Theme 2

2.1

Internal sources of finance

Capital/Funds raised within the business

1) Personal Savings
Savings from the owner funded into the business
+ Available immediately & quick
+ No interest payments
- May not be enough
- No guarantee on profits

2) Retained Profits
The profits kept by a business to be reinvested or issued to shareholders
+ Flexibility
+ Business owners in control
+ Cheap way
- Finance is drained if it’s loss making
- Danger of keeping profits
- Opportunity cost for shareholders

3) Sale of assets
When you sell an asset and get a new one paying monthly
Can sell old chip fryer for £1000 and buy a new one on lease
+ Large injection of cash
+ Most assets lose value overtime so it's better to sell
- Lose ownership of an asset

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External sources of Finance
Finance gained from outside the business

1) Bank Loans
+ Greater certainty of funding
+ Lower interest rates than overdraft
+ Appropriate method
- Interest paid on full amount
- Harder to arrange
- Not really for start up businesses

2) Bank overdraft
+ Easy to arrange
+ Flexible
- Interest rate varies
- Higher interest rates than bank loan

3)
Cash flow forecast
A prediction on the cash coming in and going out of business in the form of a table
+ Prevent businesses from becoming insolvent
+ Adjustments can be made if you can see you are short of cash
- No guarantees of sales there may be competitors or external shocks
- Not accurate as costs may have increased

How to improve cash flow

1) Speed up inflows
● Loans/overdrafts
● Reduce length of of trade credit so inflows are quicker
● Discount for buy now payments

2) Slow down outflows

● Delay paying creditors
● Reduce costs

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 2.2.1

Sales Forecasting
Forecasting future sales using a planning activity
Businesses use a variety of tools to analyse marketing data and make forecasts

Why Forecast Sales ?

Forms the basis for most other common parts of business planning:
➔ How many people we need linked with output
➔ Production / capacity plans
➔ Cash flow forecasts
➔ Profit forecasts & budgets
A very useful part of regular competitor analysis and helps to focus market research

Key factors affecting Sales Forecasts :

1) Consumer trends
2) Economic variables
Interest rates, taxation.
3) Competitor actions
Hard to predict

Where Sales Forecasts Are Likely to be Inaccurate

• Business is new
• Market subject to significant disruption from technological change
• Demand is highly sensitive to changes in price and income (elasticity)
• Product is a fashion item
• Management have demonstrated poor sales

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Extrapolation
Uses trends established from historical data to forecast the future
+ Quick and cheap
+ Simple method of forecasting
+ Not much data required
- Unreliable if there are significant fluctuations
- Assumes past trend will continue into future
- Not for business operating in dynamic markets

Moving Average
Takes extreme values out of data from period to period

Factors affecting Extrapolation

● Product Life Cycle
● Pace of technological innovation
● Growth of the global economy
● Popularity

Correlation Variables :
➔ Independent Variable (X-Axis)
The factor that causes the dependent variable to change
➔ Dependent Variable (Y - Axis)
The variable that is influenced by the independent variable

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 2.2.2

Total Revenue = Volume sold x avg. selling price

Ways to increase revenues :

1) Increase the quantity sold
By discounting products or cutting prices
2) Achieving a higher selling price
By adding value

Costs
Amounts that businesses pay in order to make goods & services

Variable costs
Costs that change with different levels of output
● Raw materials
● Wages
● Commission

Fixed Costs
Costs that remain the same
● Rent
● Insurance
● Salaries

Semi-Fixed costs
Costs that can be either variable or fixed

Total Costs = TFC + TVC

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 2.2.3

Breakeven
When there's neither profit gained nor lost. TR = TC
Formula - Fixed Costs / Contribution per unit

Total Contribution
Contribution per unit x number sold

Contribution per unit

Selling Price per unit - Variable Cost per unit

Margin of Safety
The difference between actual output and breakeven output

Breakeven Analysis
+ Focuses on what output is required, before a business reaches profitability
+ Quick and easy calculations
+ Shows the importance of keeping fixed costs down to a minimum
+ Helps Management & Finance providers better understand the risk of a
business/idea
- Unrealistic assumptions - products are not sold for the same price at
different levels of output, therefore FC change
- Sales unlikely to be the same as output, so stock is wasted
- VC per unit are not the same, e.g. a business may have high output and
therefore lower prices
- Most businesses sell more than one product

4 key assumptions of a BE analysis :

1) Selling price per unit stays the same
2) Variable cost per unit stays the same
3) All output is sold
4) Fixed costs stay the same

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 2.2.4
Budgeting
A financial plan for the future, concerning revenues and costs of a business
- Budget revenues and costs are prepared in advance and then compared with
actual performance to see if it's higher or lower

Example
If you take too much to Asda you'll end up spending more, therefore wasting money
If you take less you'll have to buy a cheaper branded item

Variance
The difference between budgeted figure and actual figure of each item
Then added to give a total variance
+ = Favourable
- = Adverse

What should management do with a variance?

● If it's only a small variance, then that's ok
● If you keep getting a low variance, questions to your employment

Historical Budgets
Using last years/month figures as the basis for the budget
+ Realistic as it is based on actual results
- Past data may not be the best indicator for the future
- External factors can affect the budgets

Zero-based budgets
Budgeted costs & revenues are set to 0
+ Potentially more realistic
- Makes budgeting more complicated
- Time consuming

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Principles of effective budgeting
● Managerial responsibilities are clearly defined
● Performance is clearly monitored against the budget
● Corrective action is taken if results differ

2.3.1
Profit
The reward for taking risks and making investments

2 approaches to measuring profit :

1) Profit in absolute terms
➔ £ value of profits

2) Profit in relative terms

➔ Profits earned as a proportion of sales achieved
➔ E.g. £50,000 profits from £500,000 of sales, profit margin of 10%

Profit = TR -TC

Gross Profit = Revenue - Cost of goods sold

Gross Profit Margin

= (Gross Profit / Revenues) x 100

Operating profit
A key measure of profit
Tells you how effectively it is run

Operating profit Margin

= (Operating Profit / Revenues) x 100

Net Profit Margin

= (Net Profit / Revenues) x 100

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 2.3.2

Balance Sheet
Shows what the business has spent their money on

Non-Current Assets
Long term investments that are not easily converted to cash within an accounting
year.
E.g. Building, tills

Current Assets
Any asset expected to be sold within a financial year.
E.g. cash & stock

Current Liabilities
Amounts due to be paid to creditors within a year.
E.g. short-term loans/debts

Non-Current Liabilities
Amounts not due to be paid within a year
E.g. long term loans/debts

Assets - Liabilities = EQUITY

Current Ratio
Identifies whether a business can pay back short-term debts when due
Formula - Current Assets / Current liabilities

Ideal Ratio is between 1.5 - 2.5

● If its too low there's a solvency (paying back long term debts) problem
● If its too high then there may be too much perishable goods and may expire
quickly

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Ways to improve Liquidity
● Encourage cash sales
● Destocking
● Negotiate longer credit terms with suppliers
● Delay Payments
● Use overdrafts

Working capital
Refers to the money a business has to pay for day to day running costs
Net Current Assets = Current Assets - Current Liabilities

2.3.3

Business Failure
When a business goes bankrupt or closes down their operations due to
internal/external factors.
● Not enough cash flow
● Bad management
● External shocks (Covid, Interest Rates, Inflation)
● Pricing costs
● Ignoring customer needs
● Lack of planning
● Lack of funds

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 2.4.1
Production methods
1) Job Production
- One-off or small number of items procured
- Normally made to customer specifications
- E.g wedding cake or Plumbers & Architects
+ Changes can be handled
+ Higher quality
+ Employees better motivated
- Higher costs
- Labour intensive
- High skills needed

2) Batch Production
- Similar items are produced together
- Each batch goes through one stage of process before moving on
- E.g. Cricket Bat
+ Cost-savings as buying in bulk
+ Products worked on by specialist staff/equipment
- Takes time switching between batches
- Boring tasks

3) Flow Production
- Product moves continuously through production process
- When one task finishes then the next one starts, time taken on each is
same
- E.g. Car assembly plants
+ Cost per unit falls as they are more efficient
+ Suitable for large quantities
- Long time to set up
- High cost and quantity of raw materials
- Production shuts down if the flow is stopped

4) Process Production
- Involves a series of processes which raw materials go through
- The end result is a large quantity of a finished product
- E.g. Oil refining, Cement

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4 factors for choosing a method of production :
1) Target Market
2) Audience
3) Resources
4) Standards

2.4.1

Unit costs Formula

Total production costs / Total Output

Ways to improve production

● Training
● Improved motivation
● More capital equipment

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 2.4.2

Capacity
A measure of how much output it can achieve in a given period

Capacity Utilisation
Is the % of a business’ capacity that is actually being used
- A useful measure, as it measures whether there are unsold products
- Higher utilisation reduces unit costs, making it more competitive
Formula
(Actual output / Maximum possible output) x 100

Capacity can change :

● When a machine is having maintenance, capacity is reduced
● Capacity is linked to labour
● Seasonal changes e.g. Easter (eggs)

Working at high capacity :

+ Unit costs are lowered, therefore more competitive
- Can't meet unexpected demand
- Strain on resources; stress & tiredness / machines could break

Why most businesses operate below 100%

● Lower demand than expected (Seasonal Variation)
● A loss of market share
● Increased capacity

How to improve capacity utilisation

1. Reduce Capacity
2. Increase usage (Promotion offers e.g when there's low demand in seasons)
3. Getting someone else to do it
4. Redeployment

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 2.4.3
Types of stock
● Raw Materials
● Work in progress
● Finished goods

Buffer Stock
The minimum stock level that is kept

Reorder level
When stock is re-ordered (can be done automatically)

Lead time
The amount of time it takes fo the stock to arrive

Problems with high stock levels

● Stock can be wasted or perished
● High cost to store (insurance, lighting of warehouses)
● Extra stock is cost to the business if sales are low

Costs of holding stocks:

1) Cost of storage (electricity & rent)
2) Interest rates on stock not sold
3) Obsolescence Risk - could be obsolete and not used anymore
4) Stock-out costs - Stock may run out and therefore results in lost sales

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Just In Time (JIT)
Order arrives before the minimum stock level is low
Uses fewer resources as possible, waste minimisation is reduced
+ Cash not tied up in stock
+ Stock will be fresh
+ Waste minimisation
- Unforeseen circumstances - late deliveries cause a halt in production lines

Just In Case (JIC)

Just in case something is faulty, they'll order more
+ Never run out of stock
+ Can meet unexpected increases in demand
- Cash wasted, could be spent elsewhere
- Higher storage costs

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 2.4.4

If it meets these it has passed the quality test ;

● Performance
● Appearance
● Availability and delivery
● Reliability and Durability
● Price
If not it is sub-standard

Quality can be measured by

● Customer service ratings
● Warranty claims
● Levels of repeat business
● Surveys
● Profit margins

Quality is important in the business as ;

● The market is highly competitive
● Customers may complain
● Customers are demanding and knowledgeable
● Bad quality can be spread on social media
If a business can get reputation with high quality, then its an advantage

Two main approaches :

Quality Control
The process of testing at the end to make sure a product is made correctly
● Encourages quality
● Satisfies customers
● Reduces inspection cost

Quality Assurance (Built-in production)

The processes that ensure production quality meets the customer requirements
● Improved production processes
● Targeted at organisation
● Aims for loyal customers

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Kaizen
Introducing small changes in a business to improve efficiency
● Another kind of quality assurance
● Based on continuous improvement

Total Quality Management (TQM)

● Is essentially an “attitude”
● The whole business understands the need for quality and seeks to achieve it
● Workforce is concerned with quality at every stage of the production
process

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 2.5.1

Economic influences

1) Interest Rates
➔ If they rise then this will incentivise saving as there's a reward for saving
➔ Decreasing consumption
2) Disposable Incomes
➔ If income tax rises then this means that consumers have less to spend
➔ Decreasing Consumption
3) Exchange Rates
● Strong Pound Imports Cheaper Exports Dearer
● Weak Pound Imports Dearer Exports Cheaper

Trade Cycle

Trend Growth (Straight)

Represents smooth line

Actual growth (Squiggly)

Real growth going up and down

Boom
Actual growth faster than trend
➔ High Profits
➔ Low Unemployment
➔ High Confidence
➔ Higher Taxes
➔ Inflation

Recession
Actual growth is less than trend, 2 consecutives quarters of negative growth
➔ High Unemployment
➔ Falls in Investment
➔ Lower Inflation

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 Theme 3

3.1

Hierarchy of business objectives

➔ Mission Statement
➔ Corporate Objectives
➔ Department Objectives

A mission statement
Communicates the purpose of a business and why it exists
● Values of the founder
● Cultures of the business
● Society's views
+ Can be used to communicate the nature of the business to the
stakeholders
+ Can be used to focus strategies of the business in a specific direction
- May not represent the truthfully, biassed
- Not every customer knows the mission statement and don't really care

Corporate objectives
Flows from mission statement and corporate vision, set by management or
directors
Aimed at satisfying shareholders
● The objective is specific
● Quantifiable/Measurable

Needs to be reviewed regularly as there's lots of factors;

● Economic conditions
● Competitors
● Technological change

Department Objectives
In a larger business they will split the departments into smaller sections
Each department will have their own set objectives to help meet the corporate
objectives
● Sales
● Marketing
● Finance
● Operations
● Human Resources

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Objectives should be SMART :
➔ Specific
➔ Measurable
➔ Achievable
➔ Relevant
➔ Time bound

3.1.2

Strategic direction
Involves a business choosing which market they should operate in and what
products to provide

Ansoff's Matrix

Existing Product New Product

Existing Market Penetration
market - Boost sales in current market
● Increase promotion
● Build brand image
● Build customer loyalty
+ Low risk
+ Limited investment
- Limited growth
- Not innovative
New Market Development
Market - Enter new markets with
existing products
● To boost sales
● Penetration pricing
● Heavy promotion / ads
+ Growth and market share
+ Don't need to develop
products
- Not enough knowledge of
cust needs and new
market
Product Development
- Develop new products for existing
customers
● Market research
● Research & Development
+ Familiar with customers
+ Customer Loyalty
- Expensive
- Takes time
Diversification (high risk)
- New product sold in new markets
● Need financial power & EoS
● Merger or Takeover
+ More markets share and power
+ Spreading risk
- High risk
- No knowledge and experience
of the new market

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Porters Strategic Matrix
He argued businesses should use of these strategies to compete in the market

1) Cost leadership
Being the lowest cost operator, could be gained by better technological capital
to lower unit costs
+ Increase profit margins
+ Lower prices
- May compete on quality

2) Differentiation
Offers a unique product, compete on quality, speed, service
+ Adds value
+ Uniqueness, stands out
+ Customer Loyalty
- May be easily copied

3) Focus
Focusing on a specific group of customers (niche)
+ Easy to target the narrow segment
+ Better understanding of customers
- Need loyalty

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 3.1.3

SWOT Analysis
An internal & external audit undertaken to identify the strengths, weaknesses,
opportunities and threats to a business
+ Low cost
+ Simple approach
+ Could combine with other decision making models such as pestle
- Biassed
- Don't provide locations
- Could be out of date

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 3.1.4

PESTLE Analysis

P - Political
➔ Govt Spending & Tax policies
➔ Industry regulation / Competition policy

E - Economical
➔ Interest Rates
➔ Exchange rates
➔ Inflation

S - Social
➔ Demographics
➔ Trends/Tastes/Fashion

T - Technological
➔ E-commerce
➔ Adoption of mobile technology
➔ New production methods

L - Legal
➔ Employment Law
➔ Minimum wage
➔ Health & Safety laws

E - Environmental
➔ Sustainability
➔ Ethical sourcing
➔ Pollution/carbon emissions

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Porter's 5 Forces

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 3.2

Internal growth (Organic Growth)

Expansion from within the business
● Developing new product ranges
● Opening new business locations
● Launching existing products into international markets
+ Less riskier
+ Financed with retained profits
+ Builds on a business strengths
- Slow growth
- Dependent on the market
- Franchising are hard to manage

External Growth (Inorganic Growth)

Firms can also grow by buying out firms this can be done by merging or a takeover
There are dangers of getting too large, meaning it will be harder to control. DoS

4 Types of Integration :

1) Horizontal integration
When a business merges with another business which is at the same level of
production processes.
For example, an increase in product range or keen to get into new markets
+ Economies of scale
+ Higher market share
+ Less risk of being bought out
+ Less competition
- Narrow range of products
- Could go bankrupt If the business doesn't go well the buyout is expensive
- The workers may lose either jobs as there would originally be 2 separate
managers of a task whereas now there will be 1 due to the merge.

15
 2) Backward Vertical integration
When a business expands by acquiring another company that operates before or
after them in the supply chain.
For example, this could be Apple getting another company so they can make a new
fingerprint screen for the new iPhone.
+ Supply is guaranteed
+ Other firms may be prevented from getting supplies
+ The business can make profit from the suppliers
- The firm may only need a particular material
- Firms may have no expertise in the industry they took over
For example a car manufacturing company would have deep knowledge of car
manufacturing, but little knowledge of selling cars.

3) Forward Vertical integration

When the firm is moving towards the eventual consumer of a good.
For example, a brewer buying a chain of pubs.
+ Secures retail outlets and can restrict access to competitors.
+ Can adapt to consumers preferences

4) Conglomerate integration
Where firms in different industries with no obvious connections integrate. They
can sometimes be linked by ; common raw materials, technology, outlets.
For example, Virgin buying anything from trains and aeroplanes to cable internet
providers
+ Spreads the risk
+ Increased brand awareness (Advertisements, Holidays)
+ Different products do well in the different parts of the cycle
- Lack of expertise
- Brands may become diluted

Reasons why some firms tend to remain small :

● To avoid diseconomies of scale
● USP and differentiated (Niche Market)
● Pricing barriers

16
 ● Marketing & Technical Barriers
Reasons why some firms tend to grow :
1) So they can benefit from greater profits and can profit maximise from the
expansion
2) Increase sales allows firm to make sales abroad

17
 3.3.2

Investment Appraisal
Refers to the technique to judge whether an investment is worthwhile or not

1) Payback Period (Years & Months)

How long it would take to regain the amount of money spent.
+ Simple to work out
+ Good for firms with cash flow problems
+ Only an estimate & doesn't really reflect reality
+ Prices may change
Formula - Amount remaining to cover / Amount recovered in next year x 12

2) ARR (%)
The average percentage return expected on an investment as compared to initial
investment cost
+ Can compare with target rate of return
+ Simple to understand and easy to calculate
+ Focuses on overall profitability of a project
+ Uses all returns generated
- Ignores the timing of returns
- Focuses on profits rather than cash flow
Formula - Average Annual Profit / Cost of Investment x 100

3) NPV (£)
Calculates the monetary value now of a projects future cash flows
We use discount factor and is given to reflect inflation
+ Considers future cash flows unlike Payback/ARR
+ Reflects the risks that future cash flows will not be as expected
+ Creates a straightforward decision
+ Different levels of risk can be accounted for
- The most complicated factor compared with Payback and ARR
- Choosing the discount rate is hard, particularly if there are long projects
- Results can be influenced
If the discount is 10%, the factor is 0.9, £10,000 x 0.9 = £9,000
+ = ACCEPT
- = REJECT

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 3.3.3

Decision Trees
Represents the likely financial outcomes for a business from different courses of
action
● A mathematical model
● Used to help managers make decisions
● Uses estimates and probability to calculate likely outcomes
● Helps to decide whether the net gain from a decision is worthwhile
+ Clarifies possible courses for action
+ Adds financial stats to decisions
- Only estimates
- Not taking into account external factors or qualitative info

Qualitative factors not being considered :

● Ethics
● Business objective level of risk
● External (PESTLE)
● Resources available

3.3.4

Critical Path Analysis

Project Analysis & Planning method, allows project to be completed in the shortest
time period
+ Finish Project on time
+ Identify which tasks can be done simultaneously
+ Use alongside cash flow
- Could put pressure on workers to finish by the deadline
- Not a guarantee of success - The project needs to be managed properly
- Time consuming - So only useful for complex projects
- No information on costs and quality

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 3.4.1

Corporate influences

Short termism VS Long termism

Two approaches to decision making :

1) Subjective

2) Evidence-Based

3.4.2

Corporate culture

3.4.3

Shareholders V Shareholders

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 3.5.2

ROCE
ROCE indicates amount of profit made compared to how much has been put in

Operating profit / Capital employed x 100

Capital employed = total equity (owners capital) + non current liabilities

Ideal answer should be around 20-30%

Gearing
Gearing shows how much of the business is financed by debt

(Non-current liabilities / Total equity + non-current liabilities) x 100

Over 50% tends to be highly geared by debt

Ratio Analysis
+ Allows comparisons to be made from different years or competitors
+ Helps locate weakness
- Doesn’t show qualitative information
- Based on historical data
- Has to be compared and is pointless on its own

Acid Test

Current Assets – Closing Inventory

Current Liabilities

Current Assets - £ 65,000

Closing Inventory - £ 5,500
Current Liabilities - £ 57,000

= 1.04 : 1

For every £1 I owe, I have £1.04 to pay the debt.

In this scenario, I don’t have a liquidity problem as it is above 1:1

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 3.5.3

Good to analyse the performance of human resources, to aid decisions for staff.

Labour Productivity
Measures output per worker in a time period
Total output (per time period) / No. of employees

Why does productivity matter?

● Labour costs are a significant part of total costs
● Business efficiency & profitability are linked to productive use of labour
● To remain competitive, a business needs to keep its unit costs down
However
● Doesn’t take into account the wages
● It depends on what the employee is producing

Factors affecting labour productivity

● Quality of equipment, IT systems
● Skills, ability and motivation of the workforce
● Methods of production
● Workforce training
● Reliability of suppliers)

Ways to improve productivity

● Measure performance and set targets
● Invest in capital equipment
● Invest in employee training
● Improve working conditions
Potential problems
● Potential “trade-off” with quality – higher output must still be the right
quality
● Potential employee resistance – e.g. introduction of new technology
● Employees may demand higher pay for their improved productivity

22
Labour Turnover
Measures number of staff leaving
● Motivation or happiness issues

Reasons
● There may be changes in strategy (e.g. closure of locations)
● Employees are overwhelmed by the amount of work
● Lack of recognition
● Poor relationship with Manager

Problems of high staff turnover

● Higher costs
● Increased recruitment & training costs
● Increased pressure on remaining staff
● Disruption to production
● Harder to maintain required standards of quality & customer service

Factors that affect staff turnover

● Type of business
– Some businesses have seasonal staff turnover (e.g. holiday parks)
● Pay and other rewards
● Working conditions
● Opportunities for promotion
● Quality of communication
● Economic conditions downturn often leads to lower staff turnover
● Labour mobility
● Employee loyalty

Ways to improve staff turnover :

● Effective recruitment and training
➔ Recruit the right staff
➔ Do all you can to keep the best staff
● Provide competitive pay and other incentives
➔ Competitive pay levels & non-financial benefits
● Job enrichment
● Reward staff loyalty
➔ Service awards, extra holiday etc

23
Employee retention
The ability of a business to convince its employees to remain with business

Absenteeism
Calculates the percentage of staff that are absent
No. of staff absent / Total employees
A significant business cost
➔ Sickness absence costs UK businesses around £600 for each worker per year
Genuine sickness, bereavement, bullying, stress
➔ Some employees simply “play the system”
Often predictable
– Monday / Friday or End of Shift Pattern – Main holidays

Productivity slows down, increases costs of cover

Could highlight issues of stress/workload

Human resource strategies

To increase productivity and to reduce labour turnover and absenteeism;

Financial rewards
● PRP
● Bonus
● Share of profits

Share ownership
Dividends shared + capital gains over time

Empowerment
● Giving employees the power to make decisions
● Concept closely linked to motivation and customer service
● Employees need to feel that their actions count
● Encouraging employee feedback – Showing more trust in employees

24
 3.6

Business Change
Change management involves the process that ensures a business responds to the
environment in which it operates

Step Change
• Dramatic change in one fell swoop
• Often required when a business has suffered from strategic drift
• Often involves significant alteration in the business
• Gets it over quickly / decisively

Incremental Change
• Many small changes which take place as a business develops and responds to
subtle changes in the external environment
• Usually involves little resistance
• Arises as strategy develops

Internal Causes of Change

Arise from factors within the control of the business
i.e. the decisions taken by business management
• New ownership (e.g. following a takeover)
• Significant investment decisions
• Adjusting the organisational structure (e.g. delayering)
• Transformational leadership - where new leadership such as a new CEO
brings about change; improving business performance

External Causes of Change -

Arise from factors outside the control of the business
i.e. as a result of changes in the external environment
• Significant competitor actions
• e.g. new products, takeovers

25
Causes of Disruptive change
• A form of step change that arises from changes in the external environment
• Disruptive change impacts the market as a whole, challenging how products
and services are sold
• Rapid improvements in technology, the main driver of disruptive change
since technological innovation provides new ways of delivering goods, as well
as reducing barriers to market entry

The Value of Change

• It is for a business as well as as the consumers
• The external environment, in particular, is constantly changing, which makes
change a constant too!

Effects of change on :
1) Productivity
● Competitive advantage
● Meet customer needs & wants
● Can take advantage of developing technologies
● Stakeholders (employees, shareholders etc.) gain from improved productivity
● Changes in organisational structure improve communication and
decision-making
● May bring market benefits

2) Competitiveness

3) Financial Performance

Shareholders
May withdraw if they don't think it’ll be successful

Employees
May fear for job security

Customers
May not like the change of the new products

26
Why may a business be resistant to change?
● Employees may lose status
● Disagreeing with the need to change
● Misunderstood the reasons to change

An example is KODAK, they didn't want to change so faced consequences

● They didn't meet up with the requirements like technology so lost out.
● Kodak's failure to keep pace with the emergence of digital photography
would decrease their sales of old cinematic films and lead to them losing out
and leaving to bankruptcy.
● It was the lack of diversification.
● The leadership did not adapt to the change.

How to overcome the resistance

● Educate them about the change
● Support
● Influence
● Negotiate or bargain
● Coerce & Threats

Kotter's 8 Steps
1) Create Urgency
2) Form a Powerful Coalition
3) Create a Vision for Change
4) Communicate the Vision
5) Remove Obstacles
6) Create Short-Term Wins
7) Build on the Change
8) Anchor the Changes in Corporate Culture

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