Business & Management Higher Level IB Notes

IB-Business-Management-Notes-and-Revision Business & Management Higher Level IB Notes Topic Page Topic 1: Business organization and environment 1.1 Nature of business activity 2 1.2 Type of organizations 4 1.3 Organizational objectives 10 1.4 Stakeholders 14 1.5 External environment 16 1.6 Organizational planning tools 21 1.7 Growth and evolution 25 1.8 Change and the management of change 31 1.9 Globalization 35 Topic 2: Human Resources 2.1 Human resource planning 38 2.2 Organizational structure 44 2.3 Communication 49 2.4 Leadership and management 52 2.5 Motivation 56 2.6 Organizational and corporate cultures 63 2.7 Employer and employee relations 65 2.8 Crisis management and contingency planning 68 Topic 3: Accounts and finance 3.1 Sources of finance 69 3.2 Investment appraisal 73 3.3 Working capital 76 3.4 Budgeting 80 3.5 Financial accounts 82 3.6 Ratio analysis 88 Topic 4: Marketing 4.1 The role of marketing 92 4.2 Marketing planning 95 4.3 Product 107 4.4 Price 112 4.5 Promotion and place (distribution) 116 4.6 International marketing and e-commerce 118 Topic 5: Operations management 5.1 Production methods 119 5.2 Costs and revenues 122 5.3 Break-even analysis 125 5.4 Quality assurance 127 5.5 Location 130 5.6 Innovation 132 5.7 Production planning 134 5.8 Project management 138 Topic 1: Business organization and environment Unit 1.1 – Nature of business activity What is a business? • An organization that uses resources to meet the needs of customers by providing a good/service that they demand • Business activity involves adding value to resources such as raw materials and semi-finished goods and making them more desirable to the purchaser Business inputs: • Land – renewable and non-renewable resources of nature • Labor – manual and skilled labor, some businesses are more labor intensive • Capital – finance needed to set up and pay for operations of a business, including resources used in production • Enterprise – driving force of a business, provided by risk-taking individuals, which combines other factors of production into a unit that can produce goods and services Business functions: Effective strategic decision-making develops from the functions working closely together. This requires good communication, co-operation and close interrelationships between functions. • Marketing - Responsible for market research to analyze what consumers want and then create a product that will be distributed for sale in the right market • Finance - Monitoring the flow of finance into and out of a business, keeping and analyzing accounts and providing financial information to other departments • Human resource management - Identifies what a workforce needs, recruits selects and trains appropriate staff and provides motivation systems to help retain and encourage staff • Operations management - Responsible for ensuing adequate resources are available for production, maintaining production and quality levels and achieving high efficiency Sectors of industry: Primary sector business activity Firms engaged in farming, fishing, oil extraction and all other industries that extract natural resources so that they can be used and processed by other firms Secondary sector business activity Firms that manufacture and process products from natural resources, including computers, brewing, baking, clothing and construction Tertiary sector business activity Firms that provide services to consumers and other businesses, such as retailing, transport, insurance, banking, hotels, tourism and telecommunications Changes in economic structure: Industrialization The growing importance of the secondary sector manufacturing industries in developing countries. The relative importance of each sector is measured in terms of employment levels or output levels as a proportion of the whole economy.  GDP increases, raising living standards  Increased output leads to lower imports and higher exports  Expanding manufacturing businesses creates jobs  Expanding and profitable firms pay more tax to the government  Value added to country’s output of raw materials rather than only exporting these  Chance of work in manufacturing, causes huge migration from countries to towns, which leads to housing and social problems associated with overpopulation  Expansion of manufacturing industries may make it difficult to recruit and retain sufficient staff  Imports of raw materials needed can increase country’s import costs  Increased pollution  Much growth in the secondary sector is due to multinationals Deindustrialization General decline in the importance of secondary sector activity and an increase in the tertiary sector. Reasons: • Rising incomes associated with higher standards of living, causing consumers to spend more • World-wide industrialization increases competition, thus rising imports of goods are taking market away from secondary sector firms • Employment patterns change – manufacturing workers find it difficult to find employment in other sectors (structural unemployment) Additional definitions: Consumer goods Physical and tangible goods sold to the general public, such as cars and washing machines (durable consumer goods) and food, drinks and sweets (non-durable goods) Consumer services Non-tangible products that are sold to the general public, including hotel accommodation, insurance services etc. Capital goods Physical goods that are used by industry to aid in the production of other goods, such as machines and commercial vehicles Unit 1.2 – Types of organization Public and private sector organizations: Private sector Comprises of businesses owned and controlled by individuals or groups of individuals Public sector Comprises of organizations accountable to and controlled by the state Mixed economy Economic resources are owned and controlled by both private and public sectors Free-market economy Economic resources are owned largely by the private sector with very little state intervention Command economy Economic resources are owned, planned and controlled by the state Links between sectors: • Public sector organizations often have objectives other than profit - Ensuring supply of essential goods and services, perhaps free of charge (e.g.: education, health etc.) - Preventing private monopolies (single firms that dominate an industry) from controlling supply - Maintaining employment - Maintaining environmental standards Privatization The sale of public sector organizations to the private sector Starting a business: Role of the entrepreneur Entrepreneur Someone who takes the financial risk of starting and managing a new venture • Innovative – needs ability to carve a new ‘niche’ into the market • Commitment and self-motivation • Multi-skilled – promotion, selling, production, financial aspects, technology • Leadership skills – lead by example and to motivate employees • Belief in oneself – many start-ups fail, hence you need belief to continue • Risk taker – investing ones savings into a business for instance Why start a business? • Losing a job – motivated to start a business, applying skills/interest they have • Desire for independence – They have work flexibility and control • Discovering a business opportunity • A wish to make more money than in the current job Start-up businesses • Identifying an industry with a high likelihood of success • Indentifying market opportunities, based on ideas for products, generate from own skills/hobbies, previous employment experience, franchising conferences and exhibitions offering a range of start-up ideas, small budget market research Problems face by start-ups • Competition - Competition from older, established businesses with more resources and market knowledge • Building customer base - Needs to establish brand loyalty, through personal customer service, knowledgeable pre- and after-sales service, providing for one-off customer requests that larger firms may be reluctant to offer • Lack of record keeping - Often entrepreneurs fail to pay enough attention to keeping records on taxes, bills and chasing up debtors as they believe its less important or they can remember everything • Lack of working capital - Without enough capital, the business can’t buy more stocks or pay suppliers or offer credit to important customers - This can be prevented through cash-flow forecasting, injection of sufficient capital, establishment of good relationships with banks for potential loans, use of effective credit control over customers’ accounts • Poor management skills - Not enough experience of leadership skills, cash handling and cash management skills, planning and coordinating skills, decision-making skills, communication skills, marketing, promotion and selling skills • Changes in the business environment - New competitors, legal changes, technological changes that make the methods used by the new business old-fashioned and expensive Profit-based organizations Sole trader A business in which one person provides the permanent finance and, in return, ahs full control of the business and is able to keep all of the profits   Easy to set up – no legal formalities Unlimited liability and lack of continuity Owner has complete control Often faces intense competition from bigger firms Owner keeps all profits Owner is unable to specialize in areas of business that are most interesting as owner is responsibly for all aspects of management Able to establish close relationship with staff and customers Difficult to raise additional capital Business based on interest of owner Long hours necessary to make business pay Partnership A business formed by two or more people to carry on a business together, with shared capital investment and, usually, shared responsibilities   Partners may specialize in different areas of business management Unlimited liability and no continuity for all partners Shared decision-making Profits are shared Additional capital injected by each partner All partners bound by the decision of any one partner Business losses shared between partners Not possible to raise capital through shares Greater privacy and less legal formalities than corporate organizations Sole trader, taking on partners, loses independence of decision-making Private limited company A small to medium-sized business that is owned by shareholders who are often members of the same family. This company cannot sell shares to the general public.   Shareholders have limited liability Difficult for shareholders to sell-shares Separate legal personality and continuity Legal formalities involved in establishing Able to raise capital from sale of shares to family, friends and employees Capital can’t be raised through sale of shares to the general public Original owner often able to keep control End-of-year accounts must be sent to Companies House – available for public inspection Greater status than unincorporated business Public limited company (plc) A limited company, often a large business, with the legal right to sell shares to the general public. Its share price is quoted on the national stock exchange   Limited liability Legal formalities in formation Seperate legal identity Cost of consultants and financial advisers when creating a plc Continuity Share prices subject to fluctuation Ease of buying and selling of shares for shareholders encourages investment ‘Divorce between ownership and control’ - Risk of takeover - Shareholders prefer short-term maximum-profit strategies - Directors aim for long-term growth to increase own power and status Access to substantial capital due to ability to issue a prospectus to the public and offer sale of shares Legal requirements concerning disclosure of information to shareholders and public Public sector enterprises Public corporation A business enterprise owned and controlled by the state – aka nationalized industry   Managed with social objectives rather than solely with profit objectives Tendency towards inefficiency due to lack of profit targets Loss-making services kept operating for social benefits Subsidies from government encourage inefficiencies Finance raise mainly from government Government may interfere with business decisions for political reasons Non-profit and non-governmental organizations Non-profit organization Ant organization that has aims other than making and distributing profit and which is usually governed by a voluntary board. Objectives: • Aiming to increase their income in order to put more money back into achieving charitable objectives • Informing the public, persuading them to support their causes and trying to convince governments to give more attentions to the problems the charities are trying to solve Impact: • Many only have a national or local presence, but still have a significant impact on the people they’re trying to support Non-governmental organization (NGO) A legally constituted body with no participation or representation of any government Objectives: • Often charities as well and involved in development, health and humanitarian issues • Support and add to the efforts made by government organizations (e.g.: disaster and debt relief) • Not profit-based but specifically focused on social or humanitarian objectives Pressure groups An organization created by people with a common interest or objective who lobby businesses and governments to change policies so that the objective is reached Objectives: • Governments to change their policies and to pass laws supporting the aims of the group • Businesses to change policies so that, for instance, less damage is caused to the environment • Consumers to change their purchasing habits so that business that adopt ‘appropriate’ policies see an increase in sales, but those that continue to pollute or use unsuitable work practices see sales fall Ways to achieve this: • Publicity through media coverage • Influencing consumer behavior • Lobbying of government – putting arguments of the pressure group to government members and ministers because they have the power to change the law Social enterprises A business with mainly social objectives that reinvests most of its profits into benefiting society rather than maximizing returns to owners • Directly produce goods and services • Have social aims and use ethical ways of achieving them • Need to make a surplus or profit to survive as they cannot rely on donations as charities do Objectives: Triple bottom line The three objectives of social enterprises: economic, social and environmental • Economic – to make a profit or surplus to reinvest back into the business and provide some return to owners • Social – to provide jobs or support for local, often disadvantaged, communities • Environmental – to protect the environment and to manage the business in an environmentally sustainable way Public-private partnership (PPP) Involvement of the private sector, in the form of management expertise and/or financial investment, in public sector project aimed at benefiting the public Three types: 1. Government funded – The government provides the funding, but the project is managed by the private sector. 2. Private sector funded – The private sector provides large required sums of capital, but the government manages the project. Private Finance Initiative (PFI) Investment by private sector organizations in public sector projects 3. Government directed but with private sector finance and management – it encourages private sector funding and management control, of public projects. Costs Benefits Private sector business managing project could try to increase profits by cutting staff wages and benefits. In effect, workers would no longer have the security of being employed by the public sector Many schools, roads, prisons etc. have been built through PPP/PFI schemes, it is said these wouldn’t have been constructed without the private sector involvement PFI schemes have been criticized for earning private sector businesses large profits from high rents and leasing charges, paid for by taxpayers Private sector businesses aim to make profits – therefore operations are highly efficient, meaning that costs to the public sector are lower than if the projects were run purely by the state Private sector organizations may lack experience needed to operate large public sector projects, such as social housing schemes, and failure of the scheme could leave vulnerable groups at risk By using private sector finance, the government can claim that public services are being improved, without an increase in taxes (in the short-run) Additional definitions: Limited liability The only liability – or potential loss – a shareholder has if the company fails is the amount invested in the company, not the total wealth of the shareholder  Shareholders are prepared to provide finance to help expansion  Risk of company failing to pay debts is transferred from investors to creditors, thus these are interested in working with limited companies and seeking for any potential future weaknesses in the company Legal personality A company is legally recognized as having an identity separate from that of its owners, meaning if the company’s products are found to be dangerous/faulty, the company can be prosecuted and not the owners themselves Continuity When the death of an owner or director does not lead to the break-up or dissolution of a company, but the inheritance of ownership by shared Shareholder A person or institution owning shares in a limited company Share A certificate confirming part ownership of a company and entitling the shareholder to dividends and certain shareholder rights Unit 1.3 – Organizational objectives Importance of objectives • Helps to direct, control and review the success of business activity • Appropriate strategy needed to ensure resources are correctly used to achieve objective • Effective business objectives meet the following criteria: - Specific – objectives should focus on what the business does and should apply directly to business - Measurable – objectives with quantitative targets are more effective - Achievable – objectives must be achievable - Realistic and relevant – objectives must be realistic compared with resources of the company and should be express in terms relevant to the people who have to carry them out - Time-specific – a limit should be set when an objective is established Mission statements and vision statements Mission statement A statement of the business’s core aims, phrased in a way to motivate employees and to stimulate interest by outside groups • Overall purpose of the organization  Quickly inform groups outside the business what the central aim and vision are  Help motivate employees  Ethical statements can guide and direct employees behavior at work  Too vague and general so they say little about specific objectives  Based on public relations exercises to make stakeholders feel good about the business  Impossible to analyze or disagree with  Mission statements alone are insufficient for operation guidelines Vision statement A statement of what the organization would like to achieve or accomplish in the long term • Outlines how the future of the organization will look Corporate objectives Corporate or strategic objectives Important, broadly defined targets that a business must reach to achieve its overall aim Common objectives include: • Profit maximization – greatest positive difference between total revenue and costs. However this objective has some drawbacks: - High short-term profits may lead competitors to enter the market - Many businesses seek to maximize sales to gain the greatest market share, rather than maximizing profit - Owners of smaller businesses are more concerned with independence and keeping control - Most business analysts assess business performance by capital employed - Profit maximization may be the preferred objective of owners/shareholders, but other stakeholder will give priority to other issues. Employees may concern over job security and local resident over environmental issues, the management can’t ignore these issues - Very difficult to assess whether the point of profit maximization has been reached, and constant changes to prices or output to attempt to achieve it may lead to negative consumer reactions • Profit satisficing - Earning enough profits to make the owners happy, instead of aiming to make maximum profit • Growth – it has some problems: - Over-rapid expansion can lead to cash-flow problems - Sales growth might be achieved at expense of lower profit margins - Larger businesses can experience diseconomies of scale - Using profits to finance growth can lead to lower short-term dividends - Growth into new business area can result in loss of focus and direction • Increasing market share – benefits resulting from being a brand leader include: - Retailers keep to stock and promote best-selling brand - Profit margins offered to retailers lower than competing brand, leaving more profit to producer - Effective promotional campaigns based on this • Survival • Corporate social responsibility This concept applies to those businesses that consider the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities and the environment • Maximizing short-term sales revenue – this could benefit staff when salaries and bonuses depend on sales revenue. But if this is achieved by lowering prices, actual profits might decrease • Maximizing shareholder value – increasing share price and dividend payments to shareholders. Puts shareholders interest over other stakeholders Interrelated objectives, strategies and tactics Tactical or operational objectives Short- or medium-term goals or targets, which must be achieved for an organization to attain its corporate objectives Set to ensure: • Co-ordination between all divisions • Consistency with strategic corporate objectives • Adequate resources are provided to allow for successful achievement of obj. Strategic/corporate objectives vs. Tactical/divisional objectives Strategic objectives Tactical objectives Set by board of directions/seniors Set by senior managers of each division Set long-term goals Set short-term goals High-risk objectives with many resources Fewer resources involved Difficult to reverse or change once Easier to change or reverse once established established Reasons for changing business objectives • The business might’ve achieved survival through operating for several years and now owners wish to pursue objectives of growth and increasing profit • The loss of a senior manager responsible for international expansion, might lead to the business focusing on domestic growth until a replacement is found • External competitive and economic environment may change • Short-term objectives of growth in sales or market share may be replaced by a longer-term objectives of maximizing profits from higher sales numbers Ethical objectives Ethical Moral guidelines that determine decision-making Ethical code (code of conduct) A document detailing a company’s rules and guidelines on staff behavior that must be followed by all employees   Avoids potentially expensive court cases Using ethical and Fairtrade suppliers can be expensive Ethical policies will lead to good publicity and increased sales Not taking bribes to secure business contracts can mean losing out on sales Ethical businesses attract ethical customers and this group of consumers is increasing Accepting that its wrong to fix prices with competitors might lead to lower prices and profits Ethical businesses are more likely to get government contracts Paying fair wages raises costs and may reduce competitiveness Well-qualified staff want to work for ethical companies Corporate social responsibility   Image of business and product is improve, which could become a major competitive advantage to attract new customers and create brand loyalty Loss of cost and price competitiveness if rivals don’t adopt CSR and have lower costs Attracts best employees motivated and efficient Shareholders may be reluctant to accept lower short-run profits Bad publicity and pressure group activity shouldn’t arise Short-run costs could increase Goodwill of other stakeholder groups could lead to better relations with stakeholders Consumers may be prepared to pay higher prices for products made in CSR manner, but in recession they want low prices and care less about CSR Higher long-term profitability resulting Considerable social backlash against from all the above factors businesses that claim to be socially responsible but aren’t truly Environmental audits Assesses the impact of a business’s activities on the environment  Favorable consumer reaction leading to increased sales  Positive media coverage giving free publicity  Working towards common aim of reducing harm to the environment could bring workers and managers closer as a team Social audit An independent report on the impact a business has on society. This can cover pollution levels, health and safety record, sources of supplies, customer satisfaction and contribution to the community • Health and safety record • Contributions to local community events and charities • Proportion of supplies that come from ethical sources • Employee benefit schemes • Feedback from customers and suppliers on how they perceive the ethical nature of the business’s activity   Identifies what social responsibilities the business meets and which need to be worked on If the social audit is not independently checked it may not be taken seriously Sets targets for improvement in social performance by comparing social audits Time and money consuming Gives direction to the action plans a business needs to achieve social obj. Many consumers only want cheap products, not socially responsible ones Improves a company’s public image, which may be used as a marketing tool Social audit doesn’t prove that a business is socially responsible Evaluation of audits • Until they’re made compulsory and a way to verify contents, stakeholders won’t take them seriously • Companies have been using them as a publicity stunt or screen to hide their true intentions • Hey can be time consuming and expensive, limiting their value to small businesses or businesses with limited finance Changes in corporate responsibility • Increasing publicity from international pressure groups • The UN Millennium Development Goals, agreed by more than 120 countries in 2000, which includes ‘environmentally sustainable growth’ has forced many developing nation to ask businesses to take environmental concerns into consideration • Global concert over climate change and its potential impact on social and economic development forces companies to confront the climatic consequences of their actions • Legal changes at local, national and EU level forced businesses to refrain from certain practices (e.g.: low wages, avoiding legal responsibility for products) Unit 1.4 – Stakeholders Stakeholders People or groups of people who can be affected by, and therefore have an interest in, any action by an organization Stakeholder concept The view that businesses and their managers have responsibilities to a wide range of groups, not just shareholders Stakeholder Responsibilities of business Benefits of accepting them Internal stakeholders Employees • • Adhere to countries laws • Provide training, job security, • minimum wages, good working • conditions, involvement in business Loyalty and low labor turnover Motivated staff = efficiency Easier to recruit new workers as they’re attracted to responsibility Managers • • • Job security • Competitive salaries and other benefits • Opportunities for responsibility and • career advancement Low turnover of management staff Work incentive Easier to attract well-qualified managers to business Shareholders • • • Incorporated business to operate in • company law Annual accounts presented • Actions taken to increase shareholder value over time Reluctant to sell shares, helping to avoid drop in share prices Willing to buy new issues of shares to invest further capital into company External stakeholders Customers • • • Follow laws on consumer protection • Don’t take advantage of vulnerable customers and not using high- • pressure selling tactics • Giving assurances about quality, • delivery dates, service levels, continued supply of vital parts Essential to satisfy customers’ demands to survive in the long term Consumer loyalty and repeat purchases Good publicity Positive feedback helps improve goods and services Suppliers • • • Establish effective two-way relation • Avoid excessive pressure on smaller/weaker suppliers to cut • prices • Pay fair prices and promptly • Supplier loyalty – meeting deadlines and special orders High quality supplies Reasonable credit terms ‘Payment holidays’ offered to struggling businesses Special interest • groups • • Banks: payment of interest and • repayment of loans • Pressure groups: recognition of genuine concern – respond by changing decisions • Local community: avoid pollution and damaging things, support them Banks: more willing to lend money Pressure groups: less likely to engage in practices damaging to business such as consumer boycotts Local community: more likely to agree with business expansion plans Competitors • Compete fairly and within the law • Avoid legal action as consequence of • NOT a responsibility to provide details of strategic plans • uncompetitive practices Opportunities for co-operation and joint ventures Potential conflicts between stakeholders Business decision / activity Impact on: Employees Community Customers Expansion  More job/career opportunities  More complex lines of communication  More jobs for locals and increased spending in local business  External costs due to increased traffic and loss of green fields  Better service due to bigger company with more staff  Less personal therefore inferior customer service Takeover of competitor  More secure and more career opportunities  Rationalization to avoid waste and cut costs – jobs lost  Local job vacancies and income may rise  Rationalization of duplicated offices etc. might lead to close and job losses  Economies of scale reduce prices  Reduced competition increases prices and reduce consumer choice New IT introduction to production  Training and promotion  Fewer untrained staff needed, those unable to learn may be made redundant  Local IT providers could benefit from increased orders  Specialist workers may not be available locally  More efficient and flexible may increase quality and reduce price  IT problems could delay supply Methods to reduce stakeholder conflict: Method   Arbitration • To resolve industrial disputes between workers and managers • Hears arguments from both • sides and decides on fair solution. • Both sides can agree before No one will receive exactly what wanted Cost might rise if higher wages/better work conditions are proposed accepting the solution Worker participation • To improve communication, decision-making and reduce • potential conflicts between workers and managers Workers make contribution to • business decisions Motivates staff to be more • efficient Some managers think it wastes time and resources Some information can’t be disclose to staff other than senior managers Profit sharing schemes • To reduce conflict between workers and shareholders over the allocation of profits and to • share the benefits of company success Workforce allocated a share of • annual profits before paid out in dividends to shareholders Encourages workers to work to increase long-term profitability Reduces retained profits and/or profits paid to shareholders, unless scheme results in higher profits due to motivated employees Share ownership scheme • To reduce conflict between workers, managers and shareholders • Aims to allow employees to • benefit from success of • business as well as shareholders • Helps to align the interest of • employees with those of shareholders Administration costs Negative impact on worker motivation of share prices fall Dilution of ownership Employees have to be with company for a while before they qualify, so effect on motivation may be limited Unit 1.5 – External environment PEST analysis An analytical framework for external environmental factors affecting business objectives and strategies in terms of political, economic, social and technological. It is sometimes rearranges as STEP and has been extended to STEEPLE (social, technological, economic, environmental, political, legal and ethical) and PESTLE (same as STEEPLE but without ethical considerations) Political (and legal) issues: • Employment laws • Consumer protection laws • Business competition laws • Political changes resulting from a new government e.g. policies towards foreign direct investment by multinationals • Major policy changes such as nationalizing some UK banks after recession Possible impact of some political and legal factors on business objectives/strategies: Economic changes: Some policies help government achieve following objectives: • Economic growth and rising living standards • Low levels of inflation and unemployment • Balance of payments equilibrium, over time, between value of imports and exports Fiscal policy Changes in government spending levels and tax rates Monetary policy Changes in level of interest rates, which make loan capital more or less expensive Economic growth Increases in the level of a country’s GDP Inflation The rate of change in average level of prices Unemployment The numbers of people in an economy willing and able to work who can’t find work Economic factors and their influence on business materials – attempt to buy more local supplies • Business might target foreign markets and change strategies towards exporting • Foreign businesses may decide to locate in country with depreciating currency • Opposite occurs when exchange rates appreciate Tax changes through fiscal policy • Higher rates of income tax reduces disposable income • High rates of tax on profits will reduce the profits after tax of companies Unemployment • Higher unemployment rates gives businesses more choice in staff recruitment. As more people are applying, business may reduce wages to cut cost • Average consumer incomes likely to fall with extensive unemployment – demand for budges ranges of cheaper goods Inflation • Higher wage demands from workers to maintain real incomes and higher costs of materials will lead to cost-push inflation. If businesses can’t increase prices for fear of falling demand, profit margins will fall • Demand-pull inflation encourages firms to raise prices to increase profit margins • Substantial increases in inflation lead to action being taken by government to increase interest rates Recession Six months (two quarters) of falling GDP (negative growth) Exchange rate The value of one currency in terms of another currency Cost-push inflation Caused by rising costs forcing businesses to increase prices Demand-pull inflation Caused by excess demand in an economy (e.g. and economic boom) Social and cultural influences • Aging population with reduced birth rates and longer life expectancy - Large proportion over age of retirement - Smaller proportion in lower age ranges - Smaller number of workers but large number of dependants ▪ Needs to change patterns of demand ▪ Change the age structure of the workforce • Changing pattern of employment - Changing role of women - Improved education facilities (increases in student employees) - Early retirement in high-income countries - Rising divorce rates (flexible work times etc.) - Job insecurity, created by forces of globalization - Increased levels of immigration Impact of technology Information technology The use of electronic technology to gather, store, process and communicate information Computer-aided design Using computers and IT when designing products Computer-aided manufacturing Using computers and computer-controlled machinery to speed up the production process and make it more flexible Internet The worldwide web of communication links between computers Impact of applications on business Impacts on objectives and strategies Cost: • High capital costs • Labor training costs • Redundancy costs – existing staff replaced by technology • Higher future profits may be achieved Labor relations: • Damaged if technological change is not explained in a positive way with reasons justified • If jobs are lost during the process of change, remaining workers have low job security, damaging motivational levels • If issue is handled sensitively, it can improve industrial relations Management: • Some fear changes • Recognizing the need for change and managing technological change processes require a great deal of management skill • IT can improve productivity greatly and increase efficiency - Managers can obtain data frequently from all departments and regional divisions of business - Computers can be used to analyze and process data quickly for Managers to interpret and make decisions quickly - Accelerates process of communicating decisions to other managers and staff Drawbacks: - Ease of transferring data electronically can lead to ‘information overload’ - Power given to central managers could be abused leading to reduction in authority and empowerment extended to work teams and middle managers Unit 1.6 – Organizational planning tools Business plans A written document that describes a business, its objectives and its strategies, the market it is in and its financial forecasts • Executive summary • Description of business opportunity • Marketing and sales strategy • Management team and personnel • Operations • Financial forecasts Importance of business plans: • Important when setting up a business, as it needs to be updates and referred to when strategic decisions are made • Planning process is important for a clear sense of purpose, direction, marketing strategies and what employees to recruit • Financial and other forecasts can be used as targets the business should aim for Importance to stakeholders: • Corporate planning (planning for the future) includes expansion programs. If this occurs banks and other creditors will ask for a business’s corporate plan before agreeing, it helps stakeholders assess the risk and rewards before investing in the expansion • Financial forecasts act as budgets and control benchmarks for internal stakeholders • Updated versions of plan can be used to attract additional partners or supply data for the experts if a stock market floatation becomes an option. Potential shareholders won’t invest without seeing the plan • Employees use it to identify specific targets and objections giving focus to their work and motivating them • Suppliers may be able to tell if the business plan communicated externally is worthwhile for the establishment of a long-term trading relations Decision-making framework Intuitive decision-making Involves making decisions based on instinct or ‘gut feeling’ (perhaps based on the manager’s experience) for a situation and the options available  Less time consuming  Less costly – no expense of gathering and analyzing data  Innovative or non-standard situations – technology advances, where scientific approach isn’t suitable Scientific decision-making Involves basking decisions on a formal framework and a data analysis of both the problem and the options available  Based on formal structure – less likely that important points are missed  Based on analysis of data – greater chance of success  When risks are high or cost is substantial, intuitive decision-making is irresponsible The Framework 1. Set objectives 2. Assess the problem or situation 3. Gather data to analyze both the extent of the ‘problem’ and the information needed to assess the options available 4. Consider all the options available 5. Decide between the alternative ideas or options using decision-making tools 6. Plan and implement the decision 7. Control and review Internal and external constraints Internal constraints Limiting factors in decision-making that can be controlled by the organization • Organizational structure – limiting authority given to managers • Financial constraints • Labor and other resource constraints • Attitude of workforce to change External constraints Limiting factors in decision-making that are beyond the organization’s control • Changes in business cycle that may make raising finance difficult/expensive • Changes in legal constraints that could influence demand for new products manufactured as a result of a strategic business decision The Fishbone Diagram A visual identification of many potential causes of a problem 6Ms are taken into consideration: • Methods • Machines • Manpower • Materials • Measurement • ‘Mother Nature’ (the environment) Stages: 1. Agree on the problem statement and write it in the centre 2. Brainstorm the main categories of the problem, or use the normal 6Ms 3. Brainstorm all detailed reasons why problems might occur under each heading 4. Analyze the findings and investigate the most likely causes of the problem Decision Tree A diagram that sets out the options connected with a decision and the outcomes and economic returns that may result  Forces decision-maker to consider all options and variables  Put these on an easy-to-follow diagram, which allows for numerical considerations of risk and economic returns to be included  Approach encourages logical thinking and discussion amongst managers  Accuracy of data – based on experience or forecasts  Probabilities may be based on past data – circumstances may change  Cannot replace risk or impact of qualitative factors of a decision  External impacts not taken into account  Expected values are average returns, hence not applicable for a one-off decision Construction: • From left to right • Each branch represents an option together with a range of consequences or outcomes and the chances of these happening • Decision points are denoted by a square – decision nodes • A circle shows the range of outcomes – chance node • Probabilities shown alongside each possible outcome – numerical values • Economic returns are expected financial gains or losses of a outcome • Rejected branch show by ≠ Expected value The likely financial result of an outcome obtained by multiplying the probability of an event occurring by the forecast economic return if it does occur node 1 (indoors option): + (0.4 × $7000) = $5800 Expected value of node 2 (outdoors option): (0.6 × $10000) + (0.4 × $4000) = $7600 Outcome of indoors option: $5800 (outcome) − $2000 (cost) = $3800 Outcome of outdoors option: $7600 (outcome) − $3000 (cost) = $4600  Outdoors option is advised as it gives the higher return SWOT Analysis A form of strategic analysis that identifies and analyzes the main internal strengths and weaknesses and external opportunities and threats that will influence the future direction and success of a business • Should be used as a guide only  Helps manager assess the most likely successful future strategies and constraints to them  Business may stand a better chance of developing a competitive advantage  Senior managers gain clarification and mutual understanding  Subjectivity – no managers would arrive at the same assessment of the company  Not quantitative so the cost of correcting a weakness cannot be compared with the potential profit of pursuing an opportunity Strengths Weaknesses Internal • Specialist marketing expertise • A new, innovative products • Location of the business • Quality processes • Any other aspect that adds value to the product or service • Lack or marketing expertise • Undifferentiated products or services • Location of the business • Poor-quality goods or services • Damaged reputation Opportunities Threats External • A developing market such as internet • Mergers, joint ventures or strategic alliances • Moving into new market segments that offer improved profits • A new international market • A market vacated by an ineffective competitor • A new competitor in the home market • Price wars with competitors • A competitor has a new, innovative product or service • Competitors have superior access to channels of distribution • Taxation is increased on the product or service Unit 1.7 – Growth and evolution Scale of operation The maximum output that can be achieved using the available inputs – this scale can only be increased in the long term by employing more of all inputs Economies of scale Reductions in a firm’s unit costs of production that result from an increase in the scale of operations • Purchasing economies – bulk-buying economies of scale • Technical economies – Only justified by large firms with high output levels through flow production, that can afford it and so that average fixed costs can be reduced • Financial economies – banks are more willing to lend money to large businesses at low interest rates and raising finance by ‘going public’ or through further public issues of shares is very expensive and thus it only reduces average costs once it’s done on a large scale • Marketing economies – Marketing costs rise with the size of a business, however large businesses with high levels of sales can spread costs • Managerial economies – As a firm grows it is able to employ specialist functional managers who operate more efficiently, thus reducing average costs Diseconomies of scale Factors that cause average costs of production to rise when the scale of operation is increased • Communication problems – communication worsens with increased size of operation, leading to poor decision-making, due to inadequate/delayed information and management inefficiency • Alienation of the workforce – workers feel insignificant, which demotivates them and thus reducing efficiency • Poor co-ordination and slow decision-making – When a firm has many departments and branches in different countries, it becomes difficult for managers to co-ordinate. Smaller businesses have tighter control and can make quicker and better decisions, benefiting from flow average costs in the end Merits of small and large organizations Small organizations Large organizations   • Managed and controlled by owners • Adapt quickly to changing consumer needs • Offer personal service to customers • Staff knows each other • Average costs low due to diseconomies of scale and low overheads • Easy communication • Afford to employ specialist managers • Benefit from cost reductions linked to large-scale production • Able to set prices that other firms have to follow • Access to different sources of finance • Diversified in several markets and products – risks are spread • Can afford R&D Small organizations Large organizations   • Limited access to sources of finance • Owner has to carry large burden of responsibility if unable to afford employing specialists • Not diversified so greater risks of negative impact of external change • Unlikely to benefit from economies of scale • Difficult to manage • Potential cost increases associated with large-scale production • Suffer from slow decision-making and poor communication due to structure • Suffer from divorce between ownership and control, leading to conflicting objectives Recommending an appropriate scale of operation Business owners must assess: • Owners’ objectives • Capital available • Size of the market the firm operates in • Number of competitors • Scope of scale economies Business growth Possible reasons: • Increased profits • Increased market share • Increased economies of scale • Increased power and status of the owners and directors • Reduced risk of being a takeover target Internal growth/Organic growth Expansion of a business by means of opening new branches, shops or factories External growth Business expansion achieved by means of merging or taking over another business, from either the same or a different industry • Horizontal integration Integration with firm in the same industry and at the same stage of production  Consumers have less choice  Workers may lose job security as result of rationalization  Eliminates one competitor  Possible economies of scale  Scope of rationalizing production (eg.: Focusing production on one plant not two)  Increased power over suppliers Rationalization may bring bad publicity  May lead to monopoly investigation if combined business exceeds size limits • Forward vertical integration Integration with a business in the same industry but at a later stage of production  Workers have greater job security as business has secure outlets  More varied career opportunities  Consumers resent lack of competition in retail outlet due to withdrawal of competitor products.  Able to control promotion and pricing of own products  Secures an outlet for firm’s products  Consumers may suspect uncompetitive activity & react negatively  Lack of experience in this sector of retailing • Backward vertical integration Integration with a business in the same industry but at an earlier stage of production  Greater career opportunities  Improved quality and more innovative products for consumers  Control over supplies to competitors may limit competition and choice for consumers  Control over quality, price and delivery times of supplies  Encourages joint R&D into improved quality of supplies of components  Control supplies of materials to competitors  Lack experience of managing a supplying company  Supplying business may become complacent having a guaranteed customer • Conglomerate integration Merger with or takeover of a business in a different industry  Greater career opportunities  More job security as risks are spread across industries  Diversifies the business away from original industry/markets  Spreads risk and takes business into faster-growing market  Lack of management experience in acquired sector  Lack of clear focus and direction now that business is spread across more than one industry Merger An agreement by shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business Takeover When a company buys over 50% of the shares of another company and becomes the controlling owner – often referred to as ‘acquisition’ Joint venture Two or more businesses agree to work closely together on a particular project and create a separate business division to do so  Costs and risks of new business venture are shared  Different companies have different strengths and experiences, thus fitting well  Having own major markets in different countries could help exploit these with the new product more effectively  Styles of management and culture might clash  Errors and mistakes might lead to arguments  Business failure of one of the partners puts the whole project at risk Strategic alliances Agreements between firms in which each agrees to commit resources to achieve an agreed set of objectives Can be set up with: • A university – finance provided by business allows new training courses to increase supply of suitable staff for company • A supplier – to design and produce components and materials used in a new range of products, helping to reduce total development time of getting the new products to market and gaining competitive advantage • A competitor – reduce risks of entering a market new to both firms. Care must be taken that actions aren’t seen as ‘anti-competitive’ and against the law in the specific country Franchise A business that uses the name, logo and trading systems of an existing successful business   Fewer chances of new businesses failing as it’s an already established brand Share of profits or sales revenue is paid to franchisor Advice and training offered by franchisor Initial franchise license fee can be high National advertising paid for by franchisor Local promotions still paid for by franchisee Supplies obtained from established and quality-checked suppliers No choice of supplies or suppliers to be used Franchisor agrees not to open another branch in local area Strict rules over pricing and layout of the outlet reduce owner’s control Ansoff’s matrix A model used to show the degree of risk associated with the four growth strategies of market penetration, market development, product development and diversification Market penetration The objective of achieving higher market shares in existing markets with existing products Product development The development and sale of new products or new developments of existing products in existing markets Market development The strategy of selling existing products in new markets Diversification The process of selling different, unrelated goods or services in new markets Analysis of Ansoff’s matrix: • Allows managers to analyze the degree of risk associated with each strategy • However it only considers two main factors in the strategic analysis of a business’s options – it’s important to also consider SWOT and PEST • Further research into the selected strategy is vital Evaluation of growth strategies Internal growth  Avoids problems such as the need to finance expensive takeovers, offer new share issues or expensive additional loans  Management issues in bringing together different businesses with their own attitudes and cultures are avoided  It is very slow, with perhaps only a few branches opening each year External growth  Rapid expansion, which might be vital in a competitive and expanding market  Takeovers can be very expensive and may result in management problems  Conflicts between two teams of managers and conflicts of culture and business ethics Porter’s generic strategies 1. Cost leadership strategy • Being the lowest-cost producer allows company to make higher profits than competitors • Allows firm to lower prices below competitors to increase market share Stems from internal strengths: • High levels of investment in advanced production methods, requiring access to much capital • Efficient production methods • Efficient distribution channels 2. Differentiation strategy • Value added to product may allow premium pricing Stems from internal strengths: • Excellent R&D facilities and track record in developing unique goods • Corporate reputation for innovation and quality • Strong sales team able to promote perceived strengths of brand 3a&b. Focus strategy • High degree of customer loyalty within the market segment • Can lead to imitation by rivals, so continued success depends on continuing to tailor a broad range of products to a relatively narrow market segment that the business knows well Unit 1.8 – Change and the management of change Change management Planning, implementing, controlling and reviewing the movement of an organization from its current state to a new one Causes of change External causes: Incremental change – Occurs slowly over time. Such change can be either anticipated or unexpected. Dramatic change – Dramatic or revolutionary change. In some cases it might lead to a total rethink of the operation of an organization – business process re-engineering Business process re-engineering Fundamentally rethinking and redesigning the processes of a business to achieve a dramatic improvement in performance Nature of change Examples Strategies for management Globalization • • New opportunities to sell • products overseas Increased competition • from products made cheaply overseas Use pan-global marketing or localization Achieve and maintain a competitive advantage Technological advances • • Products: iPods/iPhones, • hybrid-powered cars etc. • Processes: robots in • production etc. Staff retraining Purchase new equipment Additions to product portfolio Quicker product development needed • Macro-economic changes • • Change in consumers’ • disposable incomes and demand patters Boom/recession • Flexible production systems and staff flexibility Need for extra capacity or need to rationalize Deal with stuff cutbacks in a way that encourages staff that remains • Legal changes • • Changes to what can be • sold Changes to working hours • and conditions Staff training on company policy Flexible working hours and practices Competitors’ actions • • • New products • Lower prices – due to higher competitiveness/ • lower costs Higher promotional budget• Encourage new ideas from staff Increase efficiency by staff accepting changes Ensure resources available to meet change Environmental factors • • Increasing ‘green • consumers’ Growing concern about Social and environmental audits supported by strategic changes climate change and industry’s contribution Internal causes: Nature of change Examples Strategies for management Organizational changes • • Delayering • Hierarchical structure replaced by matrix structure • • Retraining of less senior staff to accept more responsibility Reassurances on job security Retraining of staff in teamwork and project management Relocation • Moving operations to • another region/country • Redundancy schemes Relocation grants for those willing to move Cost cutting to improve • competitiveness • Capital-intensive rather • than labor-intensive methods • Rationalization of • operations Retraining staff to operate advanced equipment Redundancy schemes Flexible employment contracts and working practices Factors causing resistance to change: (Exam tip: think about leadership styles) • Fear of the unknown • Fear of failure • Losing something of value – workers could lose income etc. • False beliefs about the need for change • Lack of trust • Inertia – many people suffer from inertia or reluctance to change and try to maintain the status quo Strategies to reduce impact of, and resistance to, change: Change management Exam tip: Ask yourself the following • Is the change anticipated or unexpected? • Is the change likely to have a dramatic or less significant impact on the firm? • Have managers planned for change? • To what extent can management control the change process? Key stages in successful change management 1. Identify where the business is not and why it needs change 2. New visions and objectives needed 3. Ensure resources are in place to enable change to happen 4. Give maximum warning of change 5. Involve staff in the plan for change and its implementation 6. Communication!!! Exam tip: Link to Communication chapter (2-way) 7. Introduce initial changes that bring back quick results 8. Focus on training and retraining 9. Sell the benefits of change 10. Always remember the effects on individuals 11. Check on how individuals are coping and remember to support them Lewin’s Force-field analysis An analytical process used to map the opposing forces within an environment (such as a business) where change is taking place 1. Outline the proposal for change – insert in the middle of a force-field diagram 2. List forces for change in one column and forces against change in the other 3. Assign an estimated score for each force, with 1 = weak and 5 = strong Using Lewin’s model: • Helps managers weigh up importance of two types of forces • Helps identity the people most likely affected by change • Encourages an examination of how to strengthen the driving forces and reducing the restraining forces • Use of a leadership style reducing opposition and resistance to change is more effective than forcing unpopular changes in a autocratic manner Project champions People assigned to support and drive a project forward. Their role is to explain the benefits of change and assist and support the team putting change into place Project groups Created by an organization to address a problem that requires input from different specialists Promoting change: 1. Establish a sense of urgency 2. Create an effective project team to lead change 3. Develop a vision and a strategy for change 4. Communicate this changed vision 5. Empower people to take action 6. Generate short-term gains from change that benefit as many people as possible 7. Consolidate these gains and produce even more change 8. Build change into the culture of the organization so that it becomes natural Exam tip: When discussing effective management of change, focus on the positive benefits of change to the stakeholders most affected by it, it’s very easy to be too negative about change. Unit 1.9 – Globalization Globalization The growing trend towards worldwide markets in products, capital and labor, unrestricted by barriers Multinational companies Business organizations that have their headquarters in one country, but with operating branches, factories and assembly plants in other countries Free international trade International trade that is allowed to take place without restrictions such as ‘protectionist’ tariffs and quotas Tariff Tax imposed on an imported product Quota A physical limit place on the quantity of imports of a certain product Multinational companies: Why become a multination? 1. Closer to main markets • Lower transport costs for finished goods • Better market information regarding consumer tastes • Looked upon as local company and gain customer loyalty 2. Lower costs of production • Lower labor rates due to lower demand for local labor • Cheaper rent and site costs • Government grants and tax incentives designed to encourage industrialization 3. Avoid import restrictions 4. Access to local natural resources 5. Take advantage of expanding markets in other countries, which will lead to increased sale and profits Problems of multinationals • Poor communication links with headquarters • Language, legal and cultural differences • Co-ordination of plants in multinational group need to be carefully monitored to ensure products that might compete with each other on world markets aren’t produced and no conflicting policies are adopted • High costs of training local staff, which is likely to have low skill levels Benefits and drawback of multinationals to host countries   Investment brings foreign currency Exploitation of local workforce Employment and training opportunities Pollution from plants might be higher than allowed in countries Local firms benefiting from supplying services and components to company Local competing firms squeezed out of business Local firms forced to bring up quality and productivity Large western-based businesses accused of imposing western culture on other societies Tax revenues boosted Profits sent back home to country of origin Management expertise i