FOR THE IB DIPLOMA Business Management Study and Revision Guide Paul Hoang(Bibs DIPLOMA Business Management Study and Revision Guide \ Paul Hoang Gy HODDER ) EDUCATIONDedication “This book is dicated to Mrs Smith, my werdertul primary schoolteacher who taught at Fenthl Junior School, Bris, UK Acknowledgements My deepest thanks and love to Kin, Jak and Luke for always being there for ma My hearfel thank to So-Shon Au, my Publisher and flow Arsenal fan for ber deation, Support and gudancetneughout the mony projects wa have worked on Finally my sincere grade also goes to Arson Mi and Joyce Tong, outstanding students ‘who provided me with invaaabe lodback rom te perapecbve of Bi learners “The Publehers woul lke to thank the lowing for permision to reproduce copyright mate Photo credits {110 Sean Galup/Gstty images p.24 © YurhinkstockitockiGety Imager B.2b@ cinham Okey Sol tote; p44 © Mitiey Sunes: Fok SS 6 Monkey Susines ~ ato p64 Photo From Puabey com, CCD Pubic omaiy 73 6 Global ntagration Ld (at gla integration cory, pL7S © PACITICA/Almy $tock Photo p.76 8 Carsten Reger tly p85 6 Steve Reset Steckphota com, 11346 larandaev ~fotohs com; p.1St © Imaperata Media John Fas P.167 6 istckphotoslkvayrain, p72 8 Alisandr Kurganow - Fotolia Text credits 1.87, p.89 From Businoss Management Guide © Internationa Beccalaureate Btganzaton 206; p.38 termens Revi Febrinry 2013, © PrilpAlan Publisher 2013 ‘This work has been developed independently rom and is nat endorsed by the International Baccalaureate (8). All brand names are protected by their respective twadematks and are acknowledged Every effort hae been made to race all capytight holders, but any have been inadvertently overlooked, the Publishers will be pleased to make the necessary arrangements at the fst opportunity Although every aforthas been made to ensure that website addresses are correct at time of Going to press, Hodder Education cannot be hald responsible for the cute of any wobsite reiioned in this book. tis sometimes possible to find a relocated web page by typing inthe address ofthe home page fora websitein the URL window of yout browser Hachette UK's policy isto use papers that are natural, renewable and recyclable products ard ‘rade from wood grown in sustainable forests The logging and manufacturing processes are fexpected to conform tothe erwronmental regulations ef the country of rig (Orders: please contact Bookpoint Iz, 130 Park Drive, Mion Park, Abingdon, Oxon, OX14 ASF. Telephone: (a) 01235 827720. Fx: (44) 01235 40044. Email education@bookpoint co.uk Lines are open from 9 a.m. t0 5 pam. Monday to Saturday, with 2 24-hour message answering sorvee. Yeu can ako order though Gur webste: wras.hoddereducaton.com © Paul Hoang 2016 First published in 2016 by Hodder Education, ‘An Hachetta UK Company Carmelite House 50 Victoria Embankment London ECAY 002 ‘woewhoddereducation com Impression number 10987654321 Year 2019 2018 2017 2016 All ightsesened. Apart fom any ise permitted under UK copyright lw no part of hie pubetion ny eroded varies ay farm Bay mea elena Mechanseainciing photocopying srl recording, or held within ay formation storage Shed retrevalsyste, without persion inwrtng from the publsha o unde ence fom ‘he Conyaht Licensing Ageney ited Further det of such ences (or recopraphic teprodyton may be obtained for he Copyright Licensing Agency Umited, Sefton House, ENO Ky Snes London ECIN BTS Cover photo © Pavina/steckphata.com Mustations by Aptara “Typeset in GoudyStd, 10/2 pts by Aptara Inc Printed in Spain A catalogue record for thistle ic available from the British Libray ISN: 978 147 196842 9Contents How to use this study and revision guide Getting to know the exam Assessment objectives and command terms Countdown to the exams Unit 1 Business organization and environment LI Introduction to business management 12 Types of organization 13 Organisational objectives 14 Stakeholders 15 External environment 16 Growth and evolution 17 Organizational planning tools (HL only) Unit 2 Human resource management 2.1 Functions and evolution of human resource management 2.2 Organizational structure M23 Leadership and management 24 Motivation 25 Organizational (corporate) culture (HL onl) 26 Industrialfemployee relations (HL only) Unit 3 Finance and accounts 31 Sources of nance 3.2. Costsand revenues 33 Break-even analysis 3.4 inal accounts (some HL only) 3.5 Profitability and liquidity ratio analysis 36 Bifciency ratio analysis (HL only) 37 Cash flow 38 Investment appraisal (some HL on) 39 Budgets (HL only) vi vi vill R 18 2 25 31 36 45 52 56 65 67 m4 79 82 86 92 94 97 101 105iv Contents Unit 4 Marketing 41. The role of marketing 42. Marketing planning (including introduction to the 4 Ps) 43. Sales forecasting (HL onb) 44 Market research 45a The 4 Ps: Product 45b The 4 Ps: Price 45 The 4 Ps: Promotion 45d The 4 Px: Place 46. Theextended marketing mix (7 P3) (HL onl) 47 International marketing (HL only) 48 E-commerce Unit 5 Operations management 5. The role of operations management M52 Production methods 53 Lean production and quality management (HL on) 54 Location 55 Production planning (HL on) 56 Research and development (HL onl) 57 Crisis management and contingency planning (Honk) G lossary 108 4 119 122 130 135 138 143, 146 148 152 157 160 162 167 169 174 176 179How to use this study and revision guide ‘Welcome to the Business Management for te IB Diploma Revision andl Study Guide! Thi book will help you plan your revision and work through it in a methodological way. The guide follows the Business Management syllabus topic by topic, with revision and exam practice questions to help you check your understanding, ® Features to help you succeed, Uo aes Erie These provide you with actiites fram practice is given for both These tips give advice that will help and essay questions to help prepare Papers and for the type of you boost your final grade. ‘you for the Paper 2 Section C questions you might get ~ short component ofthe final examination data questions, defnitons, and Have a goat these to consolidate rmathernatical calculations, and Keyword definitions ‘your understanding and application extended response questions, with Fnittonact omental aera cele ert” | The dentonf nena ay Business Management - change, ‘these to consolidate your revision wh mr The ‘page culture ethics, elobalzation, and to practise your exam sk. es ther appa. Thessane innovation and strategy. words that you can be expected to define in exams. ‘You can keep track of your revision by ticking off each topic heading in the book. Usea checklist to record progress as you revise. Tick each box when you haves = revised and understood a topic: 1 used the Exam practice questions and gone online to check your answers Use this book as the cornerstone of your revision. Dont hesitate to write in it and personalize your notes. Use a highlighter to identify areas that need further work. ‘You may find ithelpful to add your own notes as you work through each topic. Good luck!vi How to use this study and revision guide Getting to know the exam Exam paper__Duration Format Topics ‘Total marks Papert (SL) ‘hour 15 mins Pre-release case study all 0 Paper? (U) 1 hour 45 mins Structured questions all 50 Paper 1 (Hl) 2 hours 15 mins Pre-release case study all 5 60 Paper 2 (Hl) 2 hours 15 mins Structured questions All 40 70 Ac the endl of your Business Management course you will sitewo papers — Paper 1 and Paper 2. The external exams (Paper Land Paper 2) account for 75% of the final marks. The other assessed part of the course (25%) is the Internal Assessment (1A) which is marked by your teacher, bur externally moderated by an examinet. “Here is some general advice for the exams: Make sure you have learnt the command terms (eg evaluate, explain, outline, cere) there isa tendency to focus on the content in the question racher than, the command term, but if you do not address what the command term is, asking of you, then you will not be awarded full marks Command terms are covered helow. Ifyou cun out of room on the pag, use contindation sheets and indicate clearly that you have done this on the cover sheet. ‘The fact that the question continues on another sheet of paper needs to be clearly indicated in the text box provided. Plan your time carefully before the exams Assessment objectives and command terms To successfully complete the course, you have to achieve certain assessment “objectives. The following table shows all of the command terms, with an indication of the depth required from your written answers. “Define ___ADT_—_—_ Setting upa business involves obstacles and opportunites that employees would net atherwise face if they work for someone else ‘© Some people are motivated by and thrive on personal challenges. They enjoy gaining knowledge and developing new skills ‘Some people have a deste to follow a personal interest and pursue this as a business opportunity Ding something you are passionate about every day is a key eason forthe motivation af entrepreneurs ‘The aim isnot always primarily to make a profit ‘Some people identify business opportunities or gaps in the market so start their own business, eg. Stelios Ha-toannou (easylet) and Tony Ryan (Ryanair) saw huge business opportunites inthe low-budget European ailine industry Recognizing a niche in the market helps the business to gain a fist mover advantage Family traition ‘© Being entrepreneurial is often a family trait, e.g the Trump family (Trump Organization), the Walton family (Walmart) and the ton family (Hilton Hotels) Flexibility autonomy) ‘© Setting up and running your own business means the owners can set thelr own deailines and get things done in thelr own way ‘Money "©The key diver for starting up a business or an enterprise i the potential to earn alt of money through bard work and sheer determination Interest and enjoyment Niche market opportunities Common steps in the process of starting up a business or an enterprise (A02) ‘Table 1.2 Steps to starting up a business Have an idea Entrepreneurs idently and develop market opportunities. Many new businesses start rom the innovative and creative ideas of entrepreneurs, such as Red Bul, Alibaba.com and the Walt Disney Company CConductrelevant This helps to determine the likelihood of success, eg. size ofthe potential marke, set-up costs, cash flow forecasts, research barriers to entry and a competitor analysis. sultable busines location also needs tobe determined Produce a ‘business plan is created, outining the firm's mission, goals, resources, personnel, finances and budgets, marketing business plan plans and overall business strategy. A business plans important ifthe frm wishes to seek externa finance from banks and investors Determine The owner(s) need to decide on the legal structure ofthe business, e.g. sole trader, partnership or limited liablity a business company (see Unit 1.2). The owner's) should also decide on an appropriate business name structure ‘Meet legal Business registration is important to get formal certification, permits and licenses to trade. The owner(s) must make requirements __necessary payment to solicitors for legal fees. Insurance needs to be sorted out for employees and the busines itself ‘Once these steps have been completed, the business can setup its premises ‘onder to trade. The business will need to be managed effectively in terms of human resources, operations management, marketing and finance.1 Introduction to business managemen' Problems that a new business or enterprise may face (A02) Table 1.3 Problems that a newb ss may face Planning oor market esearch can result inthe business idea being flawed asthe product falls to meet the needs and wants of customers. The set-up procedures can be time-consuming, especially wth complicated legal aspects to deal with Finance Inability to raise sufficient start-up finance orto maintain liquidity in the business (see Unit 3.7) can cause financial problems. Start-up businesses often struggle to secure extemal sources of finance from banks and other lenders to fund ‘heir operations In some cases, setup costs can prove to be unaffordable ‘Marketing ‘Start-ups have a limited budget available for promation and advertising. The product might lck differentiation or Alistinctve seling point, so fasta gain tecogeition and market shate. A small eustamer base i Ikely to cause quity Issues Human resources New, unestablised businesses may struggle to recruit suitable and experienced employees Operations management ‘New businestes lack an established relationship with suppliers, which can cause delivery and distribution problems. ‘They lack necessary finance to fund research and development, so are ata disadvantage against established businesses Strategic thinking Entrepreneurs may lack the necessary experience in strategic decision making, causing major problems forthe start-up business. Their business plans are often not convincing or detalled enough to secure the necessary finance to get the business started The elements of a business plan (Ao2) Table 1.4 Elements of a business plan Emcee often ces and sae Ieee iaywuad Seino Business Description ofthe business, legal satus and ownership, and te goals | business plan is a formal description and objectives. It may also include the firm's mission or vision statement | osument that details how an (Gee Unit 1.3). For larger firms, the plan might also include details ofthe ‘organisation intends to meet its arene wars objectives. It adds substance to REIT Desa the arnt SY ELSES) WORLD STOTT COTS ST Stace esa IGE environment leaders or marketshare data, Ths section is likly to include a SWOT pomeaic talnringand decision: analysis (Gee Unit 1.3) ora STEEPLE analysis bee Unit 1.5) making Product Detals ofthe product offering (goods andar services) to prospective description customers. The plan should idetiy what makes the product unique or tingushable fom others that might be avallabl onthe market Marketing Thissection details the state of the market, including projected sales figures and marketing opportunites. I may incude information about market research, branding, prices, distribution channels, promotions and advertising, and online processes Thispart outlines the finances af the organization, Including ts balance sheet and income statement (see Unit 3.4), thus defining the financal status ofthe firm. Business plans are often used to attract funds from banks, venture capitalists or other investors Production processes and operational costs appear inthis secon ft may SUES IE (OSLISET ES Operations Hunan indude sections on quality assurance, stock control ventory management), Faei Oromieaion ctroul ‘supply-chain management (ee Unit 5.5) and supple networks chacarenlan Law tie corcpts ‘Thissection contain information about staffing and may inelude an ‘of change and innovation have ‘organizational chart impacted on its business start-up. 5Unit 1_ Business organization and environment 1.2 Types of organization —— Distinction between the private and the public sectors (A02) = The private sector is the commercial sector of the economy, mainly owned and run by private individuals and organizations that typically strive for a profit. 1 Examples of private sector businesses include: sole traders, partnerships, limited liability companies, franchises (ee Unit 1.6) and multinational corporations (Gee Unit 1.6) = Organizations in the public sector ate controlled by regional andjor national governments, 1 The public sector provides goods and services deemed to be essential and of benefit to its citizens, eg transport and communications networks, healthcare services, education and national defence. The main features of the following types of for-profit (commercial) organizations (Ao3) © Sole traders = A.sole trader (or sole proprietorship) isa commercial business owned by a — single person (known asthe soe taker. Sf con employ as many pecple as | Keyword definition required, but remains the only owner of the business ‘Unlimited liability means that the ‘owner of a business is personally & essninasan unineme eines other solo pation Garner fa bane socal between the owner and the busines itself Hence a sole trader has unlimited | 3. ie yay need to pay for liability and is responsible (liable) for any debe of the business which may be the debts by selling ff there paid from the sole trader's personal assets = Binance co run the business is provided by the owner. personal assets 1 Legally, asole trader and the business are considered as one, Le. the owner is not a separate legal entity ftom the owner. = The individual owner accepts ll the risks of running the busines, including possible losses or busines failure, but receives all profits if the business succeeds Table 1.5 Advantages and disadvantages of sole traders Advantages of sole traders Disadvantages of sole traders ‘© Assole trader is quick to create, without long and expensive e ‘The sole trader bears all risks and has unlimited lability as the setup procedures; itis the easiest form of business organization _ firm's finances are not separate from the owner's to setup ‘© Finances limited as the main source is provided by the owner; ‘© The owner has complete control and is free to make decisions access to extemal finance is ffcut asthe firm represents high risk, without any consultation with others soexpansion is difficult ‘© Decision making is therefore quick ‘© There is no one else to share ideas, burdens or responsibilities, ‘©The owner enjoys tax advantages as a small business. [iting the ect to wehich sole raters can benafit roca ‘© The owner enjoys privacy asthe business does not need to speciation ani etton of |sbour publish ts financial accounts to the general public only thetax © Added workload and tres from having to run the business as & authorities need to see these) sole owner, often having to work long hours ‘© Fexiblity a the sole trader can intraduce new trading activities © The lack of continuity if the owner is sick or wishes to go on ‘or change what the business does with relative ease holiday as the business will struggle to continue ‘© Motivational as ovmers have a sense of achievement from © Inability to exploit economies of scale which means that a sole running their ovm business ‘uader struggles to gain cost advantages so has to charge higher prices forthe products1.2 Types of organization 7 = Partnerships = A partnership isa commercial business organization owned by two or more people. In an ordinary partnership, there are usually between 2 to 20 owners (depending on the country’s laws on partnerships). These owners are called partners. Asan unincorporated business, at least one partner will have unlimited liability, although i is usual for all the parmersto share responsibility for any losses made by the partnership. 1 Itispossible for some businesses, such as law firms and health clinics, to operate with more than 20 partners. & Toprevent potential misunderstandings and conflict, most partnerships draw ‘upa legal contract hetween the partners, known as a deed of partnership, stating their responsibilities, voting rights, and how profits are to be shared between the owner. s= Partnerships are usually found in professional services (such as doctors, solicitors dentists and accountants) an! n family-run businesses Table 1.6 Advantages and disadvantages of partnerships ‘Advantages of partnerships jsadvantages of partnerships ‘© With upto 20 oviners (depending on the country), partners are © As there ismore than one owner, there might be disagreements abl to raise more finance than sole traders and confit between the panes, whch cen undoubtedly harm ‘© The partners can benefit from having more ideas and expertise, the running ofthe frm slong with shared workioads and eesponsiltes, «© Any profits made must be shared between all the partners ‘© They can also benefit fom specialization andthe dvsionoflabour The death or departure ofa partner can cause the organization © Busines affairs are kept confidential, so only the tax authorities Cease unti anew partnership agreements legally created need to know about the financial postion ofthe partnership» In most cases, partner ave unlimited bit (seeping «Theres improved continuity as the partnership can remain in parines are exem) busines ifaparterisill or goes on holiday © Linited ability to rise capital compared with ited ity “6 Sier.partners (or deepng partner) can prove addtional capital Companies; acces to finance i constrained by the number of vist having anacve ein the runing ofthe business partners = Companies/corporations = Companies (or corporations) are commercial businesses with limited liability and owned by their shareholders. Hence, any profits must be distributed among shareholders & Asincorporated businesses, there is divorce of ownership and control (a legal difference between the owners of @ company and the business itself), 50 shareholders have the benefit of limited liability. '= Limited lability protects shareholders who, in the event of the company going bankrupt, cannot lose more than the amount they invested in the company. © Typically, toset upa limited liability company, the owners must submit two important documents The Memorandum of Association — a relatively short document that records the name of the company, its repstered business address, the amount of share capital and an outline of the company’s operations (wat itcdoes). The Articles of Association — a longer document that contains information about: — The details and duties ofthe directors of the company Shareholders voting rights ‘The transferability of shares Details and procedures for the Annual General Meeting — How profits are to he distributed (dividend policy) ~ Procedures for winding up (closing) the company.Unit 1_ Business organization and environment = Once the authorities are satisfied with the paperwork, a Certificate of Incorporation is issued to the limited company so that it can begin trading. The shareholders elect a Board of Directors (BOD) to take charge of the strategic direction of the company en behalf ofits owners. = There are two types of limited companies: private limited companies and public limited companies (see Table 17) Table 1.7 Features of private ited companies and public limited companies Features of private limited companies Features of public limited companies ‘© Usually smaller businesses than publi limited companies "© Shares in public imited company can be bought by and sold to any member ofthe public orinsttution © Shares can only be transfered (bought or sold) e-_The first time that shares in a public ited company are sold via a stock privately, and all shareholders must agree on the saleftransfer © Typically, shares are owned by family, relatives and close fiends viaa stock exchange © Examples include Mars and IKEA exchange is called an inital public offer (IPO) © There is no legal maximum numberof shareholders; the company can have as many shareholders as its share capital can accommodate ‘6 Public limited companies tend tobe the largest type of business organizations ‘¢ _ The shares cannot be advertised for sale orsold They are strictly regulated and are required by law to publish their complete financial accounts (see Unit 3.4) on a yearly basis © Examples include Google, Toyota and Samsung Table 1.8 Advantages and disadvantages of private limited companies ‘Advantages of private limited compar Disadvantages of private limited companies ‘© Control ofthe company cannot be lost as shares cannot be bought ‘© Shares cannot be sold to the general public, restricting ‘without the agreement of existing shareholders finance compared with a public limited company ‘© More finance can be raised compared witha sole trader or apartnership = Legal fees and auditing fees mean itis mare expensive ‘© Private limited companies tend to have more privacy than public limited companies © There is continuity inthe event ofthe death of one of the main shareholders © Owners have limited ibility so can only lose up tothe sum of ther irwestment Table 1.9 Advantages and disadvantages of public imited compar ‘Advantages of public limited Disadvantages of public limited to set up compared toa sole trader or partnership, ‘©The company can become vulnerable toa takeever by 2 larger company © There slack of privacy as financial accounts must be companies companies ‘© Itiseasierto obtain finance for growth and evolution (see Unit 1.6) by selling ‘additional share capital (© Itisalso easier for large public imited ‘companies to secure external sources of finance from banks and other investors orfinancers © They can enjoy the benefits of being large, e.g, economies of scale, mattet power and market dominance ‘© Owners enjoy limited liilty 5 ‘As with private limited companies, there 's continuity, even if one of the principal shareholders dies The financial information becomes public as people have acces tothe final ‘accounts ofa public lited company They are the most administratively siffcut, time consuming and expensive ‘ype of commercial business to set up ‘There are high costs of complying with the rules ofthe stock exchange ‘There's the potential threat of a takeover bya rival company ‘There's the possiblity that the fim becomes too large to manage efficiently 0 suffers from diseconomies of sale le. higher average costs of production made avalable upon request Keyword definition A stock exchange (or stock ‘market) is the markerplace where people and businesses buy and sell seconcthand company stocks and shares, eg. the New York Stock Exchange,1.2 Types. of ‘organization Types of for-profit social enterprises (Ao3) = A social enterprise is.an organization that uses commercial business practices {eo improve communities, the environment and human well-being rather than focusing on profits for external shareholders. ‘= Some social enterprises are run for profit (eg. cooperatives, microfinance providers and public-private partnerships), whilst others are run as non-profit Drganizations (eg. non-governmental organizations and charities) = Non-profit organizations can earn a surplus from selling goods and services but reinwest this hack into the business and/or local community. = Cooperatives 1 Cooperatives are for-profit social enterprises owned and run by their members, such as employees, managers and customers, Cooperatives strive to provide a service and! to create value for their members, rather than a financial return for their member-enners 1 Like a limited liability company, a cooperative is a separate legal entity Shareholders, directors, managers and employees have limited liability so are ‘not personally liable for any debts incurred by the business. © All: members have equal voting rights irrespective oftheir position in the ‘organization or their level of investment. All shareholders are expected to help run the business. They promote a democratic style of managing the organization, with a culture of promoting the concepts of sharing resources and delegation to increase competitiveness advantages of coopers Table 1.10 Advantages and ‘Advantages of cooperatives Disadvantages of cooperatives "© [tis usualy straightforward andinexpensve to setup a ‘© Itcanbe diffcutto attract potential membersbharcholders as cooperative «cooperatives are no formed to generate a financial etun on ‘© All members and shareholders must be active stakeholders of investment the cooperative, making it more key to sucezed ‘© Limited resources asthe nancial strength of cooperatives ‘© Shareholders have equal voting rights (ll embers are equaly depends onthe capital contributed byits members (membership Important forthe cooperative), making the organization more ‘fees are limited so they are unable to raise large amounts of ‘democratic and harmonious finance Members have limited Kabilty ‘© Employes and managers may nt be highly motivated due to Members own and control the business rather than being the absence of financial rewards and benefits ‘govermed by external investors ‘© As cooperatives are managed by their members only, employees Any spin spent otha ins f heternborva may not have any managerial sil so inefficiencies can hinder portion is kept for reserues as an internal source of finance ‘andes of te Eustis ‘© Although some members have more responsible, they sil ‘© Governments often provide special financial assistance to ae lore ehchren bedened nant help cooperatives © Microfinance providers Microfinance providers are a type of banking service provided to unemployed or low-income earners who woukl otherwise strugele to gain external finance, 3. savings, insurance, loans and remittance transfers. 1 Microfinance gives these people, women in particular, the opportunity ro become self.sutficent by providing small loans, savings and other basic financial services. |= Microfinance providers charge inrerest on loans, although the rates are generally lower than those offered by commercial banks. 910 Unit 1_Business organization and environment Table 1.11 Advantages and disadvantages of microfinance providers Disadvantages of microfinance providers tics of microfinance condemn the system for earning Advantages of microfinance providers Helps those ivng in poverty to become financially independent © Empowers entrepreneurs (specially females) of smell businesses profs fom the poor, sis egardd a being unethical © As around half ofthe words population survives on les than $29 ® Microfinance is small scale, sos insufficient to transform day, microfinance provides poverty relief communities and societies ‘© They generate socal benefits, e.g. health, education, clean water, and ® Microcredit loans can prove to be too expensive for some job cation borowers as itis dificult or them earn enough prof © Helps to build and encourage a culture of economic responsibility 1 rast the lone repavmienis © Public_private partnerships (PPPs) = Public_private parmerships (PPPs) are organizations jointly established by the goverment and at least one private sector organization, e, the Hong Kong government owns 51% of the stake in Hong Kong Disneyland whilst rhe Wale Disney Company owns the other 49% stake. PPPs have been used for a wide range of projects that benefit local communities and society, eg. schools, hospitals and health care services, bridges, roads, public transportation networks prisons, parks and convention centres, They are suitable when the capital to finance a public project from public funy sufficient oF not available, eg. a government inight be heavily indebted but collaborates with a peivate sector firm in exchange for receiving seme of the operating profits from the project (Once the project is built or complete, i is usually maintained by the private sector contractor on a medium to long tert basis (up 0 30 yeas) after which time there is the option to renew the partnership or the asset returns to public ownership. ‘Acconding to the World Bank, more than half the ccuntries around the world now use PPPs Find more about PPPs on the World Bank website (httpi//goo.gl/fm62u3), which includes an introductory video on Vimesx htps://vimeo,comi47015729 Table 1.12 Advantages and disadvantages of public-private partnerships (PPPs) Advantages of PPPs Disadvantages of PPPs Both private and public sectors contribute Financial resources towards the project and share some of the risks ‘They are run more efficiently than traditional bureaucratic public sector organizations They provide a solution to the funding shortfall of many governments Similary, government funding can help private firms to reduce the amount of money they need for investment projets Private sector management skills and financial support help to create better value for money for taxpayers (who help to fund the FPP) ‘© _PPPshave positive impacts on employment and econamic growth ‘© There is eimays an opportunity cost of public sector inences and resources; by engaging in a PPP, the government forgoes (urns down) other projects or areas of expenditure ‘As PPPs tend tobe large projects and imvohe vastsums of money and high operational costs fora lang peri of time, they are high risk investments ‘There is the potential danger af confit of interests between stakeholder ofthe PPP, e.g private sector managers need to ‘actin the intrest oftheir shareholders whilst the government has alternative priorities Private investors might be put off due tothe difficulty in estimating financial outeomes ofthe PPP over such longtime petiods Types of non-profit social enterprises (Ao3) 1 Social enterprises are organizations that generate revenue but, act with, community cbjectives (forthe wellbeing f others) atthe core ef their operations . profits fo ts owners or sharchoklers, hut instead uses the su mmission ot vision ‘A non-profit organization acts in a business-like way but does not distribute plus to pursue its Examples of non-profit social enterprises include non-government organizations and charities, such as UNICEF, Human Rights Watch, Greenpeace, Ronald McDonald House Charities, and World Wildlife Fund.1.2 Types of organization 11 Figure 1.1 Greenpeace is anon- profit social enterprise Table 1.13 Advantages and disadvantages of non-profit social enterprises ‘Advantages of non-profit social enterprises __ Disadvantages of non-profit socal enterprises «© They ae exempt rom paying income taxes and “© Inorder to protect the general publi there are stct esitons corporate taxes and guidelines that mustbe followed, including the types of trading fe They qually for goverment grants and ubsdles activities alowed © They exist forthe benefit of local communities and © -Eamings of workers are often lower as it would be regarded as unethical societies, which can assist fundrasing and donations if workers were paid similar wages to those in for-profit fms © Aspart of govermentincentives to encourage donots, © They ae often eliant on donations and extemal support inorder to sunive ‘non-profit socal enterprises qualify for tax reductions con thei donations ‘© Cost and financial cantrol may not be stringent as there is no expectation toearna profit, © Non-governmental organizations (NGOs) = A non-governmental organization (NGO) isa type of non-profit social enterprise that is neither part of a government nova traditional forprofit business but run by voluntary groups. = They may be funded by governments, international organizations, charities, commercial businesses or private individuals. = NGOs can operate ata local, national ce inteenational level but are not usually affiliated with any government. ‘= The majority of NGOs are run to promote a social cause, eg, human rights, ‘animal rights, environmental protection, disaster relief, and development assistance, = Examples include: Oxfam, the Wikimedia Foundation, Amnesty International, Doctors Without Borders and World Vision International, = They exert pressure and influence on government polices to support their cause andjor a wide range of global isues. © Charities 1 Charities are notforprofit organizations that operate in an altruistic way with the objectives of promoting a worthwhile cause, eg. child protection or anti-whaling. Be sure to know the difference m= They predominantly operate in the private sector. Ceres canter me Nee Whilst ‘ate non-profit organiztions = As with all non profc socal enterprises, charities ae run forthe benefiof __ @UFOS), nt al NFOS are charts: To others in society bea chery, the organtzation must be Chane ert nance toma itd ngeoFcces eg danstons, (easiest he especie Chany fund raising events and selling goods ‘ean be charities in some counties ‘Whilst they do not always necessarily sell goods, they operate topromote and (Such as Oxfam and VSO in the UK) " Ghemney fries ey opens premet yet be NGOs in other countries.12 Unit 1 Business organization and environment 1.3 Organizational objectives Vision statement and mission statement (A02) ‘Keyword definitions A vision statement is an optimistic and inspiring declaration that defines the ‘Purpose and values of an organisation and where it wants to be in the future ‘A mission statement isa clear and concise declaration of an organisation's fundamental purpose, ic. a succinet description of what the organisation does, in onder to become what it wants to be. jan and mission statements Table 1.14 Not all businesses have separate vision Vision stotement Mission statement sion statement ___Missionstaterert______ xd mision stetements For example © Absractsetenertbatouies atthe = Aconeteandpracaltatenent ——fulatesy Yorbegs te eonend Cisne tat ono beards nent ste the pupae and aude ogee he cere ge ‘© Concentrates on the future direction of ‘the actions of an organization power to share and make the world the oranzton Adelson ofan creation’ more open and connected. Arazon's «sou ofrsprain vn force) = GnfEretee, a utes son and miion statement are for intemal stakeholders ‘© Symbolizes an organization's also combined as ‘To be: oe hilosophies, goals and ambitions: Sisters: centie company, i um © Astatement ofthe pupose ofthe EAosophies goals rambo aplace where people can come to Grgaiation,intemsofitscre Enables thecgaiaton's stakeolis fing and dscover nyting they might Vales ordeal unertnd the desired le ee ‘© Provides guiding beliefs about how performance ‘Nngshaudbe done inthe «corporates naif and ‘organization measurable criteria, ¢.g. expectations CUEGIS CONCEPTS forehand rf ‘© Informs strategic planning, ie. where grows Ny. | Espareneoneaae ces theergniaton wan tobe Describes how an organizatin wll eee ies © Does not change, even as business ‘exrate is vision, i. the tactics that mission statements have impacted models adapt overtime spake ba vison a raity (on its organizational cuture and Broad statements (© Narrow and specific statements strategy. Aims, objectives, strategies and tactics, and their relationships (403) © Aims © Aims are long-term goals ofan organization, formulated by the senior ‘management team. © Theaims ofa business are often found in its mission starement. © Objectives © Objectives are the targets an organization is trying to achieve, eto maximize shareholder value. = Objectives can be strategic (long term), tactical (medium term) or operational (shore term) Eton 1 They are often set as SMART goals (Specific, measureable, achievable, realistic Objectives are vial for any business and time constrained), e.g. to achieve sales growth of $250m by 2023, or pe eee padiet sl Lape irene mark sha by 39% within fve yeas ne nines a gg ora 1 They can givea sense of direction to employees, managers, departments and Objectives give departments and the whole organization. ‘the organizetion a sense of common purpose, making it easier to create 1 Objectives ean define both the purpose and the aims of an organization. Peale rine to = They can be communicated chrough the organization's mission statement. buses1.3 Organizational objectives 13 © Strategies = Strategies are how an organisation intends co achieve i ims and strategic = They are usualy long-term, overall corporate decisions made by seniot management, 1s Examples of strategic decisions include decisions to expand overseas orto change location or product lines in onde to develop competitive advantages. © Tactics = Tactics are shorc-term, smaller-scale or routine decisions about how an organization intends to achieve its aims and objectives ton a day-to-day basis. The responsibilty of making these decisions is usually delegated to employees lower down in the iaadiy wo mceinmeal emptn eaker, ==] = Tactics are concerned with reaching more limited and rae ee “Tata ccs psa a tu ag = satay ase ce ete the Haire besa Figure 1.2 The relationship between aims, objectives, t= They are set to facilitate the strategies ofthe organization. strategies and tactics The need for organizations to change objectives and innovate in response to changes in internal and external environments (403) nternal factors are those within the conttol of an organization, 18 Corporate culsure ~the traditions are! norms within an organization. Businesses that have a dynamic and adaptable corporate culture (such as, Google or Apple) are likely to have changing and innovative objectives. © Growth and size ofthe organization — New businesses tend to aim for breakeven ana survival, whereas established businesses might aim for greater market share, Inorganic groweh through mergers and acquisitions (see Unit L6) is likely to crete a change in corporate objectives. 15 A change in senior management — Individuals have the capacity to change the corporate culture of an organization (see Unit 2.5}. Hence, a change in leadership can result in changing business objectives. An ambitious leader is impr likely to strive for imnovative practices. 1 Chisismanagement— A. business that experiences an internal crisis (see Unit 57) such as working capital issues (ee Unit 3.7) or a majer product recall (exe Units 57 and 53) will need to focus on maintaining its market position and corporate image. “External factors are those beyond the control of an organization. 15 Business cycle~ Onganizational objectives change depending on the business cycle Gee Unit 1.5), eg duringa recession (when consumer spending is low and unemployment is high), there are few opportunities. Change and innovation become vital for business survival t= Laws and regulations — Changes in the legal system (see Unit 1.5) can constrain business activity, eg. complying with employment laws and ethical coves of practice can lead to higher costs '= Social rends —Environmental pressure groups (see Unit 14) can cause businesses to change their objectives and practices, such as being socially responsible to their stakeholder. 1 Technological changes — Technological progress and innovations can lead to many new opportunities, thereby changing the firm's corporate objectives, eg, internet technologies have led to the growing popularity of e-commerce (see Unit 48).14 Unit 1_Business organization and environment Ethical objectives and corporate social responsibility (CSR) (ao1) = Corporate social responsibility (CSR) refers tothe concern and obligation of a business in committing to behaving ethically and responsibly towards its Z various stakeholders (see Unit 14). Rerepalldeftakion Corporate social responsibility = Examples include improving the quality of work life for the employees, (CSR) refers to an organization's adopting green practices to protect the natural environment, and using duties to its internal and external socially responsible marketing strategies (see Unit 41). stakeholders by behaving in a way = CSR involves voluntary actions a business can take, over and ahove hat pobttvely gpcasectet ya compliance with minimum legal requirements in order to address competitive | @ whole. interests and the interests of wider society. f= Icisbased on what is deemed to be morally correct according to societal norms and values. The reasons why organizations set ethical objectives and the impact of implementing them (403) 1 Organizations are increasingly setting ethical objectives as they are more aware of their corporate social responsibilities (CSR). Rey = Setting and pursuing ethical objectives can increase employee motivation and productivity, Businesses might also find it easier to recruit and retain employees. = Tecan reduce negative publicity from news media and pressure groups. 1 The growing use of social media makes it easier for the general public ro demand transparency and ethical business behavior. = Having @ good corporate image with customers and a good corporate reputation with the government enables the organization to gain competitive advantages. Hence, CSR can be profitable (the ultimate aim of for-profit organizations) = Pursuing ethical objectives isa form of self-discipline which avoids government intervention, However, chere can be negative impacts of implementing ethical objective, such as © The compliance costs of acting in a socially responsible way and the extra It is incorrect to assume or state ‘management time required to execute ethical business practices places the ‘that enl non-profit organizations organization at a competitive disadvantage. (POs) set ethical objectives such as 2 Thiscan mca lenrer profits being available to be distributed bo sharcholders. | Sefpevale socal responsiniity NEOs PIT ‘may have different objectives (as they in the form of dividends. This might therefore crete some resentment with re not profit seekingh but it can Sexes be for humanitarian and altuistic 1s arthermore, as competitors are in pursuit of similar echical objectives and ‘reasons that for-profit organizations, practices, any unique selling point (USP) might not be sustainable, ‘Set ethical business objectives. The evolving role and nature of CSR (Ao3) 1m Asa business hecomes more established and grows, the scale of is operations enlarges. For example, more workers are needed, As a result, organizational objectives and peiorties may change. © Forexample, the opportunity cost for a large multinational company that doesn't act ethically is potentially huge, especially when compared to 2 small sole trader operating in a remote town.1.3 Organizational objectives 15 = Modern business practice in many countzies has shown that CSR has an {important role in determining the market postion (see Unit 42) of an fears meat oe rate of CE fr complicated when organizations 1 Attitudes towards CSR can change over time. What was previously ‘operate in overseas markets. What is considered socially acceptable, such as smoking in public areas, may no considered socially acceptable in one longer be the case. Environmental protection was not a major corporate country might not be in others. For priority until the 1980s. example, Australia and the UK have very strict laws on tobacco achertsing, 18 Hence, changes in societal norms, expectations and values mean that sohient Sepa afed Greer are far ganizations may need to review their CSR policies and practices occasionally. more relaxed about this. 1 Media exposure, pressure group action and educational awareness have ensured that an increasing number of businesses are actively implementing ethical objectives, SWOT analysis of a given organization (A03, A04) A SWOT analysis isa management tool to asess where a business is at the present time and how itis affected by the external business environment. iis sexnetimes refered ro as situational analysis ast examines the position of an ‘onganization at one point in time, SWOT stands for: 1 Strengths — Internal factors that reveal what the organization does well compared to its rivals, eg; high market share, = Weaknesses — Internal factors that reveal what the organization does not do so well compared to its rivals 8 poor customer service or low empleyee motivation. = Opportunities — External factors that may enable the organization to develop and prosper, eg, an economic boom (see Unit 15). = Threats —External factors that may hinder the organization’ ability to achieve its aims, eg, higher interest rates (see Unit 1.5) or increasing competition in the industry. Table 1.15 Example of SWOT analysis Sa Strengths ‘Weaknesses SSE Aare © Dedeatedand poductiewerorce © Highlabourtumover(lemotiated staf) yuna. miaht be vewet) as strength igh marketshare © low pot margins regarded as a weakness for others Brand loylyorand reputation High wastage ate Wit sirgrat so wer a‘ Cudkme ina oy ea cakeereweta answets inthe context of the business 2 Setomerioyety 8 Fomrastonerseniee andthe industry in which it operates. Opportunities Threats nee technologies Higher ew material costs New overseas markets f° Eonoric recession © Thecollapse olamajorcompetior «Protest om pressure groups Deragraphe changes Demographic changes WSIS Investigate how change and Table 1.16 Advantages and disadvantages of SWOT analysis poe enone ey ‘Advantages of SWOT analysis __ Disadvantages of SWOT analysis ‘portunities and threats for © Asef vu molto asst managers © tisonlya snapshot he cent 2 multinbonal corporation of inthe planning process shuaton forthe orgelzaton yourchoce. ‘© Adecision-making tool which can give Itmayneed to be revised regularly, teomaerwremeae © Lamotte ‘actual poston inthe market and external business environment pipes fortheraser ‘© Itencouroges an examination of strategic © Its subject somebiasas the analysis examination (pre-eleased case ‘opportunities for an organization, eg Isbased on opinions, not only fats and stud), construct a fll SWOT analysis ‘growth (expansion) oF relcation figures for the organization.16 Unit 1_Business organization and environment Ansoff Matrix for different growth strategies of a given organization (403, Ao4) f= The Ansoff Matrix isa management growth too, first published in an article titled ‘Strategies for Diversification featured in the Harvard Business Review (1957). 1 Ie isused by businesses to identify and decide their product and market growth strategies Gee Figure 13). Exating products Naw products Figure 1.3 The Ansoff Matrix Existing markets New markets © Market penetration 1 Market penetration focuses on existing matkets and existing products ie. the firm focuses on what it knows and does well. ss Ie isa low-isk strategy so requires litle, if any, investment in new marker research as the organization aims to increase revenues by focusing on its existing products fo existing customers. © The strategy concentrates on increasing the organization’ sales revenue or market share ofits existing products, eg. by using comporitive pricing strategies, introducing customer loyalty schemes, widening distribution channels or using a more effective promotional campaign. © Market development 1 Marker development is the growth strategy where a business sell its existing products into new markets, ie. the product remains the same, but it issold to a new group of customers. = An example would be car manufacturers that export their cars to overseas markets or have proxhiction plants in various countries. = There isan element of isk with market development because customer tastes may vary in different regions and countries, There is also the added cost of marker research. In the case of foreign direct investment, market development presents even higher financial risks f= Nevertheless, the business knows their products well so should be familiar ‘with customer needs. This helps to minimize some of the risks involved with. market development.1.3 Organizational objectives 17 = Product development f= Proxhuct development isa growth strategy where a business introduces new products into existing markets, ie. it targets new products at existing customers 1 Ieis commen for businesses, such as carmakers, to develop and innovate new products to replace their existing ones. These new products are then marketed. tjwexisting customers. m= Anexample is Apple's introduction of the iPhone, iPad and iPad Mini, and Apple Watch. = Product development often involves a business developing modified products as part ofits product extension strategy. = Iris mediumsrsk strategy as product development often involves significant investment in research and development (R&D). © Diversification 1 Diversification involves businesses marketing completely new products to new customers It is a high-tisk growth strategy as the business enters markets in which it has litle or no experience. = Related diversification means that organizations remain in a market (industry) that they are familiar with. Unrelated diversification involves, businesses entering new industries, ie. in which they have no previous market experience, = For example, Honda launched its Hondalet (aircraft) division in 2015. Lenovo introduced smartphones, watches and sports shoes in 2015, Table 1.17 Examples of diversific Company Original business Company __Original business ‘American Express Postal services Peugeot Toolmaker Shell Collectable shells Nintendo Playing cards Nol Rubber and paper Lamborghi Tractors Wigley’ Soap and baking powder Mitsubishi Shipping Table 1.18 Summary of the Ansoff Matrix Market Product Market penetration __ development _development _Diversification Same products for New products for Nev/customers for New products for existing customers existing customers existing products _new customers Famillar markets Productextension Famllar products Spreading of visks strategies and product development imal rick ‘Moderate isk Moderate sk hk Seek to maintain or Innovation ta replace Entering overseas Spreading of risks raise marketshare existing products markets Intense competition Product Newdisvibuton Use of subsidiaries ([siemtceaboeel improvements channels and strateaic ‘The needs of customers change business units overtime. Investigate how the Changing Brand extension Changing Less focus on ‘Ansoff Matrixis connected to the marketing mix strategies marketing mix core markets and ‘concepts of change and innovation competencies for an organization of your choice.18 Unit 1 Business organization and environment 1.4 Stakeholders The interests of internal stakeholders (A02) 7 Keyword definitions Stakeholders are individuals, organizations or groups with a direct interest in the operations and performance of a particular business or organization. They have varying degrees of influence on the organization. Internal stakeholders are members ofthe organization, such as employees, ‘managers, directors and shareholders (rhe owners af the business) 1= Employees are the people who work within an organization. They can have Shareholders can be classified as both significant influence on the organization, such as their level of motivation internal and external stakeholders. ‘and productivity. Employees seek to improve the terms and conditions For example, employees and directors of employment, ¢g. competitive levels of pay, jab security, ood working ‘may hold shares in the company so conditions and opportunities for professional advancement. are intemal stakeholders. However, ‘the general public and other = Managers and directors are people hired to be in charge of certain cerganizations may also own shares in departments or operations within an organization. They may aim to maximize the company but these stakeholders profits, improve operational efficiency and enhance customer relations. They _are external tothe business. also strive to improve their own conditions of employment and financial rewards, such as bonuses, share ownership schemes, performance-related pay, and finge benefits (see Unit 24), Do not confuse the terms 1 Shareholders are individuals or organisations char buy shares ina company, ‘shareholders’ with ‘stakeholders thereby owning. part ofthe business. As partowners ofthe company, they __The latter s a mtch broader term hhave rights to a share of any profits earned uch payments are known as and includes more than shareholders dividends), and voring rights ar the company’s Annial General Meeting All shareholders of @ business are (AGM) to decide who serves on the company’s Board of Directors. They also stakeholders, but not all stakeholders expect the company to earn an acceptable return on their investment, are shareholders. The interests of external stakeholders (Ao2) = Customers are the clients of a business. They want overall value for money, {e. prices char reflec the quality of the goods and services received, prdtcts laid Mana ior aie eu eee fc fr ta uepene geal custaner cae eed the pooriaaa Peseta eee ee ieeibenosers Eateenal stakeholders ae not members ofa business ot 1 Suppliers provide the goods and support services fr other businesses, eg Capantzrion, yethave a direc: Coca Cola supplies supermarkets with soft drinks and McKeys supplies seake (interest) in is operations MeDonald’s restaurants in Hong Kong and Souther China with itsChicken | and performance. Examples MeNuggets. Supplies are important stakeholders as they can decide what inclide customers, suppliers, credit terms or discounts (if any) are offered to the business. They are competitors, che local ommunity, interested in securing reasonable prices for their goods and services reular | pressure grou, finances and the orders and prompt payineot from thei business lent. government = Competitors are the rivals ofa particular business, As external stakeholders, they are interested in the business operating in a fair and honest way. Competitors set their own targets and strategies hased on the actions of other firms in the industry. = The local community is interested in businesses acting in a socially responsible ay, such as creating job opportunities, protecting the environment, and supporting local residents and events such as sponsorship of public events fm Pressure groups are organizations or groups of people who have a common. interest. They try to influence governments and public opinion in favour of their cause, such as environmental protection, fair trade or human rights ‘Therefore, these special interest groups pur pressure an businesses to work in 2 socially responsible and ethical way (see Unit 1.3).