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IB Business and Management SL Mr.

Jackson TOPIC I: BUSINESS ORGANIZATION AND ENVIRONMENT This topic is about the structure of organizations, organizational objectives and the different environments in which organizations operate. Core Content 1.1 Nature of business activity What is a business? Learning Objectives A business is a decision-making organization involved in the process of using inputs to produce goods and/or services.

A product can refer to both goods or services. Goods are physical products, such as cars, computers, books, and food. Services are intangible products such as a haircut or banking services. Identify inputs, outputs and processes of a business A business is a SYSTEM it has parts that work together to achieve an objective. ! Business activity produces output a good or service. ! Goods and services are consumed. ! Resources are used up. ! A number of business functions may be carried out. ! Businesses can be affected by external factors. A market is a place or process whereby buyers (customers) and sellers (businesses) meet to trade. Customers are the people or organizations that buy a product whereas consumers are the ones who actually use the product. What does business activity produce? Consumer goods and Capital goods (producer goods) and services. Businesses use resources (FACTORS OF PRODUCTION) in business activity. These are usually divided into 4 groups: 1) Land 2) Labour 3) Capital 4) Enterprise The Factors of Production have a financial return for their part in the production process: 1. Land = rent 2. Labour = wages/salaries 3. Capital = Interest 4. Enterprise = Profit Specialization a business concentrates on the production of a particular good or service or a small range of similar products. Occurs at different levels: individual, departmental, corporate, regional, and national. Division of Labour refers to the specialization of people, rather than organizations. Involves defining different aspects of a job or task and assigning different people to each particular part of the work. Opportunity Cost the best alternative that is forgone when making a decision.

Business functions o Production (Operations) o Marketing

Describe how business activity combines human, physical, and financial resources to create goods and services Production (Operations) changing natural resources into a product or the supply of a service. Ex: building site where houses are constructed, in a dental surgery where dental treatment is given, and in a coal mine where coal is extracted. Marketing identifying consumer needs and satisfying them. Ex: market research, advertising, packaging, promotion, distribution, and pricing. The 4 Ps: product, price, promotion, and place (distribution). Finance responsible for the control of money in a business. Duties include: recording transactions, producing documents to illustrate the performance of the business and its financial position and controlling the flow of money in the business. Human resources the management of people. Looks after the welfare of the workforce, and is responsible for recruitment, selection, training, appraisal, health and safety, equal opportunities, payment systems, benefits, and worker disputes. R&D technical research, for example, research into a new medicine or new production technique. R&D can be very expensive. Business activity is highly integrated. For example, production is heavily influenced by marketing activities. If marketing is effective and more of the product is sold, then more will have to be produced. Also, the finance dept will carefully watch the amount of money used by other departments.

o Finance

o Human Resources

o Research & Development (R&D)

Classification of business activity: o Primary o Secondary o Tertiary

Explain the nature of business activity in each sector Business activity is often classed by the type of production that takes place. PRIMARY PRODUCTION activity which takes the natural resources from the earth, i.e. the extraction of raw materials and the growing of food. Ex: Mining, fishing, farming and forestry. SECONDARY PRODUCTION manufacturing, processing and construction which transform raw materials into goods. Ex: Car production, distilling, baking, shipbuilding and office construction. TERTIARY PRODUCTION the provision of services. Hairdressing, distribution, security, banking, theatre and tourism.
Other methods of classifying business include by: size, geographical area, sector, ownership.

1.2 Types of organization Private sector Public sector

Distinguish between organizations in the private and public sectors Private sector businesses that are owned by individuals or groups of individuals. Ex: Sole trader, partnership, public limited company, private limited company. Public sector business organizations which are owned or controlled by central or local government, or public corporations.

Starting a business o Reasons for setting up a business

Explain the reasons for setting up a business. Entrepreneur the person who takes risks to manage, plan and organize the other three factors of production in order to provide goods and services. Why do people set up in business? GET CASH Growth Earnings Transference/Inheritance Challenge Autonomy Security Hobbies Explain the process a business will have to go through to start up Factors to consider when setting up a business: 1. Business Idea 2. Finance 3. Human Resources 4. Entrepreneurial Skills 5. Fixed Assets 6. Suppliers 7. Customers 8. Marketing 9. Legalities

o Identifying a market opportunity

Market opportunity - the identification of new/unsatisfied customer needs. Can come in several ways: o Identifying a gap in the market. o Innovative ideas and creations. o Developing the entrepreneurs personal qualities and skills. Market Research allows businesses to better understand the nature of the industry and the customers needs and wants. In turn, this should improve the businesss chances of success.

o Possible problems faced by startups

Analyse the problems that business start-ups may face 1. Lack of finance capital. 2. Cash flow problems 3. Marketing problems 4. Unestablished customer base 5. People management problems 6. Legalities 7. Production problems 8. High costs of production 9. Poor location 10. External influence Most people find that their technical skills are much greater than their managerial skills. It is often this lack of managerial skills which leads to problems.

Profit-based organizations o Sole trader (proprietors) o Partnerships o Companies (Corporations)

Evaluate the most appropriate form of ownership for a firm Factors that affect the choice of business organization: 1) Amount of finance 2) Size 3) Limited Liability 4) Degree of ownership of control 5) Type of business activity Distinguish between different types of business organization (structures) and identify their main features - Analyse the extent to which ownership and control differ in organizations. - Analyse the impact of the division between ownership and control on internal and external stakeholders Sole trader (Sole Proprietor) An individual who is the owner of his or her own business. The owner also runs and controls the business and is the sole person held responsible for its success or failure. Most common type of business ownership. Examples: self-employed painters and decorators, plumbers, mechanics, restaurateurs and freelance photographers. Unincorporated the owner is legally the same as the business.

Advantages o Cheap and easy to start few legal formalities o All the profit is yours o You are your own boss o You do all the work o More personalized customer service o Privacy no public disclosure of financial records. Disadvantages o You have unlimited liability o All the risk is yours o Limited sources of finance o Workload and stress o What about sickness and holidays? o Do you have all the skills? o Higher costs of production

Partnership A profit-seeking business that is owned by two or more persons. The law allows a partnership to have between two and twenty partners, although some professionals are allowed more. Partnerships need rules so most operate according to a Partnership Agreement. Partnership Agreement document drawn up which defines: 1. The amount of capital contributed by each partner. 2. The procedure in case of partnership disputes 3. How the profit will be shared between partners. 4. Partners voting rights 5. The procedures for bringing in new partners and old partners retiring.

Partnership Advantages o More capital o More ideas/expertise o Division of labour/Specialization of partners o Partners can cover each others holidays and illness. Disadvantages o Partners still have unlimited liability o Each partner is liable for decisions made by other partners o Risk of conflict between partners.

Companies (Corporations) Companies are essentially businesses that are owned by their shareholders. Shareholders are individuals or other businesses that have invested their money to provide capital for a company. In North America, more common term is Corporation. Incorporated there is a legal difference between the owners of the company (the shareholders) and the business itself. The company, being treated as a separate entity, has its own legal rights and duties. Limited Liability Shareholders do not have to bear the responsibility of a companys debts and will not stand to lose personal belongings if the company goes into arrears. The maximum a shareholder can lose is the value of their investment in the business, and hence there is a limit to how much they can lose. Board of Director elected by shareholders to run the company on their behalf. The term limited companies is used to clarify the fact that all companies have limited liability. Two types private limited company and public limited company.

Private limited company A company that cannot raise share capital from the general public. Instead, shares are sold to private family members and friends. (Ltd.)

Advantages o You have limited liability o Easier to raise larger sums of capital o More flexible than PLCs o Opportunities for bringing in more skills. Disadvantages o You can only sell shares privately o Not very flexible if expansion becomes possible o More legal formalities than sole traders

Public limited company Able to advertise and sell its shares to the general public via the stock exchange. (PLC)

Advantages o You have limited liability o Easier access to finance o More funds available for investment o Public awareness gives status Disadvantages o You have to publish results o Others, e.g. auditors have to look at your books o Greater need to conform to legal procedures o Owners might lose control

Initial Public Offering (IPO) when a business first sells all or part of its business to external investors (go public!) Non-profit and nongovernmental organizations, including charities, and pressure groups Compare and contrast the objectives of NGOs and non-profit organizations with other organizations. Non-profit organization (a.k.a not-for-profit organization), an establishment that is run in a professional and business-like manner but without profit being the major objective. Instead, such organizations aim to provide a service or to promote special causes. Charities Charities are organizations with very specialized aims. They exist to raise money for good causes and draw attention to the needs of disadvantaged groups in society. Charities rely on donations for their revenue. They also organize fund raising events. Generally run according to business principles. They aim to minimize costs, market themselves and employ staff. Most staff are volunteers, but some of the larger charities employ professionals. Provided charities are registered, they are not required to pay tax. In addition, businesses can offset any charitable donations they make against tax. This helps charities when raising funds. (Read pages 36 about advantages and disadvantages of charities.) Pressure groups Groups without the direct political power to achieve their aims, but whose aims lie within the sphere of politics. They usually attempt to influence local government, central government, businesses and the media. They aim to have their views taken into account when any decisions are made. Such influence can occur directly, through contact with politicians, local representatives and business people, or indirectly by influencing public opinion. The use of pressure groups is one way in which stakeholders can exert influence over those making decisions within a business. Pressure groups can represent stakeholders directly involved with the business, such as employees or shareholders. They can also represent those not directly involved in the business, such as local communities or consumer groups.

Analyse the impact of the actions of NGOs and other non-profit organizations There is a number of ways in which pressure groups can affect firms. o Pressure groups often seek to influence the behaviour of members of the public about a particular product, business or industry. o Political parties are able to pass laws which regulate the activities of business. o The actions of pressure groups can reduce the sales of firms. o Firms can face increased costs as a result of the activities of pressure groups. o Businesses with a tarnished reputation as a result of pressure group activity may find it more difficult to recruit employees. How should businesses react? 1. By positively responding to the issues raised by pressure groups. 2. Through promotion and public relations. 3. Lobby politicians themselves or par for the services of professional lobbyists. 4. Legal action. 1.3 Organizational objectives The importance of objectives Explain the importance of objectives in managing an organization Aims the general long-term goals of an organization. They are broadly expressed as vague and unquantifiable statements, such as to provide high quality education to the local community or to promote social and environmental integrity. Aims serve to give a purpose to the general direction of an organization and are often expressed in a mission statement. Objectives the short-term and more specific goals of an organization, based on its aims. They are more likely to be quantifiable or measurable. Without having clear aims and objectives, organizations have no sense of direction or purpose. Organizational aims and objectives are set for several crucial reasons: 1. Sense of direction, purpose and unity. 2. Foundation for business decision-making. 3. Encourage strategic thinking (long term planning) 4. Basis for measuring and controlling performance of the workforce, the management and business as a whole. Ex: Objective of increasing sales by 20% over 3 years. If it had increased sales by only 5% then it might conclude that it has been unsuccessful. Organizational objectives have 3 key functions: 1) To control 2) To motivate 3) To direct. Businesses must set objectives that are SMART: Specific, Measurable, Agreed, Realistic, and Time Specific.

What determines business objectives? There is a number of factors that can influence the choice of objective: 1. The size and status of the business. 2. The power of the stakeholders. 3. Ownership. 4. Long and short term objectives. 5. External and internal pressures. 6. Risk 7. Corporate and business culture. Explain the purpose of mission and vision statements Having vision means to have an image of an ideal situation in the future. A vision statement therefore outlines a businesss aspirations (where it wants to be) in the distant future. Ex: To be the leading sports brand in the world is the vision of Adidas. Having a mission means to have a clear purpose. It explains in general terms what the business is trying to achieve and outlines the organizations values. A mission statement tends to be a simple declaration that broadly states the underlying purpose of an organizations existence. Ex: a school may set its mission as provision of achievement for all students. Hence, a mission statement outlines how a vision statement will be achieved. Analyse the role of mission and vision statements in an organization ! !"#"$%&#'(')*)%'#&(+)&,$-.#)/&$%&'0)&1)+2&3$%4&')+*5&60)+)(#&*"##"$%& #'(')*)%'#&-(%&,$-.#&$%&'0)&*)/".*&$+&3$%4&')+*7& ! 8.9#):.)%'325&*"##"$%&#'(')*)%'#&(+)&.;/(')/&*$+)&,+):.)%'32&'0(%&1"#"$%& #'(')*)%'#7& ! !"#"$%&#'(')*)%'#&/$&%$'&0(1)&(-'.(3&'(+4)'#&'0('&*.#'&9)&+)(3"<)/7&&=%#')(/5& 1"#"$%&#'(')*)%'#&(33$6&;)$;3)&'$&#))&60('&-$.3/&9)7& ! >0)&*"##"$%&#'(')*)%'&')%/#&'$&$.'3"%)&$+&0"403"40'&'0)&1(3.)#&$,&'0)& 9.#"%)##5&"7)7&"'#&9)3"),#&(%/&4."/"%4&;+"%-";3)#7&& & & Distinguish between objectives, strategies and tactics and assess how these interrelate. Aims & objectives o Aims o Strategic objectives Strategy refers to any plan or scheme to achieve the long-term aims of a business. Used for trying to achieve strategic objectives. Tactics short-term ways that firms can use to achieve their aims and objectives, i.e. they are used to achieve an organizations tactical objectives. Strategic Objectives (Primary) the longer term aims of a business organization, e.g., targets for the next few years. Typical Strategic Objectives: 1. Profit maximization 2. Growth 3. Image and reputation 4. Market standing

Statements o Mission statements o Vision statements

o Tactical/Operational objectives

Tactical (Operational) Objectives (Secondary) short-term objectives that affect a segment of the organization, such as a department. Refer to specific goals that guide the functioning of certain operations that are in line with the primary objectives of the business. Departments will tend to set their own short-term departmental objectives, such as the Sales Department planning to raise sales by $20,000 within the next year or the HR Dept planning to keep staff turnover below 10%. Short-term objectives tend to refer to targets for the next 6-12 months. Typical Tactical Objectives: 1. Survival 2. Sales revenue maximization Ethical objectives Examine the reasons why organizations consider setting ethical objectives Ethics are a set of values and beliefs which influence how individuals, groups and society behave. Business ethics are concerned with how such values and beliefs operate in business. They help firms to decide what actions are right or wrong in certain circumstances. Ethics might influence business decisions and consider the interest of other stakeholders. Examples of Ethical Objectives: ! Treating and paying employees fairly. ! Reducing pollution by using more environmentally friendly production processes. ! Increased recycling of waste materials. ! Disposal of waste in an environmentally friendly manner. ! Offering staff sufficient rest breaks during their work shift. ! Fairer conditions of trade with less economically developed countries. Examples of Unethical business behavior financial dishonesty, environmental neglect, exploitation of the workforce, exploitation of suppliers, exploitation of consumers. In order to achieve their ethical objectives, businesses have adopted a code of ethics (ethical code of practice) and publish this as part of their mission statement or in their annual report. Analyze the advantages and disadvantages of ethical objectives. Discuss the impact of implementing ethical objectives The benefits of ethical behaviour There are certain advantages for businesses in behaving in an ethical or socially responsible way. 1. Improved corporate image 2. Increased customer loyalty 3. Cost cutting 4. Improved staff motivation 5. Improved staff morale Effects of ethical behaviour 1. Increasing costs 2. Loss of profit 3. Stakeholder Conflict

Corporate social responsibility (CSR)

Explain the different views firms may take of their social responsibility in an international context. Modern-day organizations are aware of the importance of their image, and of the relationships they have with the wider community. They acknowledge their social responsibilities to employees, customers, shareholders and other stakeholders. Examples of specific social responsibilities include: ! Equal opportunities as well as obeying labor laws, firms will wish to publicise their commitment to EO. ! ethical trading firms have to balance moral and ethical stances with the need to make an adequate return on investment (i.e. adequate profit) ! Environmental awareness firms realize the negative effect of bad publicity. ! Health and safety most firms do not limit themselves to the minimum legal requirements, believing that a good health and safety record helps create a positive image which can be used to develop their business.

There are different views and attitudes towards the role of businesses in delivering social o Differing views of social responsibility responsibility: Free-market (or non-compliance) CSR attitude. Many economists believe that the role of business is to generate profits for their owners. They argue that governments, rather than businesses, are responsible for sorting out any social problems. They believe that in pursuing the profit motive, businesses will become more efficient and prosperous, thereby helping society indirectly (such as through job creation and payment of corporation tax). Altruistic CSR attitude. Altruism refers to acting in a humanitarian and unselfish manner. These businesses do what they can to improve the society, regardless of whether their actions help to increase their profits. It can be difficult to determine in reality whether businesses help society due to altruism or because they believe such action would (selfishly) help to improve their corporate image. Strategic CSR attitude Argue that businesses ought to be socially responsible only if such actions help the business to become more profitable. Such firms see CSR as a method of long-term growth.

o Policies to implement socially responsible objectives (e.g., environmental auditing)

Analyse the value of social and environmental audits to different stakeholders Social auditing is the process by which a business organization attempts to assess the impact of the entire range of its activities on stakeholders. It might try to produce a set of social accounts to evaluate its performance against a set of non-financial criteria. This might include its effect on the environment and its attempts to meet social obligations to employees. Why might social auditing be seen as useful? They provide valuable information to pressure groups and consumers about the csr of a business. They allow the managers of a business to gain a complete picture of the impact of the businesss activities.

A business can use a social audit as a means of preventing future criticism of its activities. A business will be able to identify the extent to which it is meeting some of its nonfinancial objectives. Shareholders can use social audits to raise questions about a businesss activities at annual shareholder meetings. Government use to legislate business and regulate industry 1.4 Stakeholders Internal stakeholders o Employees o Stockholders o Managers Stakeholder any person or organization that has a direct interest in and is affected by the performance of a business. Explain the interests of internal stakeholders Internal stakeholders are members of the business organization. Employees want high earnings, an interesting job and secure employment Shareholders (Stockholders) (Owners) want regular, secure and high returns and a say in the goals of the business. Managers want responsibility, high rewards and a lack of interference in their actions. Explain the interests of external stakeholders External stakeholders are not part of the business. Suppliers want secure, regular and profitable orders Customers want quality products at low prices and a good service Government wants to achieve a large number of goals including growth in the economy and low inflation. The local community wants thriving local businesses which do not cause problems. Discuss possible areas of conflict between stakeholders Conflict can exist between many different groups of stakeholders. Employees vs. Owners 1. Levels of pay 2. Working conditions 3. Changing practices 4. Redundancy Customers vs. Business 1. Price 2. Quality 3. Delivery time 4. After sales service

External stakeholders o Suppliers o Customers o Special Interest groups o Competitors -----------------------o Creditors o The Community o Government

Stakeholder conflict

Owners vs. Managers In some businesses the management team may become powerful and influential. When this happens they may pursue their own interests rather than those of the owners. This might involve paying themselves high salaries or organizing their time to suit their own needs, whilst achieving satisfactory levels of profit rather than high levels of profit. This would go against the interests of owners who benefit from higher profits. Such conflict could result in some owners selling their shares. Suppliers vs. Managers and Owners 1. Late payment for products by owners/managers 2. Late delivery by suppliers (can delay production, and lost orders and profits) Owners vs. the community When the quality of life enjoyed by local residents is threatened by business activity. Ex: pollution.

1.5 External Environment PEST (political, economic, sociological, technological) analysis (STEEPLE, PESTLE, and other variations) Social/Cultural Technological Economic Environmental Political Legal Ethical

Prepare a PEST analysis for a given situation and use it to analyse the impact of the external environment on a firm.
(Note: you will not be tested on country-specific laws, regulations, or economic policies. The focus is on the impact of the external environment on business.)

PEST analysis is concerned with the environmental influences on a business. The acronym stands for the Political, Economic, Social and Technological issues that could affect the strategic development of a business. Identifying PEST influences is a useful way of summarizing the external environment in which a business operates. However, it must be followed up by consideration of how a business should respond to these influences. It is very important that an organization considers its environment before beginning the business process. In fact, environmental analysis should be continuous and feed all aspects of planning. The organization's external environment is made up of: 1. The internal environment e.g. staff (or internal customers), office technology, wages and finance, etc. 2. The micro-environment e.g. our external customers, agents and distributors, suppliers, our competitors, etc. 3. The macro-environment e.g. Political (and legal) forces, Economic forces, Sociocultural forces, and Technological forces. These are known as PEST factors. Political Factors. The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. You must consider issues such as: 1. How stable is the political environment? 2. Will government policy influence laws that regulate or tax your business? 3. What is the government's position on marketing ethics? 4. What is the government's policy on the economy? 5. Does the government have a view on culture and religion? 6. Is the government involved in trading agreements such as EU, NAFTA, ASEAN, or others? Some examples include: tax policy employment laws environmental regulations trade restrictions and tariffs political stability Economic Factors. Economic factors affect the purchasing power of potential customers and the firm's cost of capital. Businesses need to consider the state of a trading economy in the short and long-terms. This is especially true when planning for international marketing. You need to look at: 1. Interest rates. 2. The level of inflation Employment level per capita. 3. Long-term prospects for the economy Gross Domestic Product (GDP) per capita, and so on.

economic growth interest rates exchange rates inflation rate Sociocultural Factors. Social factors include the demographic and cultural aspects of the external macroenvironment. These factors affect customer needs and the size of potential markets. The social and cultural influences on business vary from country to country. It is very important that such factors are considered. Factors include: 1. What is the dominant religion? 2. What are attitudes to foreign products and services? 3. Does language impact upon the diffusion of products onto markets? 4. How much time do consumers have for leisure? 5. What are the roles of men and women within society? 6. How long are the population living? Are the older generations wealthy? 7. Do the population have a strong/weak opinion on green issues? health consciousness population growth rate age distribution career attitudes emphasis on safety Technological Factors. Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Technology is vital for competitive advantage, and is a major driver of globalization. Consider the following points: 1. Does technology allow for products and services to be made more cheaply and to a better standard of quality? 2. Do the technologies offer consumers and businesses more innovative products and services such as Internet banking, new generation mobile telephones, etc? 3. How is distribution changed by new technologies e.g. books via the Internet, flight tickets, auctions, etc? 4. Does technology offer companies a new way to communicate with consumers e.g. banners, Customer Relationship Management (CRM), etc?

R&D activity automation technology incentives rate of technological change

Environmental Factors Businesses are affected by many environmental issues, including global warming, pollution and recycling. As a result, most large firms have their own environmental policies that will influence the work of their various business functions. Function Finance Marketing Production HR Example of influence of environmental policy may cause an increase in costs, which must be financed; may obtain investment from environmentally conscious sources helps to define the nature of advertising and promotion used; creates a positive consumer-friendly image for the products raw materials are chosen with the environment in mind; production processes are less harmful to the environment staff become prouder and more satisfied working for the firm; may encourage more (qualified/able) people to apply for jobs.

Although many firms recognize the value of having environmental policies, environment agencies also exist to protect the environment. Evaluate the impact on a firms objectives and strategy of a change in any of the PEST/PESTLE factors 1.6 Organizational planning tools Business plans Analyse the importance of the information in the business plan to different stakeholders. Business plan a report detailing how a new business sets out to achieve its aims and objectives. A useful planning tool as it requires the owner to plan marketing, financing, and human resources of the business. However, the main aim of producing a business plan from the entrepreneurs point of view is to gain financial backing from lenders and investors. The business plan is used to show people that are lending the business money, so they have an indication of the likely success of the business. It can be used to monitor the businesses progress. Identify problems that may occur to allow the business to deal with them before they can become a problem. Highlight its strengths and weaknesses. A good business plan includes the following: Details of company Description of product Market/Customer info Organization and location How much money the business has Detailed analysis of cash available - cash flow forecasts etc. The personnel Marketing

Decision making framework

Apply formal decision making frameworks to a given situation Businesses are DECISION MAKING units. Making the right decisions help a business to achieve its aims and objectives. Decisions in a business are likely to be strategic (long term), tactical (medium term), or operational decisions (day to day). Typically, a business will have to decide: What production should take place, e.g. which goods or services to produce or supply? How much production should take place, e.g. what combination of capital and labour should be used? For whom production should take place, e.g. only for those with high disposable incomes? A decision-making framework is a systematic process of dealing with business problems, concerns or issues in order to make the best decision. In a simple decision-making model, the following seven steps take place: 1. Identify the business problem, concern or issue. 2. Gather sufficient data and information in order to make rational decisions. 3. Analyse data and information to produce a list of possible options. 4. Assess the consequences (in terms of costs and benefits) of each option. 5. Select the most favorable option, in terms of costs and benefits and what is realistically achievable. 6. Communicate this decision to the staff since the proposal is very likely to affect them. 7. Review and evaluate the outcome, i.e. did it help achieve the organizations objectives and what lessons were learnt? The above process can be remembered by the acronym IDEAL I Identify the problem, concern, or issue. D Define (or describe) the problem. E Explore possible solutions and their effects on the organization. A Action to tackle the problem. L Look back to review the progress and level of success in dealing with the problem. There are many models or frameworks that a business can use to limit the risks involved in decision-making. Commonly used decision-making frameworks include: Cost-Benefit analysis (CBA) examines the financial costs and benefits of a decision. Used when costs and benefits can be quantifiable. If benefits outweigh the costs, go ahead. Examples: Break-even analysis (topic 5) and Investment analysis (topic 3). Six Thinking Hats Psychologist Edward De Bono argued that it is important to look at decisions from (six) different perspectives. 6 different color hats representing different ways of thinking: white hat (factual info), red hat (thinking based on emotions and feelings), black hat (consider only the bad points of decision), yellow hat (all the benefits of a decision), green hat (creative solutions to a problem, and blue hat (neutral thinking).

Force Field analysis examines the forces for and against a decision. Driving forces refer to the advantages of implementing a decision and restraining forces are limitations or disadvantages. The forces affecting the change are then weighted according to the level of importance of each one as valued by the decision maker. Pareto analysis the 80/20 principle, 20% of the work can generate 80% of the output. The 5 Whys Simple process of asking, five times, why an issue or concern has happened in order to get to the root cause(s) of the problem. SWOT analysis and Ansoff matrix discussed in greater detail next.

SWOT analysis

Prepare a SWOT analysis for a given situation Strengths, Weaknesses, Opportunities and Threats (SWOT). SWOT analysis is a tool for auditing an organization and its environment. It is the first stage of planning and helps businesses to focus on key issues. SWOT stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal factors. Opportunities and threats are external factors. In SWOT, strengths and weaknesses are internal factors. For example: A strength could be: ! Your specialist marketing expertise. ! A new, innovative product or service. ! Location of your business. ! Quality processes and procedures. ! Any other aspect of your business that adds value to your product or service. A weakness could be: ! Lack of marketing expertise. ! Undifferentiated products or services (i.e. in relation to your competitors). ! Location of your business. ! Poor quality goods or services. ! Damaged reputation.

In SWOT, opportunities and threats are external factors. For example: An opportunity could be: ! A developing market such as the Internet. ! Mergers, joint ventures or strategic alliances. ! Moving into new market segments that offer improved profits. ! A new international market. ! A market vacated by an ineffective competitor. A threat could be: ! A new competitor in your home market. ! Price wars with competitors. ! A competitor has a new, innovative product or service. ! Competitors have superior access to channels of distribution. ! Taxation is introduced on your product or service.

A word of caution, SWOT analysis can be very subjective. Do not rely on SWOT too much. Two people rarely come-up with the same final version of SWOT. Simple rules for successful SWOT analysis. ! Be realistic about the strengths and weaknesses of your organization when conducting SWOT analysis. ! SWOT analysis should distinguish between where your organization is today, and where it could be in the future. ! SWOT should always be specific. Avoid grey areas. ! Always apply SWOT in relation to your competition i.e. better than or worse than your competition. ! Keep your SWOT short and simple. Avoid complexity and over analysis ! SWOT is subjective. Once key issues have been identified with your SWOT analysis, they feed into marketing objectives. SWOT can be used in conjunction with other tools for audit and analysis, such as PEST analysis and Porter's Five-Forces analysis. Analyze an organizations position using a SWOT analysis 1.7 Growth and Evolution Economies and diseconomies of scale Apply the concepts of economies of scale to decisions relating to the scale of business decisions. Recommend an appropriate scale of operation for a given situation. The size of an organization can be measured using a range of indicators. These include: profit, turnover, capital employed, and #of employees. Most firms seek to grow in size. Large size brings with it not only economies of scale, but also improved survival prospects, better capacity utilization of resources, and an increased sense of power and status. An organization can achieve growth in 2 ways: 1. external growth (integration) and 2. internal growth (organic growth). External growth two firms join together. Internal growth firm expands using its own resources. Internal Economies of Scale these occur when the increase in a firms size and the scale of its production reduces its unit costs. Although total costs production, marketing, or administration increase, the average cost per unit falls because the costs are being spread over a greater output. Internal economies of scale can be evaluated financially because they can be quantified (measured). There are different economies of scale, largely based on the various functions of a typical business. Economies of increased dimensions these arise from an increase in size: for example, a double-decker bus contains twice the passengers but still only needs one driver.

Financial economies larger firms are thought to be more financially stable, therefore find it easier to borrow money, often at cheaper rates. Managerial economies larger firms can employ more specialist (and efficient) managers. Marketing economies larger firms can employ specialist advertising agencies, and can spread marketing costs over much greater output. Purchasing economies bulk-buying discounts can be obtained as a result of larger orders, reducing the unit cost of materials, and also more favourable credit terms can be agreed with suppliers. Risk-bearing economies a wider product range allows the firm to spread risk more successfully. Technical economies - larger firms can afford to invest more in research and development, and can also afford more specialist and efficient technology.

External Economies of Scale - These result from an increase in size of the industry, rather than the firm. External economies most commonly occur when the industry is located in a limited area geographically: examples include car-making (traditionally the West Midlands), and pottery and ceramics (Stoke-on-Trent). All firms in the industry may benefit from these economies, examples of which are: training local training providers concentrate on the skills and knowledge required in the particular industry. support local firms provide specialist support, e.g. producing components needed in the industry. information local chambers of commerce and trade associations focus on the industrys needs. Diseconomies of Scale There are limits to the amount of growth for any business: the most common limitation is the level of demand for its products. After the business achieves a certain size, it may find that its unit costs start to increase: it is now starting to experience diseconomies of scale. There may be a number of reasons for these diseconomies: less efficient and slower communication, due to the increased number of levels in the firms hierarchy a long chain of command, which means greater bureaucracy (red tape) and slower decision-making. The overall effect of diseconomies of scale is to make the firm become less competitive through lower efficiency, poor staff morale, a weaker management function, and slower reaction to changing market conditions. Evaluate the relative merits of small versus large organizations. Small vs. large organizations Survival of the small firm Small firms survive despite not benefitting from economies of scale. Reasons for their survival include: o Offering specialized product and operating in a niche market. o having a local demand.

Internal/organic growth

Explain the difference between internal and external growth Internal growth is when a firm expands without involving other businesses. ORGANIC GROWTH means that the firm expands by selling more of its existing products. This could be achieved by selling to a wider market, either at home or abroad. It is likely that internal growth will take a long time for many businesses, but will provide a sound base for development. External growth occurs through dealings with outside organizations. Such growth usually comes in the form of alliances or mergers with other firms or through the acquisition (takeover) of other businesses.

External growth o Joint ventures o Strategic alliances o Mergers and takeovers

Evaluate joint ventures, strategic alliances, mergers and takeovers as methods of achieving a firms growth objectives Joint venture occurs when two or more businesses decide to split the costs, risks, control and rewards of a business project. In doing so, the parties involved in the joint venture agree to set up a new legal entity. For example, Coca-cola has a joint venture with San Miguel with shared ownership of Coca-colas bottling plant in the Philippines. Typically, a joint venture between two firms will involve a 50:50 split in costs, responsibilities and profits (or losses). Other advantages of joint ventures: Synergy Spreading costs and risks Entry to foreign markets Relatively cheap Competitive advantage Exploitation of local knowledge High success rate Strategic alliance similar to a joint venture in that two or more businesses seek to form a mutually beneficial affiliation by cooperation in a business venture. The firms in the strategic alliance also share the costs of product development, operations, and marketing. However, unlike joint ventures, forming a strategic alliance means that the affiliated businesses remain independent organizations. Drawbacks of joint ventures and strategic alliances 1. Partners in the joint venture tend to rely heavily on the resources and goodwill of their counterparts. 2. Likely dilution of the brands, yet firms spend huge amounts of money in trying to develop their own brands. 3. When firms work together on a project, there is likely to be some sort of organizational culture clash between the businesses and this can lead to problems for the joint venture. Merger takes place when two firms actually agree to form a new company, such as the merger between the UKs British Petroleum and USAs oil company Amoco in 1998 to form BP Amoco, which since shortened to BP. Other examples of large mergers Daimler Benz and Chrysler (98), Hewlett-Packard and Compaq (2001), and Nokia and Siemens (06).

Takeover occurs when a company buys a controlling interest in another company, i.e. by buying enough shares in the target business to hold a majority stake. In order to entice shareholders of the target company to sell their shares, the price offered by the buying company is likely to be well above stock market value of the shares. Mergers and takeovers can benefit from several interrelated advantages: Greater market share Economies of scale Synergy Survival Diversification Mergers and takeovers can also suffer from some disadvantages: Loss of control Culture clash Conflict Redundancies Diseconomies of scale Regulatory problems Management buy-out (Leverage Buy out) a defensive strategy that many businesses use when faced with a hostile takeover. Involves the management team of the target business buying shares in the company to become the owners, or part-owners, of the business thereby preventing it from being taken over. ! Franchises Analyse the advantages and disadvantages of a franchise for both franchisor and franchisee If a person wants independence, but is better at carrying out or improving someone elses ideas than their own, franchising might be the ideal solution. Franchise form of business ownership whereby a person or business buys a license to trade using another firms name, logo, brands, and trademarks. In return for this benefit, the purchaser of a franchise (franchisee) pays a license fee to the parent company of the business (franchisor). In return, the franchisee pays a royalty payment. The benefits to the franchisor: ! using the specialist skills of a franchisee ! the market is increased without expanding the firm ! a fairly reliable amount of revenue (because royalties are based on turnover not profits, money is guaranteed even if a loss is made by the franchisee) ! risks and uncertainty are shared. The advantages to franchisees: ! the franchisor might advertise and promote the product nationally ! they are selling a recognized product so the chance of failure is reduced ! services such as training and administration may be carried out by the franchisor.

Disadvantages of Franchising Franchising is not without its problems. o The royalty must be paid even if a loss is made. o Franchisees may be simply branch managers, rather than running their own businesses, because of restrictions in the agreement. o The franchisor has the power to withdraw the agreement and in some cases, prevent the franchisee from using the premises in future. Evaluate the use of franchising as a growth strategy Franchising involves one business selling a license to others. The license allows one firm to use anothers name, product or service in return for an initial payment and further commission or royalties. This is a quick and relatively easy way into foreign markets and it allows the franchiser a high degree of control over the marketing of its product. However, a share of the profit does go to the franchisee. Explain the value of the Ansoff Matrix as a decision making tool ! Ansoff Matrix Ansoff's Matrix - Planning for Growth. This well known marketing tool was first published in the Harvard Business Review (1957) in an article called 'Strategies for Diversification'. It is used by marketers who have objectives for growth. Ansoff's matrix offers strategic choices to achieve the objectives. There are four main categories for selection.

Apply the Ansoff Matrix growth strategies to a given situation Market Penetration Here we market our existing products to our existing customers. This means increasing our revenue by, for example, promoting the product, repositioning the brand, and so on. However, the product is not altered and we do not seek any new customers. Market Development Here we market our existing product range in a new market. This means that the product remains the same, but it is marketed to a new audience. Exporting the product, or marketing it in a new region, are examples of market development.

Product Development This is a new product to be marketed to our existing customers. Here we develop and innovate new product offerings to replace existing ones. Such products are then marketed to our existing customers. This often happens with the auto markets where existing models are updated or replaced and then marketed to existing customers. Diversification This is where we market completely new products to new customers. There are two types of diversification, namely related and unrelated diversification. Related diversification means that we remain in a market or industry with which we are familiar. For example, a soup manufacturer diversifies into cake manufacture (i.e. the food industry). Unrelated diversification is where we have no previous industry nor market experience. For example a soup manufacturer invests in the rail business. Ansoff's matrix is one of the most well know frameworks for deciding upon strategies for growth. 1.8 HL only --1.9 Globalization ! Multinational companies

Discuss reasons for the growth of multinational companies Globalization the integration of the worlds economies in terms of economics, sociology, and politics. For businesses, this means an attempt by firms to efficiently produce and sell the same products or services simultaneously in different countries. The outcome of globalization is that markets, cultures and tastes have converged at an accelerating pace. Factors contributing to the growth of globalization ! Liberalization of international trade ! Technological progress ! Deregulation ! Cultural awareness and recognition ! Language Multinationals (MNC) business organization that operate in two or more countries. Examples: Ford, Exxon Mobil, GM. Why become a multinational? 1. Customer base 2. Economies of scale 3. To avoid protectionist policies tariffs, quotas. 4. Cheaper production costs 5. Spread risks 6. Globalization of markets Read p. 157 Potential problems of expansion overseas

Analyse the role played by multinationals in the global business environment Globalisation has had many effects upon business throughout the world. The impact has not been evenly spread. Some provide opportunities whilst others present threats. 1. Competition 2. Meeting consumer expectations and tastes. 3. Economies of scale. 4. Choice of location. 5. Mergers and joint ventures. Read pp. 154-155 The effects of globalization on business activity. Evaluate the impact of multinational companies on the host country Create jobs Increase GDP Technology transfer Competition Social responsibility Unemployment in host country Takeover bids ! Regional trading blocs Explain the impact on business of a country being a member of a regional economic group/bloc Regional trading blocs (RTB) or regional economic blocs members strive to eliminate trade barriers on the movement of goods, services, labour and capital. p. 159-160 The main regional trading blocs around the world " The European Union (EU) " The European Free Trade Association (EFTA) " The North American Free Trade Agreement (NAFTA) " The Association of South East Asian Nations (ASEAN) " Closer Economic Partnership Agreement (CEPA) Trade creation takes place when a country switches from buying commodities from a high cost country to buying them from a lower cost country, following the formation of a RTB. Trade diversion results in losers in a trading bloc when a country switches form buying commodities from a low-cost country to buying from a higher cost country. Tariffs, a tax on imports, are one form of restriction. The effect of a tariff on products exported countries which impose them is to increase the price charged by businesses or to lower their profit margins. Quotas may also be used, which restrict the amount of a product that can be exported to a particular country or trading bloc. For individual businesses, quotas can mean that they can only export small quantities of their products, or indeed none at all, to countries which impose them. It is easier for businesses exporting aboard to compete with local businesses when they do not have to pay a tariff or have quotas imposed upon them.