Themes 1 to 4 Edexcel A Lvel Business notes

Im a Student that is predicted an A, made theme 2 to 4 myself and stole theme 1 off someone else. if you found this
and havent made notes yet, youve hit a goldmine! Enjoy!

Theme 1

The market - a place where buyers and sellers meet to exchange goods and services.

Marketing - the managerial process of identifying, anticipating and satisfying customer wants and
needs profitably.

Market share - a business’s total sales within the market as a percentage

formula - (sales / total sales) x 100

Market growth - increase in total sales within the market

formula - (change in sales / original 1 sales) x 100

Mass market - large unspecialised market where the products are aimed at the whole market.

advantages:

• large target audience • huge amounts of market research available • more competitiveness can lead
to higher levels of efficiency as firms try to become more price competitive • economies of scale •
increased brand awareness

disadvantages:

• high start-up capital costs to compete e.g. advertising • high amounts of competition • vulnerable to
changes in demand • harder to meet specific needs

Niche market - small targeted / specialised market which allows the supplier to meet the individual
needs of the customers.

advantages:

• less competition • higher consumer satisfaction - repeat customers/ brand loyalty • meets the market
demand easier

disadvantages:

• threat from larger potential competitors • specialisation leads to smaller profits • prone to changes
in trends

Brand - a unique company image that differentiates from the rest of the market / other suppliers.
• can portray quality • consumers know what to expect • brand importance can exceed the importance
of the price • can be used to add value

Market research - the collection and analysis of data and information about consumers, competitors
and suppliers to inform a business about its market.

Primary research - data collected first-hand about the market that didn't exist before.

Secondary research - data collected by someone else about the market / data that already existed.

Quantitative research - statistical data.

Qualitative research - non-statistical data that looks at opinions.

Segmentation - the breaking down of a large homogeneous market into smaller easily identifiable
sections that have similar wants, needs and demand characteristics.

Demand - the amount a customer is willing and able to buy at a given price.

Factors affecting demand:

• price of complementary goods • price of substitute goods • trends • seasons • income • laws

Supply - the amount a producer is willing and able to sell to the market at a given price in a given
period.

Factors affecting supply;

• changes in cost of production e.g. increase in the price of raw materials • laws

• changes in technology • external shocks • government subsidies

Price elasticity of demand (PED) - a measure of how quantity demanded reacts to a change in price.

formula - %change in QD / %change in price

PED < 1 = inelastic

PED > 1 = elastic

factors that affect PED:

• degree of product differentiation • branding and loyalty • necessity / is is addictive

Income elasticity of demand (YED) - a measure of how quantity demanded reacts to a change in
income.
formula - %change in QD / %change in income

Normal good - as income rises QD rises

Luxury good - as income rises QD rises more than proportiant to income

Inferior good - as income rises QD falls

Design mix:

• aesthetics - look and feel etc. • economic manufacture - does it harm the environment? etc. •
function / quality - is it fit for purpose?

Sustainability:

• Ecological – non-damaging to the environment • Equitable - no promotion of inequality in society •

Economical - firm takes responsibility for the long term economic development.

Marketing mix - refers to the set of actions or tactics that a company uses to promote its brand or
product in a market.

Includes: Price, Product, Place and Production

Price - reflects the brand, quality and values as well as the amount the customer pays.

Pricing tactics - the day to day changes you can make to prices to achieve targets.

Pricing strategy - process by which a business plans to change the amount paid by the customer in
the medium to long term.

Price skimming - setting the initial price high to cover their costs leaving the option to lower the
prices in the future.

advantages:

• item seen as more valuable due to the higher price • promotes exclusivity • covers high costs
quicker

disadvantages:

• some customers put off by the higher prices • if the price falls the company’s image may also fall
and be less valuable • falling price may annoy those customers who paid premium prices / removing
exclusivity

Price penetration - setting the prices low to gain market share with the intentions of raising those
prices later.
advantages:

• lower costs can lead to higher sales as the product is more affordable • economies of scale due to
more being produced to deal with high levels of demand • stores may provide high distribution levels
and maintain good in store displays

disadvantages:

• product may look cheap leading to a decline in the brand image • mass market pricing may make it
harder to sell products in high end stores • price reflecting values may cause customers to be price
sensitive

Pricing strategies for existing products:

Cost plus: unit cost + (% mark-up)

unit cost = total costs / quantity

Competitive: Price at market level or at a discount (Price takers)

However, this doesn't mean the cheapest on the market.

Predatory: price low enough to drive rivals out of business

Factors effecting price:

• Costs - costs up = price up • product differentiation • strength of the brand • level of competition •
PED • current stage of the product life cycle

Distribution - the process of getting the product from the producer to the right place for customers to
make their purchases.

Distribution channel - the routes through which the product passes from the manufacturing to the
customer.

Product life cycle - a model showing the sales of a product over time and that all products follow a
similar pattern.

stages: • intro • growth • maturity • saturation • decline

Extension strategy - an attempt to prolong the life cycle of a product by preventing decline and
prolonging saturation e.g. re-packaging, discounting etc.

Product portfolio analysis - examines the market position of a company’s products and places them
on a matrix in terms of their market share and the market growth.
• Stars - high market share and high market growth • Cash cows - high market share and low market
share • Question marks - low market share and high market growth • Dogs - low market share and
low market growth

Recruitment and selection - the process of filling an organisations job vacancy by appointing staff.

Job description - outlines what the job entails / what the applicant needs to do e.g. responsibilities.

Person specification - what qualities / qualifications a person needs for a job role.

Internal recruitment - when candidates for a position are recruited from within the organisation e.g.
promotion.

benefits:

• cheaper - little to no advertising needed • faster - candidates are already know e.g. personal
qualities etc • person already knows about the business and feels comfortable • improved promotion
prospects

limitations:

• higher costs • may be awkward for those candidates who don't receive the job • reduces the talent
available to them

External recruitment - when candidates for a position are recruited from outside the organisation.

benefits:

• increased talent available • increased number of applicants • can provide new sources of ideas to the
company

limitations:

• higher costs • may upset internal candidates • not able to see candidates at work over a period

Induction - training given to all employees at the outset of their contract when they are first
employed.

Shadowing - copying the actions of other employees

Mentoring - being allocated a more experienced employee to give advice and demonstrate tasks

Observation - watching a more experienced employee as they complete tasks

Job rotation - swapping duties with another employee in a different role to gain more experience
Off the job - taking the employee out of the immediate work situation but not out of the workplace
e.g. a conference room

Organisation structure - the relationship between different people and functions of an organisation

Chain of command - number of layers in the hierarchy within the organisation

Accountability - obligation of an individual with assigned responsibility and authority for a role to
disclose outcomes.

Division of labour - part of the job design process where processes are divided into distinct tasks

Span of control - the number of subordinates a manager must supervise directly

Tall structure - many levels of hierarchy, narrow span of control and long chain of command

benefits:

• everybody knows who they report to • known lines of communication • offers leadership and
guidance

Flat structure - few levels of hierarchy and wide span of control

benefits:

• more empowered • more trust of workforce • flexible working environment • more efficient/ lessons
the loss of communication

Motivation:

Taylorism:

Efficiency, speeds up the workforce, division of labour, assembly lines formed, incentives created
through higher wages, trade unions were banned, hard work equals good pay, workers were
supervised, workers were payed based on results, however workers had to endure tough, repetitive
work.

Maslow:

Hierarchy of needs:

• physical needs • safety needs • psychological needs • esteem needs

• self-actualisation

argument for Maslow:

• people react to a variety of stimuli which fall into these groups • people easily identify with those
groups

arguments against Maslow:

• Levels may not apply to all people • Self actualisation is rarely achieved • Some rewards fit more
than one level • It assumes that you must move up the hierarchy to be motivated

Herzberg:

Motivation factors - things that motivate, promotion opportunities, recognition, praise and
responsibility.

Hygiene factors - things that prevent demotivation, money and working conditions

Job enrichment - is a management concept that involves redesigning jobs so that they are more
challenging to the employee and have less repetitive work

Job enlargement - hire someone with the potential to do a larger job e.g. learning on the job and
increasing their skills

Job rotation - the ability to change from one job to another, enables employees to gain a greater
variety of experience by doing a range of alternative jobs

Leadership:

Autocratic - authoritarian, tell employees what to do and don't listen to what they have to say.

Democratic - like to include workers in their decision making, listne to employees and ensure they
contribute in discussions.

Management by objectives - clear goal agreed with staff, provides the necessary resources, day-to-
day decisions made by staff.

Laissez-faire - let it be - managers are either busy or lazy, time isn't taken to ensure junior staff know
what to do.

Paternalistic - manager is like a parent, tries to do what is best for staff, but decisions made by the
head.

McGregor:

theory x:
• workers are lazy • workers need to be pushed • workers avoid responsibility • workers have no
initiative • workers respond to threats

theory y:

• workers are keen • workers will work on their own • workers seek responsibility • workers seek to
show initiative • workers respond to rewards

Enterprise - the willingness to undertake new ventures and show initiative with a view to gaining
rewards.

Entrepreneur - a person who spots an opportunity and shows initiative and a willingness to take risks
to benefit from the potential rewards.

Sources of business ideas:

• spotting trends • identifying a market niche • copying ideas from other countries • innovation •
spotting a gap in the market

Opportunity cost - the next best alternative foregone

Barriers to entrepreneurship:

• lack of finance • lack of entrepreneurial capacity • responsibilities • legal / red tape • lack of ideas •
fear of failure • evasion to risk • corrupt or unsupportive government

Main business objectives:

• profit maximisation

• growth • social or ethical aims • survival

Unlimited liability - the finances of the business are inseparable from the finances of the business
owner

Sole trader - a business run and owned by one person with unlimited liability

advantages:

• complete lack of formalities • easy to set up • owner in complete control

disadvantages:

• unlimited liability • problems caused by the owner being ill or away from work • lack of finance -
banks may be less willing to give loans
Partnership - more than one owner, involves a partnership agreement to distinguish who gets what
within the business

advantages:

• extra owners share the risk • new partners can bring extra capital • partners bring in extra skills and
talents

disadvantages:

• unlimited liability • all partners are affected by the actions of another • potential for disagreements
between partners • decision making takes longer as each partner must be consulted

Limited liability - the legal duty to pay the debts of the business stays with the business

Private limited company (ltd) - needs shareholders to agree to any transfer in ownership of the
business shares

advantages:

• owners have limited liability • greater scope for raising capital • shareholders retain control over
who owns shares

disadvantages:

• accounts made publicly available at the company’s house • annual general meetings must take place
and be observed • limited potential for raising share capital

Public limited company (plc) - allowed to sell shares on the stock exchange

advantages:

• access to vast amounts of capital through stock markets • enhanced reputation • borrowing is easier
and cheaper

disadvantages:

• stock market demands may cause over-emphasis on short term objectives • potential for takeovers •
greater admin costs, both during and after flotation

Franchise - when a business (the franchiser) gives another business (the franchisee) the right to
supply its products and services

How is a franchise formed?

the franchisor sells the franchisee a licence to sell their products, often within a specific geographical
area. The franchisee will then sell the franchisor's products under the franchisor's name and
trademark. The franchisor will often continue to give support in exchange for a licence fee and
royalties on the products sold.

Franchisor

advantages:

• rapid growth • regular income

disadvantages:

• no longer doing their idea • relying on franchisee

Franchisee

advantages:

• minimises risks and failure

• fast to set up • given an area to operate • brand awareness • assistance from franchisor

disadvantages:

• rely on other franchise to uphold the image • lack of control • high start-up cost

Theme 2

2.1 – Raising Finance

Intro to finance links: Entrepreneur, leaders, sources of finance, cash flow and planning, sales
forecasting, budgets

Finance is the money used to run a business.

Working capital is the finance available for running day to day operations.

Financial concerns for start-ups:

·        How much the start up costs will be, from the idea to opening the stores doors.

·        How much running costs will be, fixed and variable.

·        How much revenue do you expect, down to forecasting.

Raising finance:
Once the business is set up, customers should provide all finance to survive but to expand or start
involves raising finance through short, medium or long-term sources.

·        Short term – under a year.

Bank overdraft – allowing the firms bank account to go into debt with the bank up to a limit.

Trade credit – suppliers agree on a future payment of a good they get now.

·        Medium term – 2-4 years.

Bank term loan – banks lend out money for a fixed interest rate and time-period to be paid back in.

Leasing – signing a contract to have another firm’s asset for an agreed time and payment monthly.

·        Long term – over 5 years.

Owners savings

Sales of shares – selling part of the business ownership.

Reinvested Profits

Venture Capital loans – loans from specialist providers which lend money for expansion or start-ups.

Sources of finance links: forms of business, liability, planning and cash flow, liquidity.

The need for finance; start-ups, growing or other situations such as cash flow problems.

Internal finance:

·        Retained profit

·        Sale of assets

·        Improved management of working capital

·        Owners savings

External sources of finance:

·        Family and friends

·        Banks

·        Peer to peer funding

·        Business angels – usually entrepreneurs willing to back high risk but high profit, new
businesses.

·        Crowd-funding – lots of small investments, usually done on through the internet.

·        Other businesses

External methods of finance:

·        Loans – borrowing from a bank.

·        Share Capital

·        Venture Capital – outside investors because the business can’t get a bank loan or raise finance
on the stock market.

·        Overdrafts

·        Leasing

·        Trade credit

·        Grants – handouts to small firms from local authority or government.

Liability and Finance links: business objectives, forms of business and sources of finance.

Unlimited Liability is where owners and liable for any debts of the business. Appropriate finance for
sole traders and partnerships are owner’s capital, bank overdraft or loan, leasing and trade credit but
mostly retained profit.

Limited Liability is where owners can only lose what they invested in the business. Appropriate
finance for PLC’s and LTD’s are share capital, bank finance, venture capital/business angels/
crowdfunding and trade credit/leasing but again, mainly retained profits.

Creditors - those owed money by a business.

Bank finance often requires collateral. This is an asset used as security for the loan.

Planning and Cash Flow links: Sources of finance and profit.

Business plan – a document setting out a business idea and showing how it is to be financed,
marketed and put into practice. This should be based on how it is going to achieve a competitive
advantage if the potential investor will become an investor in the future and should include:

·        Summary
·        The product/service

·        The market

·        Marketing plan

·        Operation plan – how will it be produced and sold.

·        Financial plan including cash flow forecast.

·        Conclusion

Cash flow forecast – estimating the monthly inflows and outflows of a business to give you the net
cash flow. Inflows are what comes into the business, outflows are what comes out. These are used to
calculate the monthly balance – inflow minus outflow, and the opening and closing balance showing
how much cash that firm has at the start and end of the month. The end balance from the month is the
start balance of the next.

Analysis of cash flow forecasts, three main ways:

·        Calculating the difference between the closing balance at the end of the period and the opening
balance at the start.

·        Use the monthly closing balance to assess trends in the data.

·        Analyse timings for cash flows, most include cash for goods at the time sold but some may use
trade credit.

Uses of Cash Flow Forecasts:

Negative Cash Flow – earn more cash

Positive Cash Flow – keep cash

·        Getting goods to the market asap.

·        Getting paid as quickly as possible.

·        Keeping stocks to a minimum – JIT

·        Leasing rather than buying equipment.

·        Renting buildings rather than buying.

·        Postponing expenditure on unnecessary extras.

Limitations of Cash Flow Forecasts:

·        Only as good as the data used to make them.

·        Risk of giving certainty when there is none.

·        Doesn’t allow for contingencies- things than can go wrong.

2.2 Financial Planning

Sales Forecasting Links: Market share, demand, Income elasticity, planning and cash flow, business
failure.

Sales Forecasting – a method of predicting future sales using statistical methods.

This forms the basis of other plans within the organisation: human recourses, cash flow forecast,
profit forecasts and production scheduling. These can be hard to predict at first but after a year or
two, managers are able to predict using trends. This leads to factors affecting sales forecasts:

·        Consumer trends – tastes and habits, demographics, globalisation and influence.

·        Economic variables – real incomes, exchange rates, taxation and inflation.

·        Competitors actions

Difficulties of sales forecasting is simply just not being able to predict the future, especially in the
long term.

Real income – changes in household income after allowing for changes in prices, e.g. inflation.

Sales, Revenue and costs links: sales forecasting, break even and profit.

Sales Volume is the number of units sold.

Sales revenue is the amount made form selling those goods, sales volume x price.

Cost of production:

·        Fixed costs – those that do not change due to the output.

·        Variable costs – those that change in line with the output of production.

·        Total costs – variable and fixed costs together at a specific level of output.

Break-even links: Sales, Revenue, costs and profit.

To calculate the break even point, you need to know:

·        Selling price per unit

·        Variable costs per unit

·        Total fixed costs

Contribution is the total revenue minus the total variable costs. So, Contribution per unit is the
difference between selling price and variable costs per unit:

Contribution per unit = Selling price per unit – Variable costs per unit

Break-even: Fixed costs / contribution. This is the point where revenue equals total costs, so no profit
or loss is to be made.

Margin of Safety – the amount by which current output exceeds the break event output. Can be
worked out using: Sales volume – break even output

Break even charts show different costs and revenues. Uses of these include: estimating future profits
from higher sales and assessing impacts of price or cost changes.

Limitations of Break-even analysis:

·        Simple – no benefit of bulk buying for example.

·        Assumes all output is at a single fixed price.

·        Assumes all output will be sold and not wasted.

·        Static model – doesn’t consider any changes in trends etc.

Budgets links: Planning and cash flow, sales forecasting.

Budget is a target for revenue (income budget as a minimum revenue) or cost (expenditure as
maximum for spending) that a frim or department must aim to reach over a period.

Purpose of Budgets:

·        Ensure no department over-spends.

·        Provides motivation to managers.

·        Enable spending to delegated roles.

·        Used as a measurement of success or failure in a period.

Types of Budget:

·        Historical budget – uses previous figures to create a budget.

·        Zero-based Budget – setting budgets at zero to force managers to justify all spending.

Variance – the amount by which the actual results differ from the budget.

Favourable Variance – a difference which boosts the firms profit.

Adverse Variance – a difference which damages the firms profit.

Difficulties of Budgeting is that the affecting factors to sales is often outside the hands of managers.
They also cost to make meaning it sometimes is worst to spend time and money on making a budget
in the first place when it isn’t stuck to.

2.3 Managing Finance

Profit Links: Sources of finance, Liquidity, Break-even, Sales, revenue and costs.

Profit = Sales revenue minus total costs OR Contribution per unit times Margin of Safety.

Three different types of profit:

·        Gross profit = Sales Revenue – Cost of Sales

·        Operating profit = Gross profit – fixed overheads

·        Net profit = Operating profit – other costs (corporation tax and net financing costs)

Statement of comprehensive income (profit or loss account) showing the total revenue over the year,
and all costs incurred in that year, giving us the three types of profit.

From the different types of Profit, we can measure the profitability using Profit Margins. This can be
used as a measurement against previous data or competitors.

Profit margin = Type of profit / Revenue (x100)

To increase Profitability, a business must increase profits by:

·        Increase Revenue

·        Decrease Costs

·        Do a combination of both above

Ways to do this are:

·        Increase the Price of the good

·        Cut Costs

Difference between cash and profit:

Profit is what the business makes minus its costs, this can be reinvested and is what the business
makes. Whereas, cash is the money the business has, this could be from the bank as a loan or could
be the profit from customers. Therefore, cash be the profit of the business, but profit is not cash.

Liquidity links: Sources of finance, profit and business failure.

Statement of Financial Income (balance sheet) – an accounting statement that shows an organisations
assets and liabilities on the last day of the financial year.

Liquidity measures the ability of a firm to find cash to pay its bills.

Current Ratio: Current Assets / Current Liabilities: 1

Accountants suggest the ‘ideal’ current ratio to be 1.5:1. Any higher would mean the organisation
has too many recourses. Any lower than 1, the firm may not be able to pay its debts causing issues.

Acid Test Ratio: (Current Assets – Inventories) / Current Liabilities: 1

Accountants suggest the ideal acid test ratio is 1.1:1. Any lower may cause short-term debts a
problem to pay, but, any higher wouldn’t be an issue other than a possibility of wasted cash which
could be reinvested.

Ways to improve Liquidity:

·        Selling under-used fixed assets

·        Raising more share capital

·        Increasing long-term borrowings

·        Postponing planned investments

Working Capital (Cash) = Current Assets – Current Liabilities OR the day to day finance for a
business.

Managing working capital involves making sure cash in the business is sufficient for any
requirements at any time.
Working Capital Cycle – how long it takes for a complete cycle from cash out to cash back in form a
customer payment. Example:

Capital injected into the business at any stage. Then a constant cycle from raw materials, produced
goods, selling to customers on credit, customers pay up, then back to more raw materials.

Managing working capital is therefore about two things: ensuring the business has the correct finance
and, keeping cash moving around the cycle.

Uncertainty means a business needs to ensure enough cash for its usual working capital
requirements, as well as the allowance for any unexpected events or a little-used overdraft facility,
for example bad weather in the summer. This is known as contingency finance.

Businesses should manage its working capital through:

·        Controlled cash usage

·        Minimise spending on fixed assets

·        Plan by estimating future working capital needed

Business Failure Links: Liability and finance, planning and cash flow, profit and liquidity.

Business failure is the inability to keep the business going, either because of the inability to keep up
with bills/liabilities or because the profits aren’t worth continuation.

Administration – when the directors of a business feel forced to hand over management control to an
administrator because of the threat of insolvency, they may try and sell the business or close it down
and sell its assets.

When a business falls into administrations, the same key Internal causes are usually to blame:

·        Market failure

·        Financial failure

·        Systems failure

External causes:

·        Fundamental change in technology

·        Effective competitors

·        Economic change

·        Behaviour of Banks

Financial causes:

·        Running below break even

·        Cash flow crisis

·        Overtrading – when a business expands to quick for its capital

Non-financial causes:

·        Sudden urge of competitions products

·        Steady sales decline

2.4 Resource Management

Resource management requires planning and control at every stage in the supply chain, form
purchasing to consumer delivery.

Production, productivity and efficiency links: Supply, Approaches to staffing and capacity utilisation.

Production measures the quantity of output.

Productivity is a measure of efficiency, calculated by dividing output by average number of staff.

Methods of production:

·        Job – tailor-made to suit an individual’s needs.

·        Batch – producing a set number of identical items.

·        Flow – continuous production of a single item, usually using a production line.

·        Cell – group working to produce similar products but with flexibility for specialisation.

Factors influencing Productivity:

·        Level of investment in modern equipment.

·        Ability level of those working.

·        Employee motivation

Factors influencing efficiency:

·        Level of wastage in the production process.

·        Level of technology being used.

·        Comparison between efficiency and the cost.

Capital intensive production is done by machinery, has high barriers to entry and high percentage of
costs as fixed. Example could be tinned Heinz beans.

Labour intensive production is done by humans, labour costs are a high percentage of total costs and
has low barriers to entry. Example could be a McLaren F1 racing car.

Capacity Utilisation Links: Staffing and production, productivity and efficiency.

Capacity Utilisation measures a firm’s output level as a percentage of the firms maximum output.
Said to be best at around 90%

CU = Current Output / Maximum possible output (x100)

Implications of under-utilisation:

Fixed costs stay the same so increase cost of product, so CU has an inverse effect on costs per unit.

Implications of over-utilisation:

If demand increases then supply will not be able to meet, enabling competitors to benefit. Struggle to
train staff or service machinery as no time to do so.

Ways of improving Capacity Utilisation:

·        Increase Demand through promotion or price cutting.

·        Cut capacity by rationalisation

Rationalisation is reorganising to increase efficiency.

Stock Control Links: Markets and equilibrium, sales forecasting, liquidity, Production, Productivity and
efficiency.

Stock can be raw materials, work in progress or finished goods.

Buffer stock is the desired minimum stock level which is held in case of emergency.

Re-order level is the point at which new stock is ordered from the supplier automatically.

Implications of poor stock control:

Too much:

·        Opportunity cost of holding wealth in the business prevents capital in other ways.

·        Cash flow problems (slow moving)

·        Increased storage costs

·        Increased finance costs if stock is paid for through borrowed capital.

·        Increased stock wastage for stock that can go out of date.

Too Little:

·        Lost orders through demand being higher than supply.

·        Worker downtime – paying staff not to do anything because supplies aren’t available.

·        Reputation loss.

Therefore, the optimum level of output is where a firm’s cost of holding stock is the lowest.

Just-In-Time (JIT) is a Japanese system of stock control which is the attempt to operate with zero
buffer stock by making sure all supplies are on time for production or selling. However, this puts
pressure on suppliers and everyone involved in the business to work more efficiently.

Waste minimisation uses JIT, so no stock is wasted by keeping it in the buffer stock too long.

Lean production aims to produce more using less, by eliminating all forms of waste (anything that
doesn’t add value) from a product. This is a process of continuous refinement that:

·        Maximises staff input

·        Focuses on quality

·        Minimises wasted resources

·        Focuses on having a competitive advantage

Which results in:

·        Higher levels of productivity

·        Requires less stock

·        Creates marketing advantages from fewer defects

Quality Management Links: Product and service design, marketing strategy, competitiveness and
production.

Quality means providing what the customer wants, to the right standard and at the right time giving
high customer satisfaction. This can often be a trade-off between price which is accpected by
customers.

Methods of Improving Quality:

·        Quality Control (QC) – traditional way using inspection at the end of the production process.

·        Quality Assurance (QA) – system that ensures quality at each stage of the production.

·        Total Quality Management (TQM) – considers quality throughout the whole business.

·        Quality Circles – group of staff meet up regularly to identify problems in the production
process and recommend any adjustments that could be made

·        Zero Defects – getting things right the first time.

Kaizen (continuous improvement) – employees in the production process have two jobs, to complete
their production stage and to look for ways of improvement. Used for productivity as well as quality.

Good quality will:

·        Generate high levels of repeat purchase and therefore a longer product life cycle.

·        Allow brand building and marketing benefits in the future.

·        Allow a price premium which is greater than additional costs.

·        Make products easier to place because retailers are more likely to stock reputative products.

2.5 External Influences

Economic Influences’ Links: Demand, Supply, Income elasticity of demand, Role of an entrepreneur.

The economy is the state of a country or region in terms of the production and consumption of goods
and services and the supply of money. The economic climate is the atmosphere surrounding the
economy, so, economic influences deal with changes in the economy and how they affect different
businesses, these include:

·        The business cycle

The process of boom and slump, when the economy is growing rapidly, confidence increases which
is great but may result in a bust (2009). Recession – where economic growth is negative for more
than half a year – is also bad. Business may run out of cash and employees see wage cuts or
redundancy.

·        Inflation

Inflation measures the percentage annual rise is GDP or average price. This affects cash savers such
as pensioners, and the reduction of value in employee wages. Inflation is measured using the
consumer price index (CPI). Effects on business include; benefits from those with large loans,
damages profitability for fixed price contracts and global competitiveness will be affected if inflation
is higher here than elsewhere.

·        Interest Rates

Interest rate is the percentage added to saved or borrowed money. For firms, the level of interest rates
is important because its affects consumer demand, especially for goods bought on credit – higher the
interest rate the lower the sales, can change operating costs because of the changes in overdraft rates,
and the level of investment. Investors will be safe and keep their money in banks with high interest
rates rather than risks in businesses.

·        Exchange rates

Exchange rates measure the price of one currency expressed in another. Use spiced or wpidec to
work out how it affects different types of business, either export or import heavy. SPICED – Strong
Pound Imports Cheap Exports Dear, WPIDEC – Weak Pound Imports Dear Exports Cheap.
Therefore, importers like a strong pound, whereas exporters like a weak pound.

·        Taxation and Government spending

Increasing tax can also take spending power out of the pockets of consumers, so prices cannot rise as
demand isn’t high enough. 40% of the economy comes from government spending on the public
sector. They can reduce this to increase redundancies and dampen consumer spending to keep prices
for rising sharply. Therefore, businessmen keep an eye on planned government actions, so they can
also plan for these changes.

Economic Uncertainty is because no one can predict what will happen in the future. This leaves
business plans for the year to be with little certainty of the economy, and even less certainty about
economic variables that have previously seen massive fluctuations including: economic variables,
rates of economic growth and the value of oil. So, all businesses need to make sure cash balances are
high enough for freak fluctuations.

Legislation Links: Managing people, business objectives and economic influences.

Legislation is defined by laws initiated by government but passed by parliament that relate to
business operations.

·        Consumer protection

Law designed to ensure consumers are treated fairly by companies they buy from. The main two acts
that are most important here are the sale of goods act and the trade descriptions act. These ensure a
level playing field with competition.

·        Employee Protection

Laws designed to protect employees at work. These include minimum wage, contracts, sick pay and
redundancies. Easiest law to remember is the National Minimum Wage legislation in 1999.

·        Environmental Protection

Laws that are put in place to restrict businesses to how much they may damage the environment
through landfill or processes of production for example. This limits business but has no benefit to
them.

·        Competition Policy

The Competition and Market Authority (CMA) are a government funded organisation to investigate
merges and takeovers, anti-competitive practices and cartel offences. Cartels are an agreement
between producers to control supply thereby control prices.

·        Health and safety

Legislation that is designed to protect employees and customers in the workplace. This is given by
the Health and Safety at Work Act in 1974. This means they must provide a safe environment to
work in and planning for any dangerous events that may occur.

Competition Environment Links: Demand, PED and pricing strategies.

Degree of competition in a business:

·        One dominant business (Monopoly)

These are bad for consumers, they restrict choice and increase prices. But, great for the business.

·        Among a few giants (Oligopoly)

They often have very intense rivalry, so price competitiveness isn’t often on the cards, this would
lead to a price war if both firms continue to cut prices. But, gains in market share result in loss of
market share for competition, which is good for them.
·        Fiercely Competitive Market

These are made up of many small firms who each compete against each other. This means high
product differentiation or monogenous goods that are very reluctant on price. Therefore, firms must
cut production costs as much as possible.

Market size:

·        Big Markets suffer from serious competition.

·        Small markets are often oligopolies as there isn’t much room for any more.

Changes can come from new entrants or competitors going out of business, or because the market
size is changing.

Responses to change:

·        Price cutting

·        Increase product differentiation, through a nicer design or new features.

·        Collusion – fixing prices with competitors, however, this is illegal.

Theme 3

3.1 Business Objectives and Strategy

Corporate objectives Links: Corporate strategy, Swot Analysis, reasons for staying small and corporate
influences.

Aims are the generalised statement of where a business is heading. These act as the basis to setting
objectives.

Mission Statement is a short passage of text that sums up an organisations mission. A mission is the
aim expressed in an inspiring way.

Hierarchy of objectives:

·        Business aim

·        Mission statement

·        Corporate objectives

·        Functional objectives

·        Individual targets

Influences on business missions:

·        Purpose – why it exists

·        Strategy – competitive position of the business

·        Values – what the company believes in

·        Standards and behaviours – policies and expected employee patterns

However, mission statements are usually too brief and can often just be an exercise of public
relations. They often try to give a purpose to the business which isn’t quite real.

Corporate Strategy Links: corporate objectives, Swot analysis, reasons for staying small and corporate
influences.

Corporate strategy provides a medium to long term plan for meeting company-wide objectives. This
sets out the actions, so the goals of the business can be achieved.

Hierarchy of strategies:

·        Corporate – major issues concerning corporate objectives usually based on industry

·        Unit – address issues within that industry

·        Functional – developed to best achieve the objectives by senior managers

Ansoff’s Matrix is a marketing planning tool used to identify the best suited strategy for a firm.

·        Market Penetration is about increasing market share.

·        Market Development is about penetrating new markets with existing products

·        Product Development is about launching new products in your current market

·        Diversification is the riskiest. It is outside its known market with new products.

Porters Generic strategy matrix aims to give a strategy in every market that will prove effective,
either low-cost operator of highest differentiation.
Portfolio Analysis is the process of reviewing all assets within a business and allocating the best
marketing strategy for each to best help decision-making.

Distinctive capabilities are ways a firm operates that cannot be copied by rivals. These are usually
previous strengths of a business but can have other influences:

·        Operational skills within the business

·        Ability to learn from mistakes and/or successes

Decisions are often long term and strategic or short term and tactical.

SWOT Analysis Links: Corporate objectives, external influence, competitive environment, corporate
influences and causes and effects of change.

Swot Analysis investigates a company’s current strengths and weaknesses and uses them to help
foresee future opportunities and threats.

When assessing internal factors, KPI’s are used. These are key performance indicators, of which the
most common are:

·        Sales revenue

·        Market share

·        Capacity Utilisation

External considerations:

·        Demography – factors relating to the population. E.g. percentage of elderly.

·        Laws and regulations

·        Technological changes

·        Commodity prices

·        Economic factors

Lobbying – electors talking to their local MPs to change things in parliament for business
advantages.

Impact of external influences links: corporate objectives, corporate strategies, competitive environment,
growth, corporate influences and causes and effects of change.

External influence is a factor beyond a firm’s control that can impact performance. PESTLE is the
best way to analyse these:

·        Political – the way the government change that can affect business.

·        Economic – all factors from the economy can affect business, e.g. exchange rates, interest rates,
inflation and unemployment levels.

·        Social – changes in social behaviour and attitudes.

·        Technological – new or changing technology affecting production, communication etc.

·        Legal – changes in the law on business, for example minimum wage. Lobbying can influence
government decisions though; a lot of money is spent on this by large businesses.

·        Environmental – looked at in a short and long-term view. Short term is about the pollution in
the area, long-term is about global warming.

The competitive environment is always changing, whether it’s a fast (dynamic) or slow (stable). Big
factors that lead to changes in competitive environment include:

·        Product life cycles

·        Changes in consumer tastes

·        Globalisation

·        Profit pressures

Porters five forces is a framework to analyse the competitive environment within an industry. (Never
Buy **** Substitutes)
3.2 Business Growth

Growth Links: Corporate objectives, corporate strategy, competitive environment, reasons for staying
small and international trade.

Reasons for growth:

·        Increase profitability – increasing the size of a business often means it will sell more and make
more revenue and profit.

·        Achieve economies of scale – the more you produce, fixed costs spread meaning lower unit
cost per item. Internal – within the business. External – in an industry.

·        Increase market power over customers – market dominance means you can charge higher
prices.

·        Increase market power over suppliers – negotiations over prices and timings for such big
orders, even paying less than the agreed price.

·        Increase market share and brand recognition – this can only be done by taking away form
competitors, but one will lead to another.

Problems arising from growth:

·        Diseconomies of scale – factors that cause costs per unit to rise, including:

·        Poor internal communication

·        Poor employee motivation

·        Poor managerial communication

·        Overtrading – a cash flow problem where cash is not present when growth is too quick.

Organic growth Links: external influences, growth, merges and takeovers, reasons for staying small.
Organic growth comes from within the business. Safer but slower. However, the only way to grow
organically is to raise finance to fund expansion through building a brand and selling more.

Inorganic growth comes from outside the business. More risk but more reward if successful.

Advantages of organic growth

Disadvantages of organic growth

·        Keeping it personal

·        Minimising financial risk

·        Providing a secure career path

·        Difficulty of getting the scale of competition

·        Many products have short life cycles

Mergers and Takeovers Links: Ansoff’s matrix, external influences, growth, culture and leadership.

Merger is where two similar firms join to create one new firm.

Takeover or acquisition is when acquires the control over another.

Reasons for inorganic growth:

·        Fast growth

·        Cost synergies (saving)

·        Diversification – entering new markets with new products, spreads risk.

·        Market power

Types of integration:

·        Backward Vertical – supplier

·        Forward Vertical – customer

·        Horizontal – competitor

·        Conglomerate – unrelated business

Disadvantages of Takeovers:

·        High cost

·        High failure rate

·        Culture clash

·        Structure clash

·        Employee demotivation

Reasons for staying small links: organic growth, motivation, mergers and takeovers

Small business employs less than 50 people and has a sales turnover less than £6.5 million.

How small firms Survive in competitive markets:

·        Differentiation/USP

·        Flexibility in response to customers – easier to change.

·        Customer Service – making sure employees offer the best.

·        E-commerce/M-commerce – selling online allows more customers.

3.3 Decision Making Techniques

Quantitative Sales forecasting Links: sales forecasting, external influences, investment appraisal and
scenario planning.

Sales forecasting forms a basis for all other planning within the organisation; human resource, cash
flow etc. However, a new business will not be able to forecast accurately due to no past data. A
business must survive the first year or two to be able to interpret sales data and figure out trends. The
three main methods of forecasting are:

·        Moving Averages

The moving average uses previous and current data to show the average sale in a previous time scale.
For example, the three-month moving average number of sales for February is the actual number of
sales for January, February and March added together and divided by three. This is used to
‘smoothen’ out fluctuations in sales due to seasons or just freak figures so that a trend can be
established and forecasted from.

·        Extrapolation
This is the simplest way of predicting future sales as it only uses past data, done by basically just
extending the line of trend.

·        Scatter graphs and correlation

Using scatter graphs to find the correlation between sales and advertising for example, is a great way
to find out if advertising is working. A useful technique is to look for the line of best fit showing
whether correlation is positive, negative or has none.

Limitations of Quantitative Sales Forecasting:

·        Only works if the past data shows trends.

·        Does not consider other uncertain factors in the future:

·        New competitors

·        Sudden waves in demand (good or bad)

·        Weather changes

·        New laws

·        Changes in the organisation.

Investment Appraisal Links: corporate objectives, quantitative sales forecasting and decision trees.

Investment appraisal uses predicted future cash flows to estimate the value of an investment using
quantitative data.

·        Payback Period (Time)

This is used to work out how long it will take to pay back the initial investment. To work out the
payback period, a cumulative cash flow needs to be created, from this we can see when the business
starts to make a profit after the investment has been paid off.

In most scenarios the payback is not exactly 3 years or 15 months. The cumulative cash flow is most
likely to become positive at some point through a length of time. Therefore, we must calculate how
many moths into a year, or how many weeks into a month.

When doing this, we should leave the answer to two significant figures, and always write what length
of time you are stating it to be in.

For example:

Years:
Cash in

Cash out

Net Cash flow

Cumulative NCF

(80)

(80)

(80)

30

15

15

(65)

40

17

23

(42)

45

27

18

(24)
4

60

24

36

12

70

30

40

42

Here we can see the cumulative net cash flow becomes positive at some point in year 3 as it is well
over zero in year 4. To work out many months, we use the (24) and divide it by the 36, then times it
by 12 as there is 12 months in a year. Therefore, we get an answer of 3 years, 8 months.

·        Average Rate of Return (%)

ARR compares the average annual profit of an investment expressed as a percentage which is then
often compared with others or the preferred rate.

We must work out the total profit over the given period, done by the total of the net profits minus the
initial outlay. This is then divided by how many years the investment project forecast has given, then
applied to the formula: ARR = average annual profit / initial outlay x100.

For the example above: 122 is the total profit, minus the initial investment we get 42. 42 divided by
the number of years, 5, is 8.25. This is then put into the formula to work out the ARR which is
8.25/80 x100 = 10.31%.

·        Net Present Value of Discounted Cash Flows (£)

NPV uses cash flows but works out the future value of this currently. This is done by multiplying the
net cash flow by the discount factor for that year which is worked out by interest rates. This is then
used in a cumulative net cash flow to see if the investment project can make a profit in the future
with the value of money now.

Using the example above and the discounted cash flows of 4% each year:
1

0.96

0.92

0.89

0.85

0.82

15

23

18

36

40

14.4

21.16

16.02

30.6

32.8

-65.6

-44.44

-28.42

2.18
34.98

Therefore, the NPV is 34.98 meaning it should be taken as a project as its makes a profit using future
value of money if the discount factors are correct.

Limitations of Investment Appraisal:

·        Only uses forecasted cash flows which may be wrong

·        Only NPV takes the time value of money into account

·        NPV can be misunderstood and hard to calculate

·        Takes time to forecast and calculate

·        Each method only focuses on one thing; time, profit or opportunity cost.

·        Other factors affect decisions; objectives, finances, confidence and social responsibilities.

Decision Trees Links: Corporate Strategy and Corporate influences.

Decision trees are diagrams that sets out all the options available when making decisions, including
an estimate of their likelihood of occurring.

Square shows the decision that needs to be made. The Circle shows the choices of a decision, and the
triangles show the expected outcome for each. This can be used to work out which is the best
decision if an accurate revenue for each choice is given.

From the Revenues, we work back to find the expected value for each outcome, then add these
together for the total revenue for each decision. By deducting all costs from each decision, we can
work out which is the better choice. For this example, it would be outdoors.

Decision trees allow for uncertainties and force managers to think of all approaches and the
probability of them occurring. However, decision trees use estimations, so it may be unreliable.

Critical Path Analysis Links: Corporate Strategy, human recourse and Scenario planning.

CPA is based on a networks diagram that sets out which activities within a project can be done
simultaneously and which must be consequently, making the critical path clear.
The Network shows; the order each task must take, how long each stage should take and the
earliest/latest dates the activity can start/finish.

Rules when working with CPA’s:

·        Must start and end at a single node.

·        No lines should cross

·        All lines must be an activity

Nodes:

1.      Node number

2.      EST – when the next activity can start by.

3.      LFT – when the previous activity must finish by.

Lines: above is the activity, below is the duration, these link the nodes together.

·        EST – work out first and do it from left to right = the biggest value given by the previous EST’s
plus the duration of the lines activity.

·        LFT – work out last and work form right to left = previously worked out LFT minus the
duration of the activity connecting them.

·        Critical path is the route taken where there is no float, basically where EST=LFT. Noted by a
‘//’ along each activity line.

·        Float is the spare time available when completing an activity that won’t affect the overall time
of the project. Total Float = LFT – duration - EST

Benefits of CPA

Drawbacks of CPA

·        Should smoothen the project.

·        Simultaneous events make the project shorter.

·        Recourses can be ordered in advance.

·        Gives implications if things go wrong.

·        Complex project (time).

·        Does not ensure effectiveness if not managed correctly.

·        Only manageable on small projects.

Influences on Business Decisions

Corporate Influences Links: Corporate objectives, SWOT Analysis, ratio analysis, growth and key
factors in change.

Corporate Influences are internal factors affecting business decisions including short- vs long-
termism and scientific vs intuitive decision making.

Short-Termism is when the actions of managers show an obsession with immediate issues rather than
long-term ones.

Symptoms:

·        Inadequate expenditure on R+D

·        Accounting adjustments to inflate current earnings

·        High dividend pay-outs and Bonus’

·        Focus on inorganic growth

Causes:

·        Shareholders demanding profits.

·        Usage of performance measures rising

·        Threat of a take-over to make it more expensive

·        Bosses don’t understand the long term thinking perspective.

Effects:

·        Opportunities being ignored

·        Reluctant to invest in R+D, training and capacity.

·        Over-focus on today as the expense of tomorrow.

Long-Termism (German mittlestand) is where managers focus on the future when making decisions,
often over 5 years. This gives a focus of the business that isn’t just earning money as quickly as
possible.

Evidence-based decision making is mostly done by computers, using past data from last year and
week. Therefore, the computer making the decision based on numerical data that forecasts future
data.

Subjective decision making is done by intuition, meaning an estimate but without evidence.

Corporate Culture Links: Mergers and takeovers, reasons for staying small, business ethics, causes and
effects of change, factors in change and leadership.

Corporate Culture sums up the spirit, the attitudes, the behaviours and the ethos of an organisation. It
is embodied in the people who work there via traditions that have built up over time.

Strong Culture – shared values, trust in staff, sticking together and working together through a crisis.

Weak Culture – staff are untrusted, business values are just words not true, when things go bad
people leave showing no team involvement.

Handy’s Four Cultures:

·        Power

Small groups of power which is held at the top or the organisation, few rules but everything goes
through the boss, encouraged flexibility and often associated with an Autocratic Leadership.

·        Role

Power depends on the position held by the individual, many rules, regularity in promotion and very
bureaucratic. Often associated with Autocratic or Paternalistic Leadership.

·        Task

No single power source, power is given by the expertise of each individual in the groups formed to
complete projects which are made from staff within different departments. Very flexible and is often
associated with Democratic or Paternalistic Leadership.

·        Person

Everyone has shared power often because they have the same qualifications, encouraged to form
groups to share and enhance expertise. Often found in departments of a large organisation, or among
professionals. Associated with Democratic leadership.

How Corporate Culture is formed:

·        Leadership style

·        Ownership type

·        Recruitment policies

Key way to change the culture of an organisation is to have a clear and consistent message. If
everyone believes the change is worthwhile and going to benefit, they will support it.

Shareholders Vs Stakeholders Links: Corporate objectives, reasons for staying small, corporate
influences, ethics and long vs short term.

Shareholder is someone that owns a proportion of a companies share capital and therefore has a right
to vote in what the business does.

Stakeholder is anyone that has a vested interest in the company, this may be a shareholder or just a
customer. Two types of stakeholder:

·        Internal stakeholder is someone that is within the business, a member of staff, a manager or the
owner.

·        External stakeholder is anyone else with an interest, including the local community and
suppliers.

Stakeholder objectives can vary but most are focused on long-term investment, prefer actions to
boost sales rather than profit focused and like to see directors buy shares. This is means the business
is focused on all stakeholders when making decisions.

Shareholders objectives are most often profit focused, this means boosting sales and cutting costs.

Because of the differences between the two can cause disagreements between them. When
shareholders only want their share price to increase and high dividends to be payed out, this results in
no profit that can be reinvested. Because there is no cash to reinvest, the business will not be able to
seek stakeholder objectives.

Business Ethics Links: corporate objectives, corporate influences, shareholder vs stakeholder and
corporate culture.

Ethics are moral guidelines which govern behaviour. An ethical business has to consider all moral
responsibilities when decision making.

When making ethical decisions, this often results in a trade-off between ethics and profit. As
businesses need profit, they must make strategic decisions to avoid a loss and keep being ethical.

Benefits of behaving ethically:

·        Higher revenues – demand from positive consumer support

·        Improved brand and business awareness and recognition

·        Better employee motivation and recruitment

·        New sources of finance – e.g. ethical investors

Drawbacks of behaving Ethically:

·        Higher costs – e.g. sourcing from Fairtrade suppliers rather than lowest price

·        Higher overheads – e.g. training & communication of ethical policy

·        A danger of building up false expectations

Different business stances when it comes to ethics:

·        The amoral business - Seeks to win at all costs and anything is acceptable

·        The legalistic business - Will obey the law but no more than that

·        The responsive business - Accepts that being ethical can pay off

·        The ethical business - Ethical practice is at the core of the business

Corporate Social Responsibility (CSR) – a term intended to sum up all ethical activities of a
business.

Reasons for CSR:

·        Marketing Advantages

·        Positive effects of staff

Reasons against CSR:

·        Higher costs and therefore profitability

·        Reduced growth prospects

·        Potential of CSR being questioned/rejected

3.5 Assessing Competitiveness

Interpretation of Financial Statements Links: ratio analysis, shareholders vs stakeholder and key factors to
change.

There are two key financial statements:

·        Balance sheet (statement of financial position) – shows an organisations assets and liabilities at
a point in time.

·        Profit and Loss account (statement of comprehensive income) – shows a firm’s sales revenue
and all relevant costs in a time period.

A balance sheet has the following components:

·        Non-current assets

·        Current assets

·        Non-current liabilities

·        Current liabilities

·        Net assets = total assets – total liabilities

·        Total equity = net assets

Most stakeholders don’t have an interest in balance sheets as they’re often too confusing.

However, shareholders focus on the profit and loss account of a business, this includes:

·        Revenue

·        Gross profit = revenue – cost of sales

·        Operating profit = gross profit – overheads

·        Net profit before tax = operating profit – financing costs

·        Net profit after tax = net profit before tax – tax

All PLC’s legally have to publish their profit and loss account, this often means the account have
been ‘window dressed’, a legal way of making the accounts look better which is often done by very
well-paid accountants.

Ratio Analysis Links: Interpretation of financial statements, causes and effects of change.
Ratio analysis is an examination of accounting data by relating one figure to another allowing a more
meaningful interpretation of the data.

Liquidity Ratios:

This shows the ability of the business to repay its short-term debts or showing the availability of cash
in the business.

·        Current ratio = current assets / current liabilities: 1

·        Acid test ratio = current assets – inventories / current liabilities: 1

Gearing Ratio:

Gearing measure long-term liabilities as a proportion of the firm’s capital employed. It shows how
reliant the business is on borrowed money. Therefore, a high gearing ratio means higher risk.

Gearing = non-current liabilities / capital employed x100

Capital employed = total equity + non-current liabilities

Profitability Ratio:

Return of capital employed (ROCE) measures the efficiency with which the firm generates profit
from the funds invested in the business.

ROCE = operating profit / capital employed x100

The higher the ratio the better as it suggests the invested money is being used effectively. The main
idea is that it needs to be higher than interest rates, if it isn’t then investors will avoid the risk and
just keep their money in the bank.

Using the ratios to make business decisions can only really ask the question of can we afford it. The
rest of the decision can be decided using other techniques in investment appraisal or decision tress.
But, if they can afford it, there are three main ways:

·        Using working capital such as cash, but this will worsen liquidity ratios.

·        Borrowing capital, but this will increase gearing.

·        Sell assets to fund the investment, this will benefit ratios but increases risk when times get
tough.

Limitations of Ratio Analysis:

·        There are calculated as an average but often taken as facts.

·       

Human Resources Links: Corporate strategy, corporate culture, causes and effects of change, key factors
in change and scenario planning.

Human resources have many jobs including what jobs are needed, and who should fill those roles.
They also must calculate the following to help make business decisions:

·        Labour Productivity – measures the efficiency of each worker.

Output per period / average number of employees per period

Higher the figure, the higher the productivity.

·        Labour turnover – measures the rate of which staff leave a firm.

Number of staff leaving per period / average number of staff (x100)

Higher the figure, the higher the threat to the efficiency, culture and consistency.

·        Labour Retention – measures the rate of which staff stay in a firm.

Number of staff not leaving per period / average number of staff

Higher the figure, the better but sometimes good not to be 100% as new blood offers new ideas.

·        Absenteeism – measures the percent of absent staff days/ hours in a period.

Total absence (hours or days) in a period / total number (hours or days) in a period (x100)

Higher figure suggests staff are choosing not to go to work, which is not good.

Human resources have strategies to improve staff performance:

·        Financial rewards

·        Employee share ownership

·        Consultant strategies

·        Empowerment strategies

3.6 Managing Change

Causes and effects of Change links: external influences, growth, mergers and takeovers, reasons for stay
small, key factors to change and scenario planning.
Change is constant in business activity, however, most do not like change. Causes of change include:

·        Changes in organisation structure

·        Poor business performance

·        New ownership

·        Transformational leadership

·        External PESTLE factors

Possible effects of change:

·        Competitiveness (Porter)

·        Productivity

·        Financial performance

·        Stakeholders

Key Factors in change links: External influences, growth, culture, causes and effects of change and
scenario planning.

Key factors in a successful change are:

·        Organisational Culture – Starting with the key issues of the business and building on the
strengths of the existing culture is the only way to improve/change culture.

·        Size of the organisation – Large businesses often take longer to change but not always, small
firms may not have the flexibility and the finance to change.

·        Time and Speed of Change – slow pace change is incremental change; fast pace change is
disruptive change which is often done when there is no time for planning.

·        Managing Resistance to change – often done in a few methods as most staff do not want
change:

Education and communication (before) can be highly effective as it explains the need for change
before it happens. Participation and involvement (during) means staff feel more valuable and that
their ideas have helped. Negotiation and Agreement (after) gives incentives to those resisting change,
often a last resort to the staff involved with trade unions.
Scenario Planning Links: Corporate objectives, SWOT Analysis, growth, causes and effects of change
and key factors in change.

Scenario planning means visualising possible futures for a business, then planning how to get the
best out of the opportunities and how to deal with the threats.

Risk assessment:

1.      Identifying possible risks

2.      Quantify their possible cost to the business

3.      Attempt to quantify the probability they will occur

The main key risks business must plan for are:

·        Natural disasters

·        IT systems failure

·        Loss of key staff

Mitigating risk means taking actions to reduce the risk. No one can stop these completely, but the
following can be done:

·        Business continuity – planning how to restore things back to normal after major setbacks. It has
several aspects: making sure finance is available, staff know what to do and who they are to respond
to.

·        Succession planning – planning for when a leader needs to be replaced.

Contingency planning is when a second plan is thought of in case the first doesn’t work.

Theme 4

Globalisation

Growing economies Links: China vs India, international trade and growth, and reasons for global
mergers and joint ventures.

Globalisation is the growth of international trade that has made an increasing number of markets
global rather than national.

The UK economy has grown at around 2.25% for the past 200 years. At this level income doubles
every 30 years and is a good level for consistent long-term growth. However, emerging economies
often have growth rates a lot higher with rapid industrialisation occurring.
Economic growth can bring benefits for both individuals as well as businesses, trade opportunities
can arise, and more jobs can become available.

Indications of Growth:

·        GDP (PPP) – the value of all goods and services produced in a country over the course of a
year. Measuring this per person gives a good indication of changing in living standards.

·        Literacy rates – percentage of people who can read and write.

·        Health – the life expectancy and infant mortality rates.

·        Human development Index (HDI) – uses three pieces of data; standard of living measured by
Gross National Income, length of life, and education standards measured by the average years of
schooling.

Purchasing Power Parity (PPP) – adjusting income levels to allow for differences in the cost of
living.

China VS India Links: corporate strategy, SWOT Analysis, external influences, growing economies,
international trade and business growth, and assessment of a country as a market/production location.

China and India are the two most populous countries in the world, both have around 1.3 billion
people, more than 4x the size of the US. China has a higher fixed capital formation (investment in
long-term assets such as roads), whereas India has a higher balance of payments deficit (more
imports than exports) making it harder to grow.

Business Potential in Africa Links: growing economies, China vs India and international trade and
business growth.

Compared to the UK, most countries in Africa have a growth rate ten times less. Although the
opportunities in Africa could come with significant rewards if done correctly, the problems of doing
business will most often make it too risky:

·        Corruption

·        Poor infrastructure

·        Weak security

·        Inconsistent regulation / tax

International Trade and Business Growth Links: growing economies, factors contributing to increased
globalisation, protectionism, trading blocs, conditions that prompt trade, global competitiveness and
assessment of a country as a market.
International trade occurs when a firm either buys or sells goods or services to an overseas country.

Imports are products produced abroad but consumed domestically.

Exports are goods and services that are produced domestically but consumed overseas.

Business specialisation is when they choose to produce a limited range of products because they are
best at making these. When businesses do this, it often makes them more efficient because they can
produce more of the same product, using the same raw materials and machinery, making economies
of scale easier to achieve. This may lead to a competitive advantage, as costs are lower, or because
they are the only producer of that specific good.

Foreign Direct Investment (FDI) comes in two ways:

·        Inward – investment into the UK from companies abroad e.g. buying property.

·        Outward – investment from the UK into a country e.g. building a factory.

FDI can help a firm grow because it:

·        Decreases transport costs

·        Decreases export problems e.g. timing

·        Removes protectionist barriers

·        Allows access to natural resources

·        Can offer lower operating costs

Factors contributing to increased globalisation Links: growing economies, international trade and business
growth, protectionism, trading blocs, conditions that prompt trade, global competitiveness and
assessment of a country as a market.

Trade Liberalisation is when governments decide to remove international trade barriers. Trade
barriers are restrictions on international trade and include:

·        Tariffs – taxes imposed on imports

·        Quotas – annual restriction on the amount of a good that can be imported

Trade liberalisation can create opportunities for domestic importers and most goods will become
cheaper. However, Trade liberalisation opens the markets to foreign competitors making it harder for
domestic firms to compete.
·        Political Change can also contribute to increased globalisation, if the government is focused on
domestic growth, they may restrict international trade. This was the case for the communist china in
the 1950s, but in 2001 they joined the WTO which meant they had access to free trade in the rich
western markets.

·        Since the 1960s, transport costs have decreased massively. This has increased international
trade as transport costs cut into the exporters profit margins and pushed them away from selling
abroad. Fuel prices, better engines and better technology have all contributed to the decreased
transport costs.

·        Communication has now become a lot easier with the internet being available almost
everywhere worldwide, and phones being an everyday object.

·        Multinational Corporations (MNC’s) are businesses that operate in more than one country. An
example in Coca Cola, they have over 900 bottling plants and sell their product everywhere other
than North Korea.

·        Increased investment flows are when money moves from one country to another. This has
become much easier with the internet and global investors looking for the best returns worldwide.

·        Migration has always been a thing in human history but is still an important factor for
globalisation. Migrants may bring new skills to a country or are eager to learn new skills, so they can
become employable because they moved for a better life.

·        Labour costs vary from country to country and has helped operating costs fall for firms that are
willing to move elsewhere, known as offshoring.

·        Structural change can occur when economies change what they are producing. Globalisation
has changed economies worldwide. For example, Britain no longer exports as much but other
countries do.

Protectionism Links: growing economies, international trade and growth, trading blocs, conditions that
prompt trade, global competitiveness and assessment of a country as a market.

Protectionism means giving preference to home producers by making it harder and more expensive
for overseas competition.

·        Tariffs - tax

Tariffs are used to promote domestic producers as it makes foreign products more expensive.

·        Import Quotas – annual limit

Quotas are used to limit imports and therefore boost domestic produce.

·        Government legislation – laws that govern what is imported

This is done to stop foreign firms selling dangerous products, often because firms can be unethical.

·        Domestic subsidies – money given to domestic firms

This is done to keep domestic firms competitive in comparison to foreign firms and stop structural
unemployment. This is long-term because the workers’ skills become obsolete when an industry
closes down.

Protectionist measures can protect domestic firms, but this can lead to a trade war. This is where both
trading countries increase protectionist measures because the other does which can get out of control.

Trading blocs Links:

A trading bloc is an agreement between countries to have free trade within an external tariff wall.

The EU operates as a trade bloc which allows movement of goods as well as labour, this allows
countries that are booming to keep this up by selling to greater markets and being able to employ
skilled staff easier.

The ASEAN trade bloc covers most of south-east Asia, over the past 25 years it has seen a massive
boom with all countries seeing over a 250% increase in GDP per capita at purchasing power parity to
the US dollar.

The NAFTA trade bloc covers America, north and south. This enables free trade but also damages
the US from increasing at the rate they could because countries such as Mexico drag it down with
wages for example.

Trading blocs impact on business:

Advantages

Disadvantages

·        Creates a larger single market

·        External tariffs protect business from the outside world

·        Becomes necessary for governments to support trade with infrastructure

·        Free movement of labour increases employability

·        Competition increases meaning more pressure on firms

·        New rules and regulations have to be put in place

·        Reduce enterprise (new firms)

·        May cause common problems within geographical trade blocs

4.2 Global Markets and Business Expansion

Conditions that prompt trade Links: international trade and business growth, trading blocs, assessment of
a country as a market/production location and global competitiveness.

Push Factors tend to be about avoiding weaknesses or threats (have to move):

·        Saturated domestic markets (no room for growth)

·        Competition is too good (market share decreasing)

·        Product life cycle extension (decline in domestic markets)

Pull factors tend to be about the strengths and opportunities (want to move):

·        Economies of scale (selling more)

·        Possibility of offshoring and outsourcing (cheaper abroad)

·        Risk spreading (demand is spread across markets)

Assessment of a country as a Market Links: International trade and business growth, trading blocs,
conditions that prompt trade, assessment of a market as a production location and global
competitiveness.

Factors to consider:

·        Levels and growth of disposable income

·        Ease of doing business

·        Infrastructure

·        Political stability

·        Exchange rate

·        Location in trade bloc

Assessment of a country as a Production Location Links: Investment appraisal, international trade and
business growth, trading blocs, conditions that prompt trade, assessment of a country as a market,
global competitiveness and the impact of MNCs.

Factors to consider:

·        Costs of production

·        Skills and availability of labour force

·        Infrastructure

·        Location in trade bloc

·        Government incentives

·        Ease of doing business

·        Political stability

·        Natural resources

·        Likely return on investment

Reasons for Global Mergers or Joint Ventures Links: mergers and takeovers, international trade and
business growth, trading blocs, conditions that prompt trade, assessment of a country as a
market/production location and global competitiveness.

Global Merger is an agreement between two companies from different countries to join forces
permanently.

Joint Venture is an agreement between two companies from different countries to join forces for an
agreed period of time.

·        Spreading risk over different countries

·        Entering new markets and/or trade blocs

·        Acquiring brand names/patents

·        Securing resources and supplies

·        Maintaining or increasing global competitiveness

However, they do face the challenges of all other mergers and takeovers.
Global Competitiveness Links: Growing economies, international trade and business growth, trading
blocs, conditions that prompt trade and the assessment of a country as a market.

Movements in Exchange Rates can impact Competitiveness, this is because they affect the price of
the imported and exported goods. You can work out how firms are affected by using SPICED and
finding out where they import from and export to.

Competitive Advantage in two ways (Porter):

·        Cost leadership so you can charge lower prices.

·        Differentiation makes the brand/goods/services unique and in some way superior.

Skills Shortages are when firms are unable to recruit extra staff with the necessary skills. This is
often due to poor short-term decision making by firms and the government. Firms often try poaching
the additional staff from competitors by offering them more but this takes time and leads to higher
costs.

4.3 Global Marketing

Global marketing Links: International trade and business growth, assessment of a country as a market,
global competitiveness and global niche markets.

Glocalisation means operating as a MNC to keep the brand image but tailoring your
products/services to the local needs.

Different Marketing Approaches:

·        Ethnocentric – your market is the only way

·        Polycentric – international but localised if necessary

·        Geocentric – local view but international where possible

When deciding what approach to use, the Marketing Mix (4Ps), Ansoff’s Matrix and Boston Matrix
also have to be considered for each country as these will be different for all.

Global niche market Links: International trade and business growth, assessment of a country as a
market, global competitiveness, global marketing and cultural and social factors in marketing.

A niche market offers products that match closely to the requirements of a distinct minority within a
larger sector.

Cultural diversity influencers:

·        Economic factors – disposable income

·        Weather factors – different temperatures change lifestyle

·        History and tradition – diet, religion etc

These factors can lead to different interests (e.g. sports) and values (e.g. moral code).

Most niche markets can only become global when at the top (luxury and exclusive) end of the
market, perfume for example. Lower end niche market products often face cultural differences that
make it hard to do well in global markets.

This is the same with the marketing mix, at the top end of the market there is little adaption. To
achieve success is global niches that aren’t luxury, the product has to very localised meaning local
knowledge is essential. The differences in fashion, distribution systems, promotional methods and
attitudes to price have a massive influence.

Aspirational pricing is a method of pricing that ignores all costs and competition by setting the price
extremely high so those who want to show off their wealth can buy them.

Cultural and Social factors in global markets Links: international trade and business growth, assessment of
a country as a market, global competitiveness, global marketing and global niche markets.

Cultural differences can cause big mistakes in one country, but not the other. For example,
exchanging business cards before a meeting in china is the same as shaking someone’s hand in the
west. Advertisement globally can also cause accidental offence. Coca cola’s advert with beach volley
ball players in bikinis didn’t go down very well with the middle east who tend to cover their whole
body. This means most MNC’s now localise their advertisements.

Different tastes are also a massive factor, with Cadbury dominating the UK chocolate market but
Hershey dominating America.

Language can cause barriers when entering new markets. Learning some of the local language and
having translators is really important.

Unintended meanings come from language translations, although google can help us, word for word
translations can give the complete wrong meaning. This can be the same with branding as well.

4.4 Global Industries and MNCs

The impact of MNCs Links: growth, international trade and business growth, factors contributing to
increased globalisation and protectionism.

On the local economy:

·        Job creation – this can have a positive or negative on wages and working conditions.
·        Local businesses – often feel the pressure when competing against MNCs or can create new
business because there are many more workers in the area.

·        Local community and environment – good or bad.

On the national economy:

·        Foreign Direct Investment

·        Balance of payments – imports compared to exports

·        Technology and skill transfer

·        Business culture – can spread high ethical standards, or not.

·        Tax revenues and transfer pricing – corporation tax increases GDP

Transfer pricing is a way of minimising their worldwide tax by transferring their profits from high-
tax to low-tax companies.

Ethics in Global Business Links: Corporate objectives, corporate culture, shareholders vs stakeholders,
impact of MNCs and controlling MNCs.

Ethics are moral principles.

Stakeholders may conflict over ethical decisions as they feel being moral is more/less important.

·        Pay is often in line with supply and demand. If there is no demand for a job the wages are too
low, and the other way around. Therefore, paying at the rate of which people still want the job can be
justified.

·        Working conditions is an issue in the poorer countries that have no regulation.

·        Environmental considerations: emissions and waste disposal should be kept at a minimum.

·        Supply Chain considerations: exploitation of labour and child labour.

·        Marketing considerations: misleading product labelling and inappropriate promotional

activities.

Greenwash is the environmental equivalent to whitewash, a business that dresses itself up to pretend
to be environmentally conscious.

Controlling MNCs Links: growth, international trade and business growth, factors contributing to
increase globalisation, protectionism and the impact of MNCs.
Why they need to be controlled:

·        Safety concerns

·        Short-term resource extraction leaving the host country poorer

·        Traditional and local cultures weakened

·        Lack of commitment to the host country

How they are controlled:

·        Legal control

·        Pressure groups

·        Social media

However, MNCs can often have political influence on laws.