IB Business HL

Revision Guide and Notes

Unit 1: Business Organizations

Vocabulary
● Business: organization set up to provide good and/or services.

● Capital: refers to resources and assets that can generate value (cash, building, land, machinery,
equipment, etc) These resources facilitate the production of goods or services.

● Revenue: The amount of money coming into a business from the sale of goods or services.

● Asset: Things of value and either tangible or intangible. The treatment of intangible assets in
balance sheets is more difficult than the treatment of tangible assets. Tangible assets are real
and touchable and have a market value that can be generally agreed, e.g. land and buildings.

● Primary sector: first stage of production. Businesses involved in the extraction of natural
materials.
● Secondary sector: Businesses engaged in manufacturing and construction to create finished,
usable products.
● Tertiary sector: Businesses that focus on providing services to customers and other businesses.

● Private sector: Commercial sector of the economy, mainly owned and run by private individuals
and organizations that typically strive for a profit.
● Public sector: Controlled by regional and/or national governments. Provide goods and services
that are deemed to be essential and of benefit to its citizens.

● Entrepreneur: Someone who is willing to take financial risks by investing in a business idea.
● Intrapreneur: Someone who develops new products or services within an organization for the
benefit of the firm and its employees.

● Shareholders: Individuals that buy shares in a company, thereby owning the business as
part-owners they have the rights to a share of any profits earned.

● Stakeholders: Individuals, organization or groups with direct interest in the operations and
performance of a particular business or organization.
➔ Internal Stakeholders: Members of the organization, such as employees, manager,
directors, and shareholders.
➔ External Stakeholders: The local community, customers, suppliers, the government and
lenders that influence, and are influenced by, an organization but are not members of it.
Types of Businesses
● Sole traders: An individual who is the owner of their own business. They own and run the
business and are held responsible for its success and failure.
➔ Advantage: Quick to create without long term and expensive set-up procedures, the
owner has complete control over decision-making.
➔ Disadvantage: Finance is limited as the main source is provided by the owner. There is no
one else to share ideas, burdens or responsibilities.

● Unlimited Partnership: Much like a sole trader but is owned by two or more individuals who are
responsible for the company’s management of its assets and being jointly and severally liable for
its debts
➔ Advantage: There can be up to 20 owners, depending on the country, they can benefit
from having more ideas and expertise.
➔ Disadvantage: There may be disagreements and conflicts between the partners, the
profits have to be shared between the partners.

● Private Limited Partnership: A company that can only raise share capital from friends and family,
not the general public (people who are chosen by the board of directors). Directors can maintain
overall control over the business as they control the trading of shares in their company.
➔ Advantage: Limited liability, Partners can share the workload and responsibilities of
running the business.
➔ Disadvantage: May find it challenging to attract investment capital from outside
investors. If the partnership runs into financial trouble, general partners may be
personally liable for the partnership's debts and obligations.

● Microfinance providers: A type of banking service provided to unemployed or low-income

earners who would otherwise struggle to gain external finance.
➔ Advantage: Help those who are living in poverty, helps empower entrepreneurs
➔ Disadvantage: Small scale, may be unethical as they are earning profits from the poor.

● Private Limited Company (PLC): A company that is owned by shareholders and their stocks are
available to the general public through the stock exchange.
➔ Advantage: More finance can be raised compared to other types of businesses, selling of
stocks can be a source of finance.
➔ Disadvantage: High costs of complying with the rules of the stock exchange, there is a
potential threat of takeover by a rival company

● Franchising: Acquisition of a proven business model and use the brand and products
➔ Advantage: Franchisees benefit from an established business model with a proven track
record of success. Benefit from the established brand recognition of the franchisor
 ➔ Disadvantage: Franchisees are required to make a significant initial investment to
purchase a franchise, which can be a barrier to entry and have limited control over
business decisions

● Cooperative: For-profit social enterprises that are owned by their members, like employees,
managers, and customers.
➔ Advantage: Straightforward and inexpensive, members have limited liability
➔ Disadvantage: Some members have more responsibilities, limited resources as the
financial strength of a cooperative depends on the capital contributed by its members.

● Not-for-profit: For-profit social enterprise that operates in the private sector, profits are
reinvested for promoting corporate social responsibility costs, predominantly do not generate
much profit. Performs useful social or environmental functions by raising profits.
➔ Advantage: Exempt from paying some taxes, exist for the benefit of local communities
and the environment.
➔ Disadvantage: There are very strict guidelines that must be followed, earnings of workers
are lower so they may not be as motivated to participate.

● Charities: Not-for-profit organizations that operate in an altruistic way with the objective of
promoting a worthwhile cause, predominantly operate in the private sector.

Factors of production
● Land: Natural resources that are used in the production process
● Labor: Physical human efforts that are used in the production process
● Capital: Non-natural resources used for further production process
● Enterprise: An individual with the necessary skills and the ability to take risks in organizing the
other factors of production to generate output in a profitable way

Organizational Objectives
Vision Statement Mission Statement

-Abstract statement that outlines what the
organization ultimately wants to be.
-Provides guiding beliefs about how things
should be gone within the organization
-A concrete and practical statement intended to
state the purpose and guide the actions of an
organization.
-Incorporates meaningful and measurable criteria

Aims: Long-term goals

 Objectives: Targets an organization is trying to achieve.
○ Strategic: long term
○ Tactical: medium term
○ Operational: short-term

Strategies: How the organization intends to achieve aims and strategic objectives

Tactics: Short-term smaller-scale decisions about how the organization intends to achieve its
aims and objectives on a day-to-day basis.

SWOT Analysis
Strengths Weakness

Internal Reveal what the organization does Reveals what the organization does not do
Factors well compared to their rivals well

Opportunities Threats

External The factors that may enable the The factors that may hinder the organization’s
Factors organization to develop and prosper ability to achieve their aims (ex: interest rates
(ex: economic booms or trends) or rise in competition)

➔ Advantages: A visual tool to assist managers in the planning process, can give a good picture of the
organization’s actual position in the market.
➔ Disadvantage: It is only a snap-shot of the current situation and is needed to be reviewed regularly.

Ansoff Matrix
A management growth tool that is used to identify and decide their product and market growth
 ● Market penetration: Focuses on existing markets and products, a low risk strategy that requires
little investment.

● Market development: Sells existing products to new markets, there is an element of risk as
customer tastes may vary.

● Product development: When a business introduces new products into existing markets,
developing modified products as a part of their extension strategy.

● Diversification: Completely new products into new markets, a high-risk growth strategy as the
business has little to no experience.

STEEPLE
This tool serves an analysis of the external factors that can affect the company, it can help managers
to be more objective, proactive and comprehensive in their analysis of external opportunities and
threats for the business.
● Social
● Technological
● Economic
● Environmental
● Political
● Legal
● Ethical

Growth
● Economies of scale: Cost-saving benefits of operating on a large scale
● Diseconomies of scale: Arise when unit costs increase due to the organization being too large
and inefficient.

● Internal growth: occurs when an organization expands using their own resources
● External growth: When a business relies on a third party organizations for growth
○ Mergers and acquisitions: Takeover as a form of external growth that occurs when one
company buys a controlling interest in another company

○ Strategic alliances: Formed when two or more businesses join forces to benefit from
growth without any fundamental changes to their own long-term strategies.

○ Franchising: Arrangement between a business giving the legal rights to another

organization to sell products under the franchisor’s brand name.

● Market penetration: Focuses on existing markets and products, a low risk strategy that requires
little investment.

● Market development: Sells existing products to new markets, there is an element of risk as
customer tastes may vary.

● Product development: When a business introduces new products into existing markets,
developing modified products as a part of their extension strategy.

● Diversification: Completely new products into new markets, a high-risk growth strategy as the
business has little to no experience.

Planning tools
Fishbone diagram
➔ Advantages: Shows a variety of
probable causes of a given problem,
and is easy to follow in order to
determine root causes and
consequences.

➔ Disadvantage: Causes and effects

are not always interrelated, does not
take into account quantifiable data.
Decision trees
Quantitative and systematic decision-making tool that allows managers to visualize possible
operations

Project Chicago:
Success: $70m x 0.65= $45.5
Failure: $45m x 0.35= $15.75
Total: $45.5m + $15.75m=61.25 -
55= $6.35m

➔ Advantage: Formalizes the decision-making process and makes it more impartial as the
outcomes can be compared, management is forced to consider the risks of the options

➔ Disadvantage: Qualitative factors are ignored, data on likely outcomes are forecasts.

Force field analysis

The forces that support change toward a

goal= driving forces

The forces that block or hinder change=

restraining forces

➔ Advantage: It makes the decision-making process more objective and logical, weighing the forces
makes managers consider the relative importance of factors affecting the decision.

➔ Disadvantage: Qualitative factors are ignored, weighing the forces is subjective, leaving room for
potential biases.
Unit 2: Human Resource Management

The management process of anticipating and meeting an organization’s

current and future staffing needs. Aims for the effective management
of an organization’s workforce in order to achieve its objectives.

Labour turnover
Labor turnover is defined as the number of workers leaving a company per year as a percentage of
the average number of workers employed during that period.

Recruitment
Recruitment is the process of attracting, screening and selecting qualified people for a job vacancy.
● Internal Recruitment
Hiring people from within the organization to fill a job vacancy.
➔ Advantages: Lower risks and costs, usually faster than external recruitment
➔ Disadvantages: Lower number of applicants, can create unnecessary internal
competition and conflict between workers who apply for the job.

● External Recruitment
Hiring people from outside the organization to fill a job vacancy.
➔ Advantages: Higher number of applicants that can have new skills that are needed
among the company.
➔ Disadvantages: It can be difficult to determine if the candidate will fit into the company’s
culture, slower than internal recruitment and has a higher risk.

Training
A process of teaching a particular new skill or knowledge in order to develop a person’s competence
in the workplace. The purpose is to match the skills of the current employees.
 Types of training:
● On the job training ● Formative appraisal
● Off the job training ● Summative appraisal
● Cognitive training ● 360-degree feedback
● Behavioral training ● Self-appraisal

Work Styles
● Teleworking: Working away from the office using electronic devices as communication
● Flextime: A flexible schedule where employees choose the hours when they want to work
● Migration from work: Moving to other countries in search of employment opportunities.
● Part time: Employment practice that hires workers for fewer hours per week compared to full
time employees.

● Outsourcing: the use of external providers for certain non-core business activities
● Offshoring: The practice of recollecting business function or activities abroad
● Re-shorign: The transfer and relocation of a firm’s overseas operations back to its original
country (due to cost or competitive advantages)

Organizational Structure
● Levels of hierarchy: Management structure of an organization based on the number of layers of
formal authority
● Chain of command: the formula line of authority through which orders and decisions are passed
down.
● Bureaucracy: Administrative systems of a business, such as the set rules and procedure and
formal hierarchical structures in an organization
● Centralization: Organization structure where the majority of decision making is in the hands of a
very small number of people at the top of the hierarchical structure.
● Decentralization: Include the delegation of decision-making authority throughout an
organization, away from the central authority.
● Delayering: The process of removing one or more layers in the organizational hierarchy to make
the structure flatter, shoring the chain of command

Types of organization charts

Flat/horizontal
-Line managers have a wide span of control in these structures. Giving the manager a lot of
authority over decision making but also places added pressure on his or her level of responsibility.
-These are suitable when employees are multi-skilled and can organize their own work effectively
and have shorter chains of command, which improves
communications.
-Decisions can me made quicker due to the small amount of layers
-Employees have limited opportunities, progression, and maybe have a high labor turnover.

Tall/vertical
-Many layers in a tall or vertical organizational structure.

-Roles, responsibilities, and departments tend to be highly

specialized.
-Generally taller organizations are characterized by a narrow
span of control, with each manager being responsible for fewer
subordinates.
-These can be motivational for junior staff as these are
prospects for promotion and moving up the hierarchical
structure of the organizational chart.
-There can be miscommunication problems due to the large
numbers of layers in the organization. Decision making can be
slow due to formal, inflexible, and bureaucratic structures.
-The taller the company is the more managerial positions are needed to run the company

Matrix
-Traditional departments that are found in other structures, but utilizes them to make projects for
the business. Each of the projects have their
independent organizational structure
-Ideas flow quickly and freely throughout the
structures
-Effective communications
-Many managers that can have different
objectives that can result in neither of the
objectives to be achieved.
-Ex: Coca-Cola has regional structures divided
by continents

Hierarchal

-Many layers of responsibility, these place people

within the organization in terms of their ranking.
-Long chain of command, communication has to go
through many layers
-They are suitable when jobs roles are
straightforward and routine as output can be easily
measured and checked because there are clear lines
of accountability
 -The person directly above an employee on the next hierarchical level is the line manager

Changes in organizational structure

Project-based organization
● The organization of human resources around specific projects that need to be completed.
● Using flexible project teams involves the temporary use of the most suitable employees from
different departments for a particular project.

Leadership Styles
Management Leadership

Follow the culture of the organization Set the culture of the organization
Manage others Inspire others
Focus on the present Focus on the vision and mission statements
Tactical decision making Strategic decision making

Autocratic
Authoritative leaders that avoid discussions as employees are not a part of the decision-making
process. Communication is top-down and one way.
➔ Advantage: Ensures that there is control and close oversight within the organization,
quick decision making and employees have a clear sense of direction
➔ Disadvantage: Demotivates workers as their ideas are not valued, and does not nurture
future leaders among employees so can damage competitiveness in the long term

Paternalistic
See the workforce as an extension of the family so make decisions that they perceive to be in
the interest of their employees.
➔ Advantage: A softer form of autocratic leadership where feedback is inhibited, there is
often more commitment and loyalty to leaders.
➔ Disadvantage: Employees can become dissatisfied as their viewpoints are often ignored,
communication of mostly downwards

Democratic
Involve workers in the decision-making process and leaders encourage discussion and employee
participation
➔ Advantage: Can motivate workers as they feel their opinions are valued, there is
two-way communication so it makes the value of ideas important
➔ Disadvantage: Decision-making is slower, it may be inappropriate for urgent decisions
needed during challenging times faced by the business
Laissez-faire
Delegate responsibility and authority to their staff, enabling them to complete tasks in their
own way, staff are given the freedom to work without supervision in an attempt to develop
power and authority.
➔ Advantage: Freedom that is given to the employees can allow them to excel, autonomy
in decision making can have a positive impact on staff motivation and productivity.
➔ Disadvantage: Individual goal setting conflict with organizational objectives, and often
criticized for the poor definition of the role/purpose of management

Situational leadership
Adapt to the style of leadership according to differences in circumstances, it is assumed that
there is no single best leadership style but rather different styles are suitable depending on the
context or situation.
➔ Advantage: Recognized the need for leaders to be flexible in their style, given the
dynamic nature of management. It is practical and applies across a range of industries
and problems.
➔ Disadvantage: Expecting them to change their style according to situations can be
difficult. It can be very inconsistent.

Motivational Theories
Taylor (Scientific management)
States that the only thing that motivates employees is money. By motivating employees to be more
efficient and productive, the business would generate more profit, thus enabling employees to be
paid high wages.
Limitations:
➔ Not all workers are motivated in the same way
➔ Does not acknowledge the complications of human behavior, such as personal preference
➔ Working harder can make staff demotivated due to burnout.
Maslow (Hierarchy of needs)
It is important for employees to understand that when one level of need is satisfied then it no longer
motivates, hence moving up the pyramid until reaching self-actualization.

Physiological needs: pay and decent working

conditions
Safety needs: Job security, insurance and clear job
description
Love and belonging: team working, co-workers,
mentors
Esteem needs: Status, power, trust and recognition of
achievements
Self-actualization: Job opportunities to develop new
skills and meet new challenges
 Limitations:
➔ Debate whether all humans have the same needs
➔ People place different levels of importance on different needs
➔ It is not realistic for most workers to reach self-actualization

Herzberg (Two-factor theory)

Found that employee satisfaction did not stem from extrinsic factors (such as salary) as they are easily
forgotten and become an expectation
Hygiene factors Motivators

Aspects of a job that can lead to workers being Factors which help staff to gain job satisfaction,
dissatisfied, these need to be addressed in order these satisfy the psychological needs of
to prevent dissatisfaction, but do not motivate. employees.
Limitations:
➔ Role of wages and salaries being a hygiene factor, which could perhaps appear to be in both sets
of needs.

Adams (Equity)
People seek fair balance between their inputs and output. Equity suggests people place emphasis on
what is perceived to be fair and responsible. This theory helps explain why wages and salaries alone
do not determine motivation as workers compare their inputs and outputs to others.
Limitations:
➔ Perceptions of equity are highly subjective

Pink (Dive)
There are three different intrinsic factors that drive people at the workplace
● Intrinsic motivation: Comes within a person
● Extrinsic motivation: Engaging in an activity in order to earn external rewards or avoid an
adverse outcome

Autonomy: Enables people to have control over their work but it

does not mean abandoning accountability
Mastery: Allows people to become better skilled at something
that matters to them as individuals
Purpose: Gives context to autonomy and mastery.

Limitations:
➔ Not applicable across national borders and cultures
Financial Rewards
Financial rewards are the combination of an organization’s pay structure for its employees; these have
to be carefully designed to have the availability to recruit staff, motivate employees, and retain
workers.

Salary
Annual sum of compensation (usually paid monthly) for doing a job, salaries are a fixed cost for the
business.

Wages
A type of payment that rewards workers based on time or output that they produce, this is a variable
cost for a business
Advantage: Disadvantage:
➔ Workers are paid poorly on results ➔ Quality control can become an issue as
➔ It can increase staff motivation workers rush to do their work
➔ It can increase and improve cash flow as ➔ Can create unnecessary internal
less wages are paid if there is a decline competition between workers
in sales

Commission
A form of financial reward paid to workers each time they sell a good or service. It is typically paid as
a percentage of the value of the good or service sold, thereby encouraging staff to sell more products.
Advantage: Disadvantage:
➔ Pushes staff to sell more ➔ Can be detrimental to team working as
➔ Customer service is likely to improve in it encourages internal rivalry
order to boost sales ➔ It encourages a hostile culture and lack
of security, thus causing a higher labor
costs
Performance-related pay (PRP)
Used to pay people whose work reaches or exceeds a required standard or target. Performance
appraisals occur regularly, against agreed objectives and performance targets. Can be cash bonuses
and increases in the wage or salary.
Advantage: ➔ PRP can be useful for rewarding
➔ Can motivate people to be more individuals, which reflects their personal
productive in order to reach profit circumstances
Disadvantage: ➔ The pay-out from the organization can
➔ These can be set too high so employees be minimal
can become demotivated

Non-Financial Rewards
● Job enrichment: improving and developing the experiences of employees through a wider
variety of tasks

● Job rotation: Assigns staff to various tasks and departments over a period of time by widening
the range of activities of workers.
● Job enlargement: Boradengin the work of employees by increasing the number of tasks

● Empowerment: Involves giving employees more responsibility and autonomy in their job

● Purpose: Refers to meaningful work, reminding employees why they are doing their job

● Teamwork: Working as a group or clusters in specific departments or working on a particular

project

Organizational culture
Directly influenced by the size of the organization, personalities, and behaviors of senior managers. A
strong and cohesive corporate culture creates a sense of belonging.

Elements of organizational structure: Types of organizational culture:

● Cultural norms ● Power culture
● Cultural Quotient (ability and ● Role culture
willingness of workers to understand ● Task culture
other cultures to avoid cultural ● Person culture
misunderstandings) ● Entrepreneurial culture
● Culture gap: Differences in cultures

Industrial/employee relations
● Employee representatives: Individuals or organizations who act as the collective voice of the
workforce.

● Employer representatives: Individuals or organizations that represent the senior managers team
in the collective bargaining process.
● Reasons for resistance: Self interest, low tolerance, misinformation, interpretation of
circumstances

Methods used by employees

● Collective bargaining: Process in which employees negotiate on the terms and conditions of the
employment.
Involves negotiations around pays and wages
The purpose is to achieve a mutually beneficial outcome, thereby preventing conflict from
escalating beyond control

● Slow-downs: The act of working at the minimum allowable pace in order to reduce productivity
yet without workers being sanctioned.
Used as a strike-action

● Work-to-rule: When workers adhere to every single rule, policy and procedure of the
organization with the intention of purposely disrupting production and racing output.

● Overtime bans: A directive from the employee representatives instructs its members to refuse
working beyond their contracted hours.

● Strike action: Extreme method of industrial action as it involves employees refusing to work,
which prevents the organization from continuing to operate.

Methods used by employers

● Collective bargaining: Process by which pay and conditions of employment are settled by
negotiations between representatives of employees and their employers.

● Threat of redundancies: Might pressure or threaten employees with redundancies if industrial

action continues.

● Changes of contract: A threat of redundancies can cause negative media attention, employers
may choose to change employment contracts for employees who cause industrial unrest.

● Closure and lock-outs: Extreme method used to deal with workers taking industrial action by
stopping all business operations. This means there is no work for the staff, forcing them to
renegotiate.

Approaches of conflict resolution

● Conciliation and arbitration
● Employee participants and industrial democracy
➔ Work council
➔ Team Working opportunities
 ➔ Employee share ownership schemes
● No-strike agreement
● Single-union agreement

Unit 3: Finance & Accounts

Finance is needed for starting up a new business or fund an existing firm’s expansion.
● Capital expenditure: Spending on fixed assets and capital equipment of a business
● Revenue expenditure: The need for businesses to finance their daily routine operations.

Internal Sources of Finance

● Personal founds (sole-traders)
● Retained profit
● Sale of assets

External Sources of Finance

● Share capital (stock market sales) ● Debt factoring
● Loan capital (bank loans) ● Leasing
● Overdrafts ● Venture Capital (external firms that
● Trade credit invest in business start-ups)
● Grants ● Business Angels (wealthy individuals
● Subsides who invest in high-risk businesses)
Types of Costs
● Fixed costs: The costs that do not change according to the input.
Includes costs like rent, salaries, costs of equipment, etc.

● Variable costs: Costs of production that do change according to the level of output that is
generated.

TC= TFC TVC

● Semi-variable costs: Characteristics of both fixed and variable costs

● Direct costs: Variable costs of production like raw materials

Revenues
● Total Revenue: Refers to the income form the sale of the good and/or service
Total Revenue= Price x Quantity

● Revenue Streams: The various sources of income that the company has.

Break-even Analysis
When the business does sell enough goods/services in order to cover all of their costs of production.

Contribution per unit: The amount of money a business earns from selling each unit of output
Contribution per unit= Price - AVC

TFC: the costs don’t change

BEP: Occurs when the total sales revenue (TR) equals total costs of production

BEQ: The sales volume needed for the business to break even

Profit: Positive difference between the firm’s TR and its TC

Profit= Total revenue - Total costs
Profit= Total contribution -Total Fixed Costs

Target profit output: Refers to the sales volume needed in order to reach target profit

Target price: The amount charged to the customer in order to break-even.

Benefits of Break-even Analysis Limitations of Break-even Analysis

● Visual tool that helps managers to easily
interpret the relationship between the
fixed costs, variable costs, price,
revenue, and profits.
● It can be used to predict the effects on
profitability if the business changes its
costs
● The module assumes that costs and
revenues are static
● It is not always easily to classify certain
costs being only fixed or variable
● The effectiveness of the model depends
on the accuracy of the data used.

Final Accounts
Compromise the profit and loss account, the balance sheet, and cash flow to help with decision
making

Profit & Loss Account

Shows the profit and the loss after all costs have been deducted from the organization’s revenue
 1. Costs of Goods Sold (COGS)
2. Gross Profit
3. Expenses
4. Net profit before interest and taxes
5. Tax and Interests
6. Net profit after interests and taxes
7. Dividends
8. Retained Profit

COGS= Opening Stock + Purchases - Closing Stock

Balance Sheet
Shows the value of an organization’s assets and liabilities at a particular point in time

1. Fixed assets
2. Current Assets
● Cash
● Debtors
● Stock
3. Current Liabilities
● Overdrafts
● Creditors
● Short-term loans
4. Working Capital
5. Net assets
6. Share capital
7. Retained profits
Depreciation
The decline in the value of a fixed asset over time, mainly used due to usage

Straight line method Reducing/Declining balance method

Profitability ratio analysis

Gross Profit margin (GPM)
A profitability ratio that shows a firm’s gross profit expressed as percentage of its sales revenue.
Net Profit margin (NPM)
Measures a firm’s overall profit after all the costs have been deducted as a percentage of its sales
revenue.

ROCE
The return on capital employed ratio measures a firm's efficiency and profitability in relation to its
size.

Liquidity ratio analysis

The financial ratios that look at a firm’s ability to pay its debts.

Current ratio
A short-term liquidity ratio which calculated the ability of a business to meet its debts within the next
12 months.

To improve the current ratio:

● Attract more customers and encourage them to pay in cash
● Deposit cash that is not being used
● Use its cash balance to pay off their short-term debts

Acid test
A ratio that measures a firm’s ability to meet short-term debts. It ignores stock because some
inventories are difficult to turn into cash in a short time

To improve the current ratio:

● Use the same methods that improve the current ratio
● Improve its stock control management system
Efficiency Ratio Analysis
Used to measure how well an organization uses its resources and available capital to generate
income.

Stock Turnover
Measures the number of days it takes a business to sell its stock or the number of times the business
replenishes its stock during a given time

To improve the stock turnover:

● Disposing of obsolete stock to reduce the firm’s level of stock
● Adopting a just-in-time system

Debtor Days
The average number of days a business takes to collect debts from its customers who have bought
goods and services on trade credit

To improve the stock turnover:

● Encouraging customers to pay in cash
● Offering cash discounts
● Reducing the cash period offered to clients

Creditor Days
The average number of days a business takes to repay its creditors

To improve the creditor days:

● Negotiated extended credit periods with suppliers
● Seek alternative suppliers that offer better trade credit terms and conditions

Gearing Ratio
The degree to which a business is financed by a loan capital by comparing loan capital and the total
capital employed.
 To improve the gearing ratio:
● Paying off some long-term liabilities
● Improving working capital to produce cash which can be used to pay off debts

Cash flow forecast

The movement of money in and out of an organization base on the actual movements of cash or
based or forecasts

Net cash flow: The differences between cash inflows and outflows

Reducing cash flow problems Improving cash flow problems

● Improve trade credit
● Reduce in the duration of credit that is
offered
● Offer price discounts for the ones who
make early payment of invoices
● Strive to improve its marketing
● Consider raising the prices of products
that have a high degree of brand loyalty
● Lower prices that face fierce
competition

Investment Appraisal
Is a quantitative decision-making tool used to assess and justify the capital expenditure of a firm in
terms of whether or it will be financially worthwhile
Payback Period
Amount of time it takes for a business to recover the initial cost of an investment project

Advantages Disadvantages
● Simplest and quickest method of ● Ignores the timing of the net cash flows,
investment appraisal despite the future value of cash being
● Easy for managers to understand the lower
results ● It is not generally suitable for long-term
● Helps managers to choose project with projects
a short PBP to reduce risks ● Time, rather than profitability, is the
docs of attention, which could be
unrealistic

Average Rate of Return (ARR)

Calculate the average annual profit of an investment project expressed as a percentage of the initial
amount invested in the project.

Advantages
● Simple to understand
● Focuses on profitability rather than time

Disadvantages
● ARR ignores the timings of cash flow
● The figures are predictions only

Net Present Value (NPV)

Calculates the real value of an investment project by discounting the value of future cash flows.

Advantages
● Considers future net cash flows
expressed in today’s value
● More accurate than the ARR as it
discounts the future values of net cash
flows
Disadvantages
● Difficult to forecast in the distant future
● Can be difficult to decide on an accurate
discount rate due to inflation
 Budgets
The plan of the cost and revenues with the purpose of achieving the objectives in a given time period

Importance of budgets:
● Planning ● Target setting
● Cash flow forecasting ● Accountability
● Prioritizing ● Benchmarking
● Controlling ● Motivating

Limitations
➔ Preparing setting and updating budgets may be expensive
➔ If budgets and inflexible and unrealistic, staff can become demotivated
➔ The culture of organization can relate more to power and status than the needs of the firm

Variance
● Favorable: When the difference between the actual and budgeted figure is beneficial to the
business
● Adverse: When the difference between the actual and budgeted figure is disadvantageous to the
business.

Unit 4: Marketing
The process of anticipating, identifying and satisfying the needs and desires of customers in a
profitable way.

● Intangible: Unlike goods, services are not physical in their nature

● Inseparable: The service received is attached to the people who deliver the service
● Perishable: Services do not last but are usually consumed at the time of purchase
● Variable: Services are heterogeneous, each customer experience is unique

● People: refers to the customer service element of a service

● Process: the way that a service is provided (waiting times and payments)
● Physical evidence: visible or tangible aspects of a service (uniform)

● Market size: The value of the sales revenue in the industry

● Competitor analysis: To identify the nature and degree of intensity of competition
● Market growth potential: Probable increase in the size of the market in the foreseeable future

Orientations
● Product orientation: Inward-looking marketing approach that focuses on making products that a
business knows how to make or has been making for a long time. Usually technologically
advanced and innovative which gives then a unique selling position
 ● Market orientation: Outward-looking marketing approach that focuses on meeting the specific
needs and wants of customers and potential customers
-Nature of the product
-Organizational culture
-Number of competitors

Commercial marketing
The use of marketing strategies to meet the needs and wants of customers in a profitable way to
benefit the owners.

Social marketing
Marketing activities designed to influence the behavior of the general public to benefit the wider
community.

Market Share
A firm’s portion of the total value of sales revenue in a particular industry

● Market leaders: Firms within the largest market share in a given industry
● Economies of scale, customer loyalty and price leadership in an industry are all forms of
competitive advantage for market leaders and so act as barriers to entry for firms wanting to
compete in the industry.

Marketing Objectives
These are the specific goals of the marketing department in order to help achieve the overall
objectives of the organization.
● Increased market share ● New product development
● Target new markets ● Brand management
● Enhance customer relationships ● Increased profitability for a business
● Improved product and brand awareness ● Increased awareness of social issues
(NGO’s)

Marketing Evolving
Consumer tastes change over time. Successful businesses change their marketing strategies in
response to changes in customer preferences.

Innovation
Using internet technologies as theses have an increasingly large impact on the marketing practices
and strategies
Ethical considerations
Marketing ethics are the moral aspects of a firm’s marketing practices and strategies. Unethical
marketing happens when moral codes of practice are ignored or when they cause an office to the
public.
1. Bait and switch: Aimed at luring customers by using advertising deals that are just too good to be
true so they become hooked to the product

2. Ambiguous advertising claims: Using unproven or unrest claims that can mislead and deceive the
public

3. Product misinterpretation: Giving misleading and ambiguous information to customers in order

to persuade them

4. Prester power: Using children to pressurize their parent to buy certain products

Marketing plan
Document that outline a firm’s marketing objectives and strategies for a stated period of time
Enabling the business to engage in meaningful marketing communications

4 P’s
● Product: What the business is selling
● Price: How much the business is selling the products for
● Promotion: The methods used to ensure customers know about the product
● Place: Methods of distributing the product to customers

Target Market Market Segment

A particular market segment that a business Group of customers with similar
aims to focus its marketing effort on. characteristics, needs, or wants.

Niche market Mass marketing

Corporate strategy based on identifying and Marketing strategy aimed at all consumers in
serving a relatively small market segment a market without trying to differentiate them
into separate market segments.

● Market segmentation: Process of splitting a market into distinct consumer groups to better
understand their needs
● Customer profile: Demographic and psychographic characteristics of customers in different
markets
○ Socio-economic
○ Psychographic
○ Demographic
○ Geographic
 ● Targeting: The practice of devising an appropriate marketing mix and marketing strategies for
different market segments.
● Unique selling point: Any aspect of the business, brand or products that makes it stand out from
their competitors

Product Position Map

A visual representation of customers’ perception of a product relative to their competitors.

Premium product: high quality and price

Cowboy product: low quality but high price

Bargain product: high quality but low price

Economy brand: low quality and price

● Differentiation: The act of making a business or its products distinct from its rivals in the industry
➔ Advantage: allows the firm to charge a higher price due to the uniqueness of the
product, creating brand awareness
➔ Disadvantage: Can be expensive but can create confusion in the minds of consumers
through excessive differentiation and advertising clutter

Sales forecasting
Quantitative technique used to predict the level of sales revenue that a firm expects to earn over a
certain period of time.
● If sales are predicted to rise, HR will possibly need to recruit more workers
● Cash flows will also rely on the sales forecasting data
 ➔ Seasonal variations: Expected periodic fluctuations in sales revenue over a given time
period.
➔ Cyclical variation: The recurrent fluctuation in sales revenues linked to the business cycle
➔ Random variations:Unpredictable and erratic fluctuations in sales revenues caused by
irregular factors.

Benefits of sales forecasting

● Assign the production accordingly
● Reduce uncertainties
● Identify trends
● Prepare for capital requirements

Market Research
Systematic process of collecting, collating and analyzing data and information about existing and
potential customers.
● Primary market research: New data coming from interviews or questionnaires
➔ Advantage: gives business competitiveness and enables the business to be more precise.
➔ Disadvantage: high costs, time consuming

● Secondary market research: Data coming from available sources

➔ Advantage: Relatively faster and cheaper, allows access to wider range of sources
➔ Disadvantage: The data has to adapted to the firm’s particular needs, there may be
biases in the data

Research Methods
Primary Market research Secondary Market Research
● Survey ● Market analyses
● Interviews ● Academic Journals
● Focus groups ● Government Policies
● Observations ● Media Articles

Qualitative Research Quantitative Research

Based on opinions, feelings and perspectives Based on facts and figures on numerical figures
on non-numerical figures Use closed questions on a large scale of
Can be prone to biases responses
Find consumer’s tastes, opinions and buying Quicker and easier to collect
behaviors Tries to establish correlations

Sampling
 ● Quota
● Random
● Stratified
● Cluster
● Snowballing
● Convenience

Product Life Cycle

Marketing theory that illustrates the different stages a typical product goes through from its launch to
its eventual withdrawal from the market.

Stages of the PLC

● Research and design
● Introduction
● Growth
● Maturity
● Decline

Extension Strategies
Marketing techniques to prolong a products life cycle

These can include factors like; cutting prices, product

enhancements, redesignings or repackaging

Mainly used when the product is over saturated in

the market
BCG Matrix
Marketing tool to examine the firm’s product portfolio

● Stars: High or increasing market share

in a high growth market

● Cash cows: Products with high market

share in a low or mature market

● Dogs: Products at the end of the life

cycle

Branding
Unique name or identity of a business that can help the firm have a more competitive edge.
● Awareness
 ● Development
● Loyalty
● Value
➔ Importance of branding: Encourages customer loyalty and creates a unique identity to be
distinguished from other rival products in the market.
➔ Importance of packaging: Helps the customer to identify and recognize the brand or product

Pricing
Cost-plus
Involves adding a profit element to the cost of production represented as a percentage
Price= cost of production + profit margin
➔ Advantage: Simplest form of pricing strategy and suitable for all products, straight forward
➔ Disadvantage: Ignores the impact of lower pieces of rival businesses

Penetration
Setting the price low enough to enter an industry and gain market share from existing firms.
Short-medium term pricing strategy as it can lead to possible losses
➔ Advantage: Allows to enter new markets or launch new products, can discourage potential
new competitors from entering to to the low prices
➔ Disadvantage: The firm could be at loss for a while, may lose some quality-conscious
customers, it is very widely used so customers are accustomed to psychological pricing

Skimming
Involves setting a high price when laughing, common in high-tech products. It is used in order to
maximize short-term profit margins before rivals enter the market.
➔ Advantage: Recoup the costs of research and development prior to the launching
➔ Disadvantage: The strategy can backfire as the high price can put off customers

Psychological
Making the price seem lower ($499.99 vs $500.00)
➔ Advantage: Helps gain higher scales thus generating more profit. It can encourage
impulse buying
➔ Disadvantage: Can be unethical as it tricks people to spend money, it is widely used to
customer are accustomed to this strategy

Loss leader
Setting the price below its cost of production to attract customers to buy. (Selling at $0.5 instead of $2
to attract more customers)
➔ Advantage: Help gain customer loyalty and increases the sales revenue
➔ Disadvantage: Firm can make a loss on these products as there is no guarantee that
customers will purchase another products along with the loss leader
Price discrimination
When a firm charges different prices to different customers (adult vs children prices)
➔ Advantage: Gain higher revenues by charging higher in market segments
➔ Disadvantage: Some customers may be dissatisfied as they will need to pay more for the
same good/service.

Price leadership
When a business sets the prices which are closely monitored and followed by their rivals, the
dominant firm is known as the price marker and the rivals as price takers
➔ Advantage: Customer gain when the dominant firm sets lower prices due to its power to
exploit economies of scale, low prices can increase the firm’s market share
➔ Disadvantage: It is not in the interest of the customers if the dominant firm set higher
prices, low prices means low process margins

Predatory
Involves charging a low price, even blow cost of production in order to harm the sales of competitors
and to restrict competition
➔ Advantage: Lower prices can encourage customers to switch to buying the products of
the business, lower prices can act like a barrier to entry for other firms considering
entering the industry
➔ Disadvantage: Is illegal in some countries, lower prices can trigger quality concerns
about the goods/services
Promotion
● Above the line promotion
Paid-for marketing communication via independent media ( ex: ads on youtube)
● Below the line promotion
Promotional activities that the business has complete control over, not used nor intended for the
mass media
● Promotional mix
The combination of different appropriate methods of ATL and STEL promotion aimed at specific
target markets
Impact of technology
● Viral marketing
● Social media
● Social networking
 ● Guerrilla marketing

Place

The Extended Marketing Mix

Model applicable for marketing services rather than strictly for goods.

International Marketing
● Exporting: The firm selling to overseas buyers without having to expand abroad
● Direct investment: Setting up overseas production or distribution facilities
● Franchising: The growth strategy involving a third-party provider to supply the goods and
services of the business in return of payment of a licensing fee and royalty payments
● Joint venture: The formation of a new business with two or or more firs using shared resources

Opportunities in International Markets Threats in International Markets

● Profitability ● Language barriers
● Economies of scale ● Legal and political barriers
● Laws and legislations ● Financial barriers
● Competition ● Competitive rivals
● Production costs ● Exchange rats
● Financial incentives ● Additional Costs

E-commerce
Trading of good and/or services using online electronic systems
➔ Low set-up costs
➔ Breaks geographical barriers
➔ Broad product ranges

● B2B: E-commerce between two or more businesses is conducted between two companies, such
as wholesalers and online retailers.
● B2C: Business that sell directly to the general public using internet technologies
● C2C: E-commerce strategy that connects customers with other customers (EBay)
Unit 5: Operation Management
Operations Management: The business function of inputs to produce outputs that are valued by the
customers
● Marketing Function: Based on the market research in order to meet the needs and wants of
consumers
● Finance Function: Costos of different production methods are needed to gain economies of scale
 ● HR Function: Production where workers need to be fired and trained to work productively

Ecological Sustainability

A lack of ecological sustainability means that production

will deplete the earth's natural resources for future
generations

It requires efficient and sensible use of the planets scarce

resources so that
they do not become exhausted.

Ecologically sustainable business practices include:

● Green technologies
● Recycling
● Ecological footprint: The impact of the resource consumption and waste
● production on the natural environment
● Conversation: Using the planet's scarce resources more carefully by the
means of renewable resources at a sustainable rate
● Preservation: Protecting the earth's natural resources by reducing the human impact on the
physical, natural and ecological environment

Social Sustainability
Enables society to optimize the quality of life for current and future generations. Male business leaders
need to accept women as equals if there is to be social sustainability and development

Economic Sustainability
-The development of a country that meets the economic needs of the present generation, using existing
available resources, without compromising the ability of future generations to meet their economic
needs
-Requires a business to use their resources, like labor and land, efficiently and in a maintainable way.
Increased global demand and consumption make It ever more difficult to sustain the output of goods
and services.
-The overuse of scarce resources is a major threat to a country's economic well-being
Production
the manufacture or output of a physical good or intangible service

Input > Transformation > Output

Job/customized production
Is the production of a special or customized good or service suited to the specific requirements of an
individual customer.

Advantage:
➔ Most flexible method of production as orders are made specifically for a customer
➔ A high mark-up price can be changed because of the product's exclusivity and high quality

Disadvantage:
➔ High labor costs due to the need of high skilled and experienced employees
➔ Production is time consuming because specific requirement that are needed

Batch production
Is a production method that involves identical goods being made in groups (batches) rather than in a
continuous flow.

Advantage:
➔ There is some flexibility to meet a variety of demands, thereby providing some choice to
customers.
➔ Average unit costs of production are lower compared with job production due to there being
some economies of scale.

Disadvantage:
➔ Less flexibility as customers have to select from a range of standardized output.
➔ There is a greater need for stocks (inventories), especially raw materials

Mass production
Used by businesses that focus on large-scale production techniques of mass market goods.
 Advantage:
➔ Costs per unit of production are lower due to economies of scale
➔ Capital intensive so manufacturing can take place for longer periods

Disadvantage:
➔ Lower profit margins are earned due to the low prices and standardized outputs
➔ Limited, if any, flexibility as large quantities of identical products are created

Cellar Manufacturing
Involves teams working on certain parts of the production line. The production processes are broken
down into units based around these teams working on a couple of units.

Advantage:
➔ As cells are responsible for quality assurance, it should lead to less wastage and a lower rejection
rate
➔ It enables workers to operate in teams with greater autonomy, thus boosting morale,
motivation, and productivity

Disadvantage:
➔ High start-up costs coming from the machinery and/or equipment that is needed
➔ Machinery is not used as intensively as with flow or mass production

Lean production
The production of goods and services that are made when they are ordered by the customers.

The 8 Types of Waste:

1. Talent waste: Underutilizing skills or knowledge of the employees
2. Inventory: When companies keep excess products and materials in stock and don't use them
3. Motion: Unnecessary movements by people, like walking through the store
4. Waiting: Time=money, the time that is waited for the next step in the process
5. Transportation: Unnecessary movements of products and materials
6. Defects: Anything that is produced without quality control ends up having faults or defects
 7. Overproduction: Production that is more than needed or before that it's needed
8. Overprocessing: More work or quality than what is required by the customer

Land
To be closer to customers domestically or overseas markets to gain competitive advantages. Production
can be reorganized to become more efficient.
● Outsourcing: Practice of subcontracting non-core activities of an organization to a third party
provider in order to improve operational efficiency
● Offshoring: Relocating a part or all of the firm’s business functions overseases.
● Insourcing: Use of a firm’s own resources to fulfill a certain role

Production planning
Supply chain process: management process of overseeing the logistics from manufacturing stage to
finished product being delivered to the customer.

● Just-in-time: Stock control system that avoids the use of holding stocks, instead they are
produced when they are needed.

● Just-in-case: Stock control system that relies on having sparse stock so that output can be raised
immediately in the vent of a sudden or unexpected increase in demand
Capital Utilization rate
Expresses a firm’s actual output as a percentage of its maximum potential output
A firm that has a 100% capacity utilization is operating at full capacity with all their resources used

Productivity rate
The measure of efficiency of production

Research and Development

● Research: investigating the unknown such as new products or processes (customer unidentified
needs or wants)

● Development: Using research findings to create products that might be commercialized. Also
means improving the existing processes or products
➔ Purpose of research and development: provide an ongoing advancement to satisfy
customers in a profitable way. These processes can be lengthy and drain the
resources of a business, these can also increase competition as a race with other
competitors. However, these may improve the efficiency and performance of an
organization by adding value in the production process.

-Prototypes: trials or test products that are used as part of the R&D process
-Sunrise industries: those who have a rapid growth potential, such as high-tech industries, where
there is a negative or deteriorating growth potential is likely to be unprofitable.

Limitations of Research and Development

● High cost
● High failure rate
● Budgetary constraints (funding problems)
● Demoralizing when the prototypes fails for those who created it

● Innovation: the process of commercially pioneering new ideas and creation in the production
process
 ○ Discovery of new production process
○ Successful exploitation of creative ideas
○ Introduction of new products

Types of Innovation
● Product Innovation: Introduction of new products
● Process Innovation: Improved processes of production
● Position Innovation: Moving up the rankings of the company
● Paradigm Innovation: Repurpose an item

Crisis and Contingency planning

● Crisis Management: The response taken by the business in the event of an actual crisis occurring

● Contingency planning: The development of predetermined strategies to deal with a crisis should
it occur

Factors that affect effective crisis management

● Transparency
Ethical obligation to be honest while informing their stakeholders during crisis
● Communication
During and after, PR plays an important role in communicating with all reassuring stakeholders
● Speed
Essential to contain the crisis and to ensure it is not prolonged or worsened by causing collateral
damage
● Control
Preventing the crisis from occurring in the first place, taking all the possible risks to stop the
crisis