Salespeople they have close contact with the final consumers, they may suggest improvements or new products Brainstorming in groups generate new ideas beyond the level that would be achieved by individuals working separately 2. Idea screening Ideas with the least chance of success are eliminated Questions that need to be considered: How will consumers benefit from this product? Is it technically possible to manufacture this product? Will the product be profitable enough at the selling price? 3. Concept development and testing Who are the most likely consumers? What features should the product have? How will consumers react to it? (Can be tested by surveys & market research) What are the most cost-effective methods of manufacture? What will it cost to produce?


4. Business analysis What are the likely impact on sales, costs and profits? Is finance available to develop the product? Will it fit with the existing product mix? 5. Product testing Developing a model of the product Testing the product in typical use conditions Using focus groups to gather opinions about the product Adapting the product as required after testing or focus group feedback 6. Test marketing the launch of the product on a small-scale market to test consumers reactions to it Actual consumer behaviour can be observed and measured Feedback from customers will help decision whether the firm should invest in a full-scale launch or not Risks of product failing are reduced Any weaknesses in the product identified by consumer feedback could be used to adjust and improve the final version of the product Test marketing can be expensive Competitors can observe a firms intention and react before a full-scale launch is put into effect 7. Commercialisation A full-scale launch of the product (introduction phase of the product life cycle) Promotional strategy & advertisements to inform the market of the arrival will be put into place Distribution channel will be filled up with stocks to ensure the availability of the product

Research and development

The scientific research and technical development of new products and process. R&D can lead to product innovation, which allows the business to charge premium prices and earn higher profits. Factors influencing the level of R&D expenditure: The nature of the industry rapidly changing technologies in the market would require higher investment into R&D


R&D spending plans of competitors it may be essential to spend as much as or more than competitors to maintain market share and technical leadership Business expectations if the firm is optimistic about future demands and economic growth, then it is more able to agree to substantial budgets for R&D Culture of the business some business view short-term profit as a very crucial issue. This would prevent large spending on R&D Government policy grants and tax reduction to businesses would encourage more investment into R&D

R&D do not guarantee success, new ideas can fail to reach the market because: Defects in designs or manufacture Competitors products rising ahead Inadequate market research and inappropriate pricing Changes in technology leaving the product outdated Regardless of these risks, many firms still continue to invest in R&D. They believe that they would benefit from the long-term success and profitability that R&D would lead them to

Sales forecasting
Predicting future sales levels and sales trends Helps reduce risks of business operations The firm would know how many materials to order (aids stock control) Marketing department knows how many products to distribute More accurate workforce plan (correct level of staffing) Cash flows and other forecasts would also be more accurate (finance department could plan more accurately)

Moving average method

Factors that may influence future sales: Trend basic movement (pattern) in a time series Seasonal fluctuations regular & repeated variations that occur in sales data within a 12 months period Cyclical fluctuations variations in sales occur due to the business cycle Random fluctuations occur at any time & will cause unpredictable sales figures (e.g. poor weather, negative public image, product failure)



Description: Four-quarter moving total: 4 sales revenues added together Eight-quarter moving total: two 4 four-quarter moving totals added together Moving average: eight-quarter moving total divided by 8 Seasonal variation: actual sale revenue moving average Average seasonal variation: seasonal variations for each quarter added together and divide by number of results

Forecasting sales 1. Plot the moving averages on a time-series graph 2. Extrapolate into the future 3. Read off the forecast trend result from graph 4. Adjust by the average seasonal variation for that particular time period

Evaluation Advantages: Useful for applying seasonal variation to predictions Can be accurate for short-term


Identifies average seasonal variations for each time period (aids future accuracy) Useful for operations management & marketing decisions (if sales are forecasted to be falling, price could be lowered) Disadvantages: Complex calculation Only useful if external environment do not change (in reality things change) Forecasting into longer term requires qualitative methods that are less dependent on past results as well (e.g. market research)

3AL.5 Globalisation and international marketing

Globalisation the growing trend towards worldwide markets in products, capital and labour, unrestricted by barriers


International marketing
International marketing selling products in markets other than the original domestic market Why international? Saturated home markets too much competition with large firms Profits sales growth and lower costs of operation Spreading risks sales and profits or the business are less dependent on economic & legal constraints in home country Legal differences other countries may have fewer restrictions (e.g. advertising)

Differences: Political changes in government can cause instability in some countries, this may lead to risks of terrorism e.g. Thailand protests. May lead to destruction of companys assets Economic & social age structure, role of women, tax and interest rates (so business needs to sell the right products & use the right strategies) Legal banned goods in some country, advertising restrictions, safety Cultural peoples behaviour, language, perception Different business practices formalities of setting up a business can vary from country to country

Methods of entry
Exporting can be selling directly to a foreign customer (online website), or through export intermediary (agent or trading company based in the country) International franchising can be one company in charged of all branches in the country or individual franchisees operate each outlet Joint ventures Licensing allowing another firm to produced its branded goods or patented products under licence. Goods do not have to be exported, saves time & transport cost. But quality must be ensured, any unethical practice by the licensee may create negative impact on the parent firm Direct investment in subsidiaries setting up factories in foreign country. Can be decentralised (local managers in charged), or centralised (control from the head office in the home country)

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: Relatively low cost (EOS) use one marketing strategy & mix A common identity for the product can be established. This aids consumer recognition

Disadvantages: Sometimes firms need to adapt to suit various culture & religion (or else people wont buy it)


Legal restrictions can vary advertising strategy may need to be different or the same product may be legal in one country and illegal in another Setting the same price in all countries will not reflect the different average income levels in different countries There may be local opposition to multinational business activity

Global localisation
Adapting the marketing mix, including differentiated products, to meet national and regional tastes and cultures Advantages: Local needs, tastes and cultures are reflected in the marketing mix of the business this could lead to higher sales There is no attempt to impose foreign brands or products advertisements on regional markets The products are more likely to meet local national legal requirements than if they are standardised products There will be less local opposition to multinational business activity

Disadvantages: The scope for EOS is reduced The brand could lose its power & identity if differentiate products to adapt Additional costs of adapting (e.g. adverts, store layouts) to specific local needs

4AL.2 Operations planning

Enterprise resource planning
The use of a single computer application to plan the purchase and use of resources in an organisation to improve the efficiency of operations Coordinate & link together all systems of a business stock control and ordering, invoicing to customers, human resource planning, production planning and so on E.g. a customer orders a product The order is recorded on the ERP system, which updates the stock Then a replacement is ordered from the manufacturer The customer is sent an invoice When payment is made the accounting records are updated


Benefits of ERP software Supply only according to demand lean production (avoid waste) Just-in-time ordering of stocks Reduces costs at all stages of supply chain materials & products are electronically tracked Improved delivery times and better customer service (computerised system works faster than labour force does) All departments are linked better coordination and less wastage Data from all departments and all stages of production will be available to management via the computer system may help future decision making

Limitations of ERP software High costs of installation (advanced technology is expensive) Different departments now need to work in one common system may not be suitable for some managers/workers Implementation of ERP can take many years, chosen software can become obsolete by the time installed or competitors could come up with a better and more advanced system already

4AL.4 Capacity utilisation

Capacity utilisation the proportion of maximum output capacity currently being achieved (measure operational efficiency) Current output level X 100 Maximum output level

Excess capacity has spare capacity

Rationalisation reducing capacity by cutting overheads to increase efficiency of operations, such as closing a factory or office department, often involve redundancies


Full capacity producing at maximum output

Benefits: Lowers fixed costs per unit (spread among large number of units) Increases competitiveness as a result this is a competitive market Gives staff job security & pride in the firm they work for Cuts down on wasted time/resources


Drawbacks: Little time for maintenance/repairs This may lead to breakdown of machinery Worsens health and safety record Puts pressure on staff/managers (stress & work overload) Not able to meet increased orders e.g. from established customers

Using another business to undertake a part of the production process rather than doing it within the business using the firms own employees

Advantages: Reduction of operating costs specialist firms are cheaper because they benefit from economies of scale) Increased flexibility contracts can be ended when demand fall Improved company focus the business can concentrate on its main aims & tasks and outsource other functions Access to quality service or resources that are not available internally Freed-up internal resources for use in other areas

Disadvantages: Loss of jobs within the business reduce staff motivation & job security


Quality issues difficult to monitor on quality Customer resistance creates doubts and consumers may question the quality & reliability Security risks of important data of the business being lost when outside businesses involve

Evaluation Outsourcing may help to improve efficiency and this may lead to increased opportunity for businesses. However, there are risks involved. The company should weigh up the costs and benefits before the decision. It is less risky to outsource the minor sections of the business and focus on the core activity itself

4AL.5 Lean production and quality management

Lean production
Philosophy of operations that aims to minimise waste of all resources while maintaining quality: Involves quality circles, efficient use of capacity & JIT (produce quality output with fewer resources) Getting right the first time Cutting out anything that adds complexity, cost and time, and does not add value to customer Flexible specialisms flexible employment contracts/machinery/multi-skilled workers. Adaptable for changes, reduce stock holding cost, cut waste time Simultaneous engineering different stages of product development are done at the same time instead of in sequence (reduce time) Cell production splitting flow production into groups that are responsible for whole work units (motivation = faster & better quality work) Advantages: Reduced waste time & resources Reduced unit costs = higher profits Working area is less crowded and easier to operate in Less stocks hold = less risks of damage and obsolescence New products launched more quickly


A part of lean production, involves fewer resources being tied up in buffer stocks (notes in AS revision)

Kaizen continuous improvement

1. A series of small improvement can lead to big improvement in efficiency over time 2. Involving all staff sometimes workers know best about how production could be improved because they have a lot of experience with the tasks they are doing 3. Team working discussing ideas to improve quality or solve problems 4. Empowerment by giving each Kaizen group power to take decisions, ideas can be put into practice faster and workers would be more motivated 5. Improvements in one part of the production system requires improvements further down the line as well to avoid bottleneck and increased work in progress Limitations of Kaizen Some changes cannot be introduced gradually and may need a complete & expensive solution (e.g. complete new investment in the business) There may be resistance from senior managers to involve all subordinates May be costs to the firm of such scheme (e.g. training, meeting time) Diminishing returns big improvements tend to be made only in the beginning of the scheme, then less significant changes are made later on

Suitability of JIT and lean production

Advanced & flexible staff and equipment required for lean production. So that they can adapt to different products quickly, not building piles of stocks. BUT training & equipment are expensive, may not be suitable for small businesses Cooperation of all staff needed because changes in working conditions, level of empowerment, culture and etc. will take place. Workers need to accept and obey Not suitable: When business cannot forecast demand zero stocks, what if demand rises unexpectedly? When production processes are expensive to start after a breakdown (keeping low level of stocks can lead to production breakdown) When firms use it to create redundancies (lean production can result in job losses). No support from existing workforce When costs of technology and retraining are so high and unaffordable When suppliers are not reliable

Quality control and assurance

Quality product a good or service that meets customers expectations and is therefore fit for purpose. It is not necessarily made of highest quality materials but must meet consumer requirements for it. Quality depends on the products price and the expectations of consumers Quality standards the expectations of customers expressed in terms of the minimum acceptable production or service standards. Firms establish the quality standards that customers expect by using market research and consumer feedback data Advantages of producing quality products 1. Gain customer loyalty 2. Saves the costs associated with customer complaints (replacement etc.) 3. Long product life cycles 4. Establishes a quality image for the brand less advertising may be needed 5. Possible to charge higher price for quality products higher profits

Quality control
Inspection of completed product 1. When raw materials are received before production 2. Whilst products are going through production process 3. When the products are finished Includes inspection, testing the products, and random sampling. It is more like identifying the defects rather than preventing in the first place Weaknesses of quality control Looking for problems is a negative process. Workers may feel that they are not trusted and the working relationship in the business will not be good The job of inspection can be tedious, inspectors can become demotivated and may not carry out their tasks efficiently Checking can be done too late in the production process; faulty products may pass through several stages before being noticed. A lot of time needs to be spent finding the source of the fault Workers will not see quality as their responsibility because they know that there will be inspectors checking on the quality anyway. This lack of responsibility can lead to demotivation and lower-quality output


Quality assurance
A system of agreeing and meeting quality standards at each stage of production to ensure consumer satisfaction. Quality assurance: Focuses on prevention of poor quality by designing the appropriate production process, rather than inspecting for poor quality products at the end Emphasises on the need for workers to get it right the first time to avoid expensive reworking of faulty goods Establishes quality standards and targets for each stage of the production process Checks components, materials and products at every stage of the production process, not only at the end when much time and resources could have been wasted already by that time Advantages over quality control 1. Everyone is responsible for quality leads to job enrichment 2. Making efforts to improve quality increase motivation 3. Easier to trace back quality problems to the stage of production process where a problem might have been occurring 4. Reduces the need for expensive final inspection and correction of faulty products Importance of quality assurance Involves all staff & promote teamwork = increased motivation All materials are checked against set targets before it is too late and the whole product has been completed Reduces costs of final inspection (already checked at each stage) Improved quality = reduced costs of wastage & faulty products Gain accreditation for quality award and good public image of the company

Total Quality Management

An approach to quality that aims to involve all employees in the quality-improvement process Every department is required to meet the standards expected by its internal customers (people within the organisation who depend upon the quality of work being done by others) To be effective, the concept must be fully explained and training must be given to all staff Staff must check the quality of their work before passing on to the next stage


It involves management identifying the best firms in the industry and then comparing the performance standards including quality of these businesses with those of their own business. Process: 1. Identify the aspects of the business to be benchmarked (what is thought to be the most important factors, e.g. speed of delivery) 2. Measure performance in these areas (e.g. delivery records & customer complaints) 3. Identify the firms in the industry that are considered to be the best 4. Use comparative data from the best firms to establish the main weaknesses in the business (may be obtained by published accounts, contact with suppliers/customers) 5. Set standards for improvement 6. Change processes to achieve the standards set 7. Re-measurement it is a continuous process to achieve the long-term improvements in productivity & quality Benefits: Faster & cheaper way of solving problems when have comparisons Most important areas to customers can be identified and improved Helps increase firms international competitiveness Limitations: The relevant and updated data from other firms can be difficult to obtain

Copying the ideas and practices of other firms may discourage initiative & original ideas The costs of the comparison exercise may not be recovered by the improvements obtained from benchmarking

4AL.6 Project management

Project a specific and temporary activity with a starting and ending date, clear goals, defined responsibilities and a budget (e.g. installing machinery, building a factory, setting up a new IT system) Project management using modern management techniques to carry out and complete a project from start to finish in order to achieve pre-set targets of quality, time and cost

Key elements of project management

Setting clear objectives Dividing the project up into manageable tasks Monitoring the time of the project at every stage Giving each staff a clear role Providing controls over quality issues Customers were not involved in the planning process No or not enough resources vital for its completion Senior management did not give interest in giving assistance to the project Details & instructions keep changing during the course of the project Planning was poor Projects scope became outdated due to change in business environment The project team was technically incompetent

Causes of project failure

Results of failure
Bad publicity in the industry Penalty payments having to be paid Loss of future contracts


Critical path analysis

CPA A planning technique that identifies all tasks in a project, puts them in the correct sequence and allows for the identification of the critical path

CPA process
1. 2. 3. 4. 5.

Identify the objective of the project Put the tasks in order and draw a network diagram Add the durations of each activities Identify the critical path Use network as a tool during the project

Network diagram the diagram used in CPA that shows logical sequence of activities and the logical dependencies between them and the critical path can be identified Critical path the sequence of activities that must be completed on time for the whole project to be completed on time (nodes that EST and LFT are equal) Arrow indicates each activity Node a circle that indicates the start & end of each activity EST earliest start time next activity cannot start until the one before finishes LFT latest finish time calculate from right to left of the diagram, subtract the time of the activity before (if there are two answers, use the lowest number) Total float amount of time an activity can be delayed without delaying the whole project duration (LFT duration EST) Free float length of time an activity can be delayed without delaying the start of the following activity: EST (next activity) duration EST (this activity) Dummy activity not an activity at all, only used to show logical dependency. The arrow shows the direction of dependency

Puts tasks in order; helps with identifying simultaneous activities Helps managers to plan the ordering of equipments and materials Allows business to give accurate delivery dates Float times can be used to allocate resources more efficiently (resources could be taken from activities that have spare time first to aid other activities) Delays can lead to managers using network to identify which activities need to be speeded up


Only a planning tool needs good & skilled management to see the project through to successful completion Outside events could result in unforeseen delays e.g. planning permission problems Depends greatly on reliability of the duration estimates

CPA can be a useful tool to managers, but skills are required. Staff will be more motivated if they involved in the planning process. Using CPA for new projects would be harder because the business has no previous experience about the durations of the activities. The time and expense of using CPA must be justified by the following cost & efficiency savings of applying the technique

5AL.4 Costs
Cost centre a section of a business, such as a department to which costs can be allocated or charged Profit centre a section of a business to which both costs and revenues can be allocated so that profit can be calculated

Full/absorption costing
A method of costing in which all fixed and variable costs are allocated to products or services (fixed costs can be shared on a basis of space taken up by each product, percentage of direct labour costs for that product and etc.) Evaluation Relatively easy to calculate & understand All costs are allocated compared with contribution costing method Relevant to single-product firms Good basis of pricing decision (full unit cost is calculated) But overhead cost is not allocated base on the actual expenditure used by that centre (e.g. a product may take up a lot of factory space, but use low-cost machinery which adds up only a little amount to the overhead cost) So final costing figure can be misleading or inaccurate Same basis needs to be used overtime for comparisons to be made


Marginal or contribution costing

Costing method that allocates only direct costs to cost/profit centres, not overhead costs The firm would continue production if the product is still making a positive contribution towards fixed costs Ending production will reduce overall profits as the fixed overhead costs will still have to be paid and there will be reduced contribution to pay them Contribution = selling price minus marginal (variable direct) costs Profit = contribution minus overheads Evaluation Overhead costs are not allocated to cost centres, so it avoids inaccuracies of allocating these costs Excess capacity can be used effectively as orders that make a positive contribution will be accepted But, ignoring overhead costs until final calculation can lead firms to ignore that fact that some product have much higher fixed costs than others Firms may continue production just because it is making a positive contribution, and do not consider that a new product can make an even greater contribution Qualitative factors are crucial too (e.g. stop making one product may affect the image of the whole range of products of the firm)

5AL.6 Budgets
Budget a detailed financial plan for the future that a business aims to fulfil

Benefits: Planning: the budgetary process makes managers consider future plans carefully so that realistic targets can be set Effective allocation of resources: so that the business does not spend more on resources than it can finance Setting targets to be achieved: this sets aims for each staff and motivates them to work hard towards the objectives Co-ordination: all departments need to discuss over the allocation of resources and work effectively together to achieve to main goal Monitoring & controlling: the business process and be monitored and checked against the plan to see if anything can be done to improve


Assessing performance: once the budgeted period has ended, variance analysis will be used to compare the actual performance with the original budgets

Drawbacks: Lack of flexibility: external factors are constantly changing, the plan could be unrealistic if not set flexible enough to adapt Focused on the short-term: managers may make decisions according to the short- term budget plan, but this may not be beneficial for the long-term success of the firm (e.g. reduce labour to stay within budget but may limit the firms ability to increase output) May lead to unnecessary spending: managers may think that they under-spent their budgets and therefore spend on unnecessary things just to prevent having a surplus and to maintain the same level of budget for next year Training required: setting financial plans and objectives are not simple tasks, staff training is required for an effective plan

Producing budgets

1. Organisational objectives are established based on the previous performance of the business, external changes likely to affect the business and the sale forecasts based on research and past data 2. The budget for the key factor affecting the success of the business needs to be set first (sales for most businesses). Inaccuracy of the key-factor budget would distort all other budget as well (e.g. if sales budget is inaccurate then cash, production, labour budgets would be inaccurate as well) 3. The key-factor budget is prepared after discussion with all branches & division of the business 4. The other budgets (cash, labour-cost, material-cost, selling and distribution budgets) are prepared based on the key-factor budget 5. The coordination of budgets needs to be ensured. Budgets can not conflict with each other and the spending level planned can not exceed to resources of the business 6. A master budget is prepared (main details of all the budgets & concludes with a budgeted profit and loss account and balance sheet) 7. The master budget is then presented to the board awaiting for approval


Flexible budgeting

Cost budgets for each expense are allowed to vary if sales or production vary from budgeted levels. New budgets are set depending on the actual output level achieved (e.g. if output level rises 20%, then other budgets are set 20% higher as well) This is more accurate & efficient and more motivating for managers because they will not be criticised for adverse variances that occur just because output was slower than budgeted

Zero budgeting

Setting budgets to zero each year and budget holders have to argue their case to receive any finance. This can be very time-consuming, as managers need to provide a review of their work and the importance of each one in order to justify the finance needed. But it could provide incentive for managers to defend the work of their own section and it can prevent managers from spending on unnecessary items


A variance is the difference between budgeted and actual figures It assists in analysing the causes of deviations from budget (e.g. if profit is lower than budgeted, was this due to lower sales or higher costs?) The causes identified may help the business to set more accurate future budgets


5AL.7 Contents of published accounts

Intangible assets
1. Goodwill arises when a business is valued at or sold for more than the balance- sheet value of its assets Will appear on balance sheet only when the business is prepared for sale or just after the firm has been purchased It is written off (get rid of) ASAP because it is difficult to value and can change or disappear rapidly It will appear on the business that has bought another firm and has paid for goodwill under non-current intangible asset and will be taken off ASAP

Inventory valuation
Can be in forms of raw materials, work in progress and finished goods Net realisable value the amount for which an asset (inventory) can be sold for minus the cost of selling it (the cost of damage or fixing the asset needs to be reduced from the original value)

The decline in the estimated value of a fixed asset over time Profits would be more accurate because the cost of asset bought is spread over its useful life (not lower than actual in the first year and higher in later years) It will reflect the true retain value of the asset on the balance sheet each year until fully depreciated or sold off Original cost of asset expected residual value Expected useful life of asset (years) Evaluation Straight-line method is easy to calculate & understand But it requires estimates, mistakes will lead to inaccuracies Assets tend to depreciate more quickly in the first few years than in later years, straight-line method does not reflect this Repair & maintenance costs of an asset usually increase with age and this will reduce the profitability of the asset (not shown in this method)


5AL.8 Analysis of published accounts Accounting ratios:

1. Profitability ratio
Return on capital employed (RoCE) Net or operating profit X 100 Capital employed Capital employed: the total value of all long-term finance invested in the business Total asset current liabilities Non-current liabilities + shareholders equity Compares profit with capital invested in the business (how much profit can a $1 investment generate) The higher, the greater return on capital invested in the business Comparisons with previous years or other firms can be made (allows trend to be identified) Can be compared with the return from interest accounts (does investing in banks get more return?) RoCE is not related to risks involved in the business. High RoCE may result from a high-risk operation not a true business efficiency

2. Liquidity ratios (in AS notes)

3. Financial efficiency ratios

Inventory turnover ratio Cost of goods sold Value of inventories


Number of times stock bought in and resold (turnover) in a period of time (how fast can the firm sell stocks) The higher the ratio, the lower the investment in inventories efficient stock management (small stocks but high value of sales) Depends on industry (perishable products = less stocks) Not related to service firms (they are not selling products held in stock)

Days sales in receivable ratio (debtor days) Accounts receivable X 365 Sales turnover Tells how long it takes for customers to pay debts The shorter, the better control of working capital More days means business gives long credit to customers management strategy to gain customers. But too high means poor control of debtors & repayment periods Depends on the industry (selling for cash = low results) Can be reduced by giving shorter credit terms or improving credit control

4. Gearing ratio
Long-term loans X 100 Capital employed Non-current liabilities X 100 Shareholders equity + non-current liabilities Long-term debt X 100 Shareholders equity Shows the extent to which the firms assets are financed from external long-term borrowing Highly geared = more risks (have to pay interest rates, less profits & dividends) could cause working capital problems Too low = safe but maybe not borrowing and investing enough Can be reduced by using non-loan sources of finance to increase capital employed (issuing shares or retained profits)

5. Investor ratios
Dividend yield ratio Dividend per share X 100 Current share price

Measures the rate of return a shareholder gets at the current share price (how much you get for investing $1) Rate of return can be compared with other investments More effective when compared with previous years or same industry Potential investors will be attracted when yield is high and price is not expected to fall soon A high dividend yield may not indicate a successful investment yield could be high because price is falling (not necessarily a good sign!) Yield could also be high only because directors want to keep shareholders happy (profit stays the same but pay from reserves) Directors may reduce dividend to reinvest in the business, but would shareholders be happy? Dividend cover ratio Profit after tax and interest Annual dividends Compares dividend with profit (how much profit the firm has to pay out dividends) High = firm is able to pay the dividends and still have a considerable amount of profit left to reinvest back Low = pays dividends out of low amount of profit (low retained profits)

Price/earnings ratio Current share price Earnings per share (profit earned per share) Shows how much investors are willing to pay for each $1 of earnings Industries with high growth prospects would have high P/E More useful to compare firms within the same industry because of different growth prospects and investors expectations

Limitations of accounting ratios

1. One ratio result alone is not very useful, comparisons to other firms or previous years need to be made for the analysis to be meaningful 2. Financial years end at different times for businesses, this may lead to misleading results when comparisons are made 3. Some factors outside the companys control can affect its performance and ratio results too (e.g. recession)

4. Some ratios are calculated using different formulae, comparisons would be misleading (same formulae have to be used to allow accurate comparison) 5. Different depreciation methods will lead to different ratio results. Also window dressing can make results look more favourable in the short term. Therefore, results would not reflect the true performance of the business 6. Qualitative factors regarding business performance are crucial as well 7. Ratios only highlight issues that need to be tackled; they do not solve business problems or indicate the causes of the problems. Managers still have to come up with strategies to overcome them

5AL.9 Investment appraisal

Investment appraisal
Evaluating the profitability or desirability of an investment project Quantitative methods compare cash outflows with the expected future cash inflows Managers use this to assess whether the likely future returns on projects will be greater than the costs and by how much Used together with qualitative factors to determine whether or not a project is profitable or should be undertaken Forecasting cash flows is not an easy task It is possible that unpredicted events or external factors will occur making the forecasts inaccurate Managers need to bare in mind that there are some risks involved in investment decisions due to the uncertainty of cash flow forecasts

Basic methods
Payback method Payback period is the length of time it takes for the net cash inflows to pay back the original capital cost of the investment. Formula to find out the exact month: Additional net cash inflow needed X 12 months Annual cash flow in that next year

Advantages: Quick & easy to calculate Results are easy to understand & analyse


The focus on the speed of return of cash flows means more concentration on short-term forecast of the projects profitability Results can be used to eliminate projects that take too long to give returns Useful for businesses where liquidity is more important than overall profitability Disadvantages: Does not measure overall profitability of a project & ignores cash flows after payback period (possible that a project gives rapid return but then offer no more cash inflows) The business may reject very profitable investments just because they take some time to repay the capital It does not consider the timing of the cash flows during the payback period

Average rate of return (ARR) measures the annual profitability of an investment as a percentage of the initial investment Annual profit (net cash flow) X 100 Initial capital cost

Advantages: It uses all the cash flows (unlike the payback method) It focuses on profitability (may be the firms objective) Results are easy to comprehend & compare with other projects

Disadvantages: It ignores the timing of the cash flows (some projects may have the same ARR but one could pay back much more quickly than the other) Predicted or expected cash flows in the future may not be accurate The time value of money is ignored as the cash flows have not been discounted

Discounted cash flow methods

This is when the time value of money is taken into account. Discounting is the process of reducing the value of future cash flows to give them their value in todays term; the future value depends on the interest rate

Discounted payback uses the discounted cash flows to calculate the payback period of the projects (same dis/advantages as payback period except that it takes into account the time value of money)


Net present value (NPV) todays value of the estimated cash flows resulting from an investment

1. Multiply the given discount factors by the net cash flows 2. Add all the discounted cash flows together 3. Subtract the capital cost to give the NPV

Advantages: It considers both timing of cash flows & size of them in arriving at an appraisal The rate of discount can be varied to allow for different economic circumstances It takes into account the time value of money & the opportunity cost of money

Disadvantages: Complex to calculate & explain for some managers Results depend greatly on the rate of discount used, and that could be inaccurate NPV can only be used to compare projects with same initial costs because it does not provide a percentage rate of return on the investment

Internal rate of return The rate of discount that yields a net present value of zero the higher the IRR, the more profitable the investment project is (because as the rate of discount increases, the net present value declines) Can be compared with IRR of other projects highest = more profitable Can be compared with criterion rate (minimum levels set by management for investment-appraisal results for a project to be accepted) preset by the business

Qualitative factors
Non-numerical factors including impact on environment & local community, publicity & image of the business The aims and objectives of the business some projects may seem profitable but reduce the customer service which is the main priority of the firm Managers attitude towards risk Firms view of the importance of ethical issues


If different methods of investment appraisal suggest different projects to be profitable, then the decision will depend on the businesss main aims and the managers attitude to risk

6AL.1 What is strategic management

Corporate strategy a long-term plan of action for the whole organisation,
designed to achieve a particular goal (how we get from where we are now to where we want to be in the future). Involves all departments in the business. All firms need a corporate strategy to provide integration, direction and focus Corporate strategy are influenced by: 1. Resources available scarce resources will force firms to choose which strategies to proceed and which to drop or scale back 2. Strengths of the business the firm will be more likely to be successful if it applies its strengths in the strategies 3. Competitors actions firms need to respond to competitors action to retain or attract customers to the business 4. Objectives social-responsibility or short-term profits? Etc.

Tactics short-term policy or decision aimed at resolving a particular problem or

meeting a specific part of the overall strategy (smaller-scale decisions which often impact on only one department)

Strategic management the role of management when setting long-term goals

and implementing cross-functional decisions that should enable a business to reach these goals 1. Assessing current position of the business 2. Setting mission, vision and objectives 3. Taking important long-term decisions that lead to objectives set 4. Coordinating activities of all departments 5. Allocating sufficient resources to allow new policies to work 6. Evaluating success against goals then improvements can be made

Business strategy and competitive advantage

World trade is growing rapidly, businesses now have to compete with domestic and also international competitors, which may have: 1. Lower costs 2. Differentiated products

These are 2 main factors that can lead to a major competitive advantage Strategies to increase competitive advantage: Automation advanced & flexible production process help to reduce costs of manufacture and also create differentiated products Rationalisation cut any unnecessary costs (e.g. make workers redundant) Research and development allows diversification away from original activities and create product differentiation

6AL.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 (where is the business now? what is happening or likely to happen? how can the business respond to the changes?)

SWOT analysis
A form of strategic analysis that identifies and analyses the main internal strengths & weaknesses and external opportunities & threats that will influence the future direction & success of a business Only carrying out the SWOT analysis is not sufficient, managers need to decide how to overcome the threats & weaknesses and how to take full advantages of the strengths & opportunities. The business also needs to carry out further analysis before strategic choices can be made. One weakness of the SWOT analysis is the subjectivity, one manager could see one thing as strength and another could see it as a weakness

PEST analysis
The strategic analysis of a firms macro-environment, including political, economic, social and technological factors


PEST is complementary to SWOT, not an alternative. PEST analysis should be constantly reviewed and updated because businesses are operating in a dynamic environment

Vision/mission statement
Vision a statement of what the organisation would like to achieve or accomplish in the long term (outlines the preferred future of the firm) Mission a statement of the businesss core purpose and focus, phrased in a way to motivate employees and to stimulate interest by outside groups

The vision & mission statement are not set to impress anyone, they should be clearly understood by all employees. They both give the sense of purpose to an organisation, and prevent business from drifting away from its main aims. Therefore strategies should be set according to those main focuses of the organisation


Boston Matrix
A way of analysing the products of a firm in the different markets they are in. The matrix compares market share and market growth and firms try to categorise each of the products so that they can analyse what to do with them. This analysis works for a multi-product firm and the important conclusions are based around the future tactics not the labelling of the diagram Star A successful product in an expanding market Needs to try and maintain market position But fast-changing market so promotion is needed to differentiate product & reinforce brand image High marketing costs but generates high amounts of income for firm Cash cow Well-established in a mature market Sales are high and promotional costs are low (high consumer awareness) The firm needs to maintain this for as long as possible The cash can then be injected into other products Problem child Has potential to succeed because the market is growing fast Consumes resources but generates little return. Needs heavy promotion costs to compete with competitors in the expanding & evolving market If sales do not improve, the firm could revise the design, relaunch or even withdraw from the market Dog Offers little to the business and has low potential of success The market is not growing, the firm could try to gain high market share or stop producing this product and focus on other product in the range

The analysis helps to establish the firms current product positions but do not predict future success of the business. It does not tell managers what to do with the products. Further market research is required and other external factors need to be considered when making decisions. It also assumes that higher market shares mean higher profits, but this may not always be true if sales are gained by reducing prices and profit margins


Porters Five Forces analysis

The five forces analysis is a way of assessing an industry in which a business operates. The analysis assumes that there are 5 factors, which need to be analysed for that business 1. Barriers to entry the ease with which other firms can join the industry 2. Buyer power a measure of the power that the customers have on the firm 3. Supplier power suppliers may be more important than customers in this relationship when the brand is very powerful or when customers have very little power 4. Threat of substitutes products in other industries that might affect the businesss industry. It must be aware of what is being produced else where 5. Competitive rivalry the most important force. The success of any business is a function of its ability to compete in the market place. In some markets competition is high, in other markets, it can be hardly noticeable

Benefits: By analysing new markets, the firm may decide whether to enter or not By analysing existing markets, the firm may decide whether to stay in or not and whether if it has potential to become profitable The analysis aids business to decide whether to differentiate its product, buy out some competitors, enter different market segments (less competitive)


Drawbacks: Only works at a specific point in time (but the business environment is constantly changing) Can become very complex when analysing modern industries

Core competencies
Core competence an important business ability that gives a firm competitive advantage (ability that makes the business different from other firms in the industry). A core competence should: Provide recognisable benefits to consumers Not be easy for other firms to copy (e.g. patented design) Provide access to a wide range of markets Once a core competence is established, the business has the opportunities to develop core products and then new end products & markets

Core product product based on a businesss core competences, but not necessarily for final consumer of end user (can be a product that has many uses or are used to produce many other products)

6AL.3 Strategic choice

Ansoffs matrix
A model used to show the degree of risk associated with the four growth strategies of: market penetration, market development, product development and diversification


Evaluation Managers can analyse the degree of risk associated with each opportunity However, it only considers 2 factors in the strategic analysis of a businesss option. Other analysis are needed as well to give a more complete picture The matrix does not suggest actual detailed marketing options (which market to enter? Or which product to produce?) Managers still need to make decisions based on experience too

Force-field analysis
Technique for identifying and analysing the positive factors that support a decision and negative factors that constrain it 1. Analyse current and the desired situation 2. List all the driving factors 3. List all the constraining factors 4. Give a numerical score, scale of 1-10 (1 = weakest & 10 = strongest) 5. List all forces on the diagram 6. Total the scores and decide whether the change is reasonable 7. Consider ways which can strengthen the driving forces & reduce the restraining forces Limitation Inexperienced managers could fail to identify all relevant forces involved The allocation of numerical values is subjective, 2 managers may come up with different values for the forces Therefore, propose very different decisions based on their assessments

Decision trees
A diagram that sets out the options connected with a decision and the outcomes and monetary returns that may result 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 and subtract cost of operating

Decision tree measures the risk in relation to possible level of reward Drawn to visually aid the decision-making process Forces managers to consider ALL options available Simple to follow


By using probabilities, there is an attempt to calculate the level of risk HOWEVER: In reality it is not easy to calculate probabilities, the model can be inaccurate Estimate returns can be difficult to predict for new projects Decision trees may aid decision making, but other qualitative factors need to be considered as well (e.g. environment, workforce attitude) It does not eliminate the risks involved

6AL.4 Strategic implementation

Business plan
A written document that describes a business, its objectives and its strategies, the market it is in and its financial forecasts Summary of the strategies Description of the business opportunity Marketing & sales strategy how to sell the products to customers? Management team whom to recruit or work with? Operations premises, facilities, IT systems Financial forecasts of sales profit and cash flow

Businesses need to provide plan in order to obtain start-up finance Plan gives sense of purpose and direction and aids resource allocation Helps motivate staff to work towards targets Progress can be reviewed against objectives

Corporate culture
The values, attitudes and beliefs of the people working in an organisation that control the way they interact with each other and with external stakeholder groups the way we do things around here. Corporate culture will affect any decisions of individuals in the business, it defines what is considered normal an organisation. It will be influenced by the values and expectations of managers and employees, the firms objectives and the type of market it operates in. Different departments have different corporate culture Power culture concentrating power among just a few people similar to autocratic leadership. Few people are involved in decision making


Role culture each member of staff has a clearly defined job title and role similar to bureaucratic organisations. Well-defined structure, clear roles & responsibilities. People work within strict rules and show little creativity Task culture based on co-operation and teamwork communication similar to matrix structure. Groups are empowered to take decisions and are encouraged to be creative Person culture when individuals are given the freedom to express themselves fully and make decisions for themselves the most creative culture but may cause conflict between individual goals and those of the whole organisation Entrepreneurial culture encourages management and workers to take risks, to come up with new ideas and test out new business ventures. Success can be rewarding when some degree of risk is taken

Techniques for implementing and managing change

1. Understand what change means change is the adaption of business strategies and structures in response to changing internal & external forces 2. Recognise the major causes of change Technological advances leading to new products and processes (staff training and new equipment needed) Macro-economic changes policies, business cycle etc. Legal changes Competitors actions higher competitiveness 3. Understand the stages of the change process Where are we now and why is change necessary? New visions and objectives established explained to those people involved Allocate sufficient resources to enable change Give warnings to people to avoid resistance to change Provide training to staff Check on how individuals are coping with the change and support them 4. Lead change, not just manage it Take actions that lead firm away from resistance to change Motivating staff at all levels

Resistance to strategic change

Fear of the unknown increased uncertainty can lead to anxiety for some people


Fear of failure changes may require new skills that may be beyond a workers capabilities Lack of trust workers may not believe in the reasons given to them

Contingency planning and crisis management

Contingency plan planning for unforeseen events (fire, floods, damage to stock, illness of key staff, IT-system failure or accidents on the business premises etc.) also known as business continuity planning 1. Identify the potential disasters that could affect the business 2. Assess the likelihood of these occurring (it is easier to plan for the most common disasters but managers also need to think about the unlikely ones because they can have greater risk to the business) 3. Minimise the potential impact of crises when they happen (staff training and practice drills, telling the truth and indicating details of causes and solutions to protect the reputation) 4. Plan for continued operations of the business (the sooner the business can begin trading again, the less impact is likely to be on customer relationships

Final evaluation: Cost of CP needs to be balanced against the potential costs of not doing it How much time is spent on preparing and testing contingency plans? In this case it seems to have been effective but it might be more important to focus on quality issues themselves, rather than trying to respond to a problem once it has arisen