BUSINESS MANAGEMENT

Unit 1, 2, 3, 4, 5 till 5.7

1.1: What is business?

● Decision-making company or organization

● May/may not be for profit
● Involves the exchange of goods and services
● Produce goods and/or provide services

Entrepreneur:

● Who takes financial risk to start a new venture.

Reasons to start a business:

● Gaining independence
● Financial security
● Flexible time working

Business plan: Written document describing a business, its objectives, and strategies

● Executive summary: Overview the new business and it’s strategies.

● Business opportunities: What is sold why, and to whom?
● Marketing strategies: Why the owner thinks his product will be sold, plans to sell, how
to sell it.
● Management team and personal: Skills and experience of the owner and employers.
● Operations: Place to be used, production facilities, it systems.
● Financial forecasts: The future projection of sales, profit, and cash flow.

1
Business plan helps you investigate your business idea.

Factors of Productions:

● Land: All natural resources

● Labor: Physical and mental effort
● Capital: Non-natural resources (money,equipment)
● Enterprise: Planning of all the process (creative,passionate)

Factors of Financial Return:

● Rent: Reward of land

● Interest: Reward of capital (bank loans)
● Wages and salaries: Reward for labor
● Profit: Reward for responsibilities

Centralised Organisation:

● Decision-making come from one place only

Multinationals:

● Vote or make decisions together

Department Roles:

● Accounts: record the money coming in and out of the business.

● Human Resources: Deals with training, health and safety with workers.
● Marketing: Organises advertising and product promotion.
● Operation management: makes sure production plans are on time, and products having
the right quality.

Business Sectors:

2
 1. Primary Sector: Extractions and productions of raw materials (ex: coal miner)
2. Secondary Sector: Transformation of raw materials into goods (ex: builder, dressmaker)
3. Tertiary Sector: Provision of services to. Customers (ex: cinema, banking)
4. Quaternary Sector: Services focused on knowledge (ex: media)

Advantages of specialization:

● Producer becomes more efficient

● Producer can change higher for better products

Economic Development:

● Primary — Secondary — Tertiary

1.2: Sole Trader: Business owned by one person

Advantages of sole trader:

● Total control of all the business by the owner

● Cheap and easy to start up
● Keep all the profit
● Business affairs are private

Disadvantages of sole trader:

● Unlimited liability
● Difficult to raise finance
● Difficult to enjoy economies of scale

Sole traders are successful:

1. Can offer specialist services

2. Sensitive to the needs of customers

3
 3. Can cater for the needs of local people
4. Keep proper business accounts and records
5. Comply with legal requirements

Partnerships: Owners of the enterprise are two or more.

Deed of partnerships:

● Amount of capital each partner should provide

● Division of profits and losses
● How many votes each partner has
● How to take on new partners
● How a partner leaves

Advantages of Partnerships:

● Spreads the risk across more people

● Partner may bring money + resources
● Partner may bring more ideas and skills

Disadvantages of Partnerships:

● Sharing the profits

● Less control of the business for the individual
● Disagreement between partners

Limited companies: Owned by its shareholders, and have limited liability

Limited liability: Investors can only loose the money they invested in and no more. If the
company fails the owner doesn’t pay from their own money.

Limited Companies:

4
 ● Private Limited Companies:
● Not in the stock market
● Initial value of shared can be less than 50,000

● Public limited Companies:

● Available in stock market
● Initial value of shares more than 50,000

Private limited companies in order for them to change into public limited companies
they need to go through “flotation”.

Advantages of Private limited companies:

● Owner can retain control

● More able to raise money
● Limited liability

Disadvantages of Private limited companies:

● Harder to motivate and control workers

● High set-up costs

Advantages of Public limited companies

● The shareholders have limited liability

● Growth and expansion opportunities

Disadvantages of Public limited companies:

● Costly and complicated

● Financial info must be public

5
 ● Share holders expect steady income

Reasons to buy shares:

1. Shares pay dividends

2. Value of shares may increase
3. Can influence management of the company

Flotation: A company selling all or part of the business to outside investors.

Cooperatives: Number of individuals or businesses work together to achieve a common

purpose. Usually done for small businesses can join larger groups.

Dividends: Companies usually pay dividends tot there shareholders biannually/ the dividends
represent a share of the profits. The more shares that a shareholder owns the higher the total
payment.

Capital growth: Stock brokers and investment bankers argue that over the medium to long
term, shares outperform the return from savings in a bank account. Over time the value of
shares may increase or decrease and the shareholder can then sell the shares at higher price
thereby making a financial gain. This gain is known as capital growth.

Voting power: Shareholders who hold enough shares in a limited company can become a major
influence in the management and operation of the company. This reason is generally held by
people who are risk takers and possess high entrepreneurial spirit.

Type of cooperatives:

1. Retail cooperatives — most familiar, making profit is not their aim.

2. Marketing cooperatives
3. Worker cooperatives

Retail Advantages:

6
 ● No Liability
● More Profit Margin
● Very High Competition

Retail Disadvantages:

● Banks not willing to lend them money since gaining profit isn’t their purpose.
● Ethical aims may not be agreeable with all members
● Doesn’t lead to profit in the long run.

Microfinance: Financial or banking service targeted at individuals that have no access to credit

It enables qualifying individuals to borrow small amounts of money to finance

self-sufficiency, or very basic business, or provide health treatment.

● Public corporations aren’t in the private sector of industry.

Public corporations:

● Business enterprise and controlled by the state

● Non-profit organization: Organization that doesn’t aim in making and distributing
profit

● NGOS: Legally constituted body with no participation with any government.

1.3: Organizational Objectives

Vision statement:
● A Vision statement usually refers to future.

7
 ● The vision statement lures all employees into a belief about what the business wants to
achieve.

Mission statement:
● They are short statement found hanging in the business where they are visible to
employees.
● It is a philosophy that answers the question “why do we exist”. It describes the
fundamental purpose of the business. Almost all institutions have a mission statement.
What is your schools mission statement?

Vision statement examples:

● “Our vision is to create a better every-day life for many people.” IKEA

Aims:
● are long-term goals that a business wants to achieve in the future.

Objectives:
● are targets set by an organization to achieve its corporate aims.

Strategy:
● is the long-term plan that sets out the ways a business is going to achieve its corporate
aims.

Objectives comes in 3 types:

Strategic: (why and when?)

● They are broadly defined targets set by the strategic decision makers of the business,
such as the board of directors or CEO of a corporation, and usually encompass the long
term, more than 5 years.
● Strategic planning usually ends with a plan of implementation in the form of objectives.

8
 ● Medium to long term

Tactical:(where and how?)

● Are set by middle managers to achieve strategic objectives.
● Medium to short term.

Operational: (what?)
● Are the day to day objectives set by floor managers so that the company can reach the
tactical objectives.
● Short term.

Objectives:
● Business objectives are measurable targets of how the aims can be achieved. There are
many different types of business objectives that an organization can set, such as
increasing profits by 20%, or expanding into another market within a particular time
period. In all cases in order to make the objectives realizable an acronym used to set
objective is SMART.

SMART:

1. Specific: objectives must be clear.

2. Measurable: easy to determine if they are being achieved or not.
3. Achievable: they should be within the reach of the business.
4. Relevant: is the objectives of any use.
5. Timely: a time frame for should be set to meet the objective.

Business strategy:
● Who, when, where, why?

The need for organizations to change objectives:

9
 ● As organizations change and develop, so do their objectives.
● In the beginning, an organization might be preoccupied with simple survival.
● Once day-to-day survival is less of a problem, the firm might turn its aims to increasing
growth and profitability.

Internal factors of change:

● Leadership: Change in leadership
● HR: Actions taken by employees
● Organization: Mergers and Acquisitions
● Products: how well products do in different markets
● Finance: change in the financial circumstances
● Operations: relocation or innovation

External factors of change:

● Social
● Technological
● Economic
● Ethical
● Political
● Legal
● Ecological

Ethical objectives and corporate social responsibility (CSR):

● Ethics refers to the moral principles, values and beliefs that shape decision-making and
behavior.
● What might be considered ethically right in one society might not be appropriate in
another.

10
 ● Business ethics relates to how individuals, groups and organizations set priorities and
make decisions that involve moral principles. In addition to the economic and
performance-oriented objectives described earlier, many organizations set ethical
objectives they hope to achieve.

Ethical objectives:
● Are specific goals that the business sets.
● They are based on codes of behavior.
● Closely related to CSR.

Why ethical objectives?

● Building up customer loyalty
● Creating a positive image
● Developing a positive work environment
● Reducing the risk of legal redress
● Satisfying customer expectations
● Increasing profits

Corporate social responsibility (CSR)

● A concept that a business has an obligation in a way that will have a positive impact on
the society
● A business would want to assess its actions
● As a result a business might choose to adopt an ethical objective

Impact of CSR:
● Environment
● Work place
● Market place
● Society

SWOT Analysis:

11
 ● SWOT is both one of the most simple and one of the most useful tools taught in
business.
● SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Strengths and
Weaknesses describe characteristics of the organization itself, while Opportunities and
Threats are present in the external environment.
● Managers can clarify the existing situation and begin to think about how to maintain
and improve their competitive position.

SWOT Analysis and Market Position:

● SO (Growth Strategies)
● ST (Defusing Strategies)
● WO (Reorientation Strategies)
● WT (Defensive Strategies)

Ansoff Matrix: Most organizations aim to expand and develop rather than stay still.
Ansoff grouped the different options for growth into one of four categories, based upon
combinations of two criteria: products and markets.
● The market penetration strategy involves selling more of the same products and
services to pretty much the same customers, and or at least the same types of
customers. The market penetration strategy is most usually considered the least risky
growth strategy as it often does not entail making large investments.
● Product development involves selling new products in the organization's existing
market, often to existing customers. In the Product development usually involves some
risk because it requires investment in time and resources to carry out.
● Market development involves selling existing products to new customers. Market
development can also involve selling the existing product to a new demographic group
or target market. Another example of market development is a company that begins
selling directly to individual customers and families when the previous model was based
on selling only to other businesses. Companies in the personal computer industry grew

12
 this way when individuals and families began to purchase computers that had initially
been designed for office use.
● Finally, diversification is considered the most risky growth strategy, as it involves
selling new products in a new market. The business is thereby getting involved in an
activity of which it has little knowledge and as a consequence there is more potential for
making costly mistakes. If the new activity has some similarities with the existing
business it may be considered ‘Related Diversification’.

1.4: Stakeholders

Who is a stakeholder:
● A stakeholder is any individual or group that affects an organization or is affected by it.

Interests of internal stakeholders: Internal stakeholders include managers, employees and

usually shareholders.
● Managers: individuals who run the organization. They are responsible for setting aims
and objectives and make sure they are met.
● Employees: individuals who work for the company but are not responsible for managing
other employees.
● Shareholders: Are owners of the company, they invest in a business to receive a return
on their investment.

Interests of external stakeholders: External stakeholders have less influence over the
organization than internal stakeholders.
● Customers: are individuals and businesses that purchase the output of the organization.
The demand goods services and products that are safe and sold at reasonable cost.

● Suppliers: are individuals and businesses that sell goods and services to other
organizations. They maintain a stable relationship with companies they supply to
ensure a reliable market for their goods.

13
 ● Governments: are organizations that protect the public interest, they enforce laws and
reprimand companies when necessary.

● Unions: They exist to protect employees rights, they are important stakeholders for
many organizations. Unions represent employees in different firms; they may have more
resources to defend employees interests than the employees in a single firm acting
alone.

● Banks: They lend organizations funds so they can invest and carry out their operations.
Banks want to be sure that these loans are paid back, with interest, on schedule.

● Competitors: a company’s competitors do not have an interest in its success. However,

they are impacted by its practices.

Areas of mutual benefit and conflict between stakeholders interest:

● Managers and employees: Management may wish to maximize productivity, while
employees may prefer to work less or under less stressful conditions.
● Shareholders and managers: Managers may sometimes look after their own interests
rather than those of the firm. They may engage in activities that improve their personal
reputation or remuneration without improving profits.
● Shareholders and the government: Government expects businesses to pay fair taxes,
according to the law of the country, but shareholders may pressure management to
reduce the company’s tax burden through sophisticated accounting and legal schemes.
● Managers and unions: Managers may oppose unions’ intervention in the relationship
between managers and employees at a particular firm.
● Customers and suppliers: Customers demand high quality and low prices, which is in
conflict with suppliers’ interest in being paid fairly.

14
 ● Pressure groups and employees; Pressure groups may oppose certain projects that have
the potential to harm the environment. These same projects may benefit the local
community in terms of employment.

1.5: External Environment

Importance to business of the external environment:

● All businesses exist in an external environment that has effects on their
decision-making. A businesses survival depends on their understanding and response to
external factors that are beyond their control.

Steeple Analysis:
● It is a strategic planning tool used by businesses to focus on opportunities and threats of
the external environment that affect businesses when they are developing strategy and
making decisions.
● It may be conducted to allow a business to review its objectives and strategies in light of
external changes.

STEEPLE stands for:

Social:
● Attitude of society towards wide range of issues
● Population demographics (more young/old, more women/men, etc.)
● Roles and attitudes of people
● Cultural and religious beliefs
● Security and education

Technological:
● Use of tools and machines
● Information technology

15
 ● Innovations in technology

Environmental:
● State of the economy
● Interest and tax rates
● Exchange rates and foreign relations
● Inflation rates, unemployment rates, etc.

Economic:
● Abundance of natural resources or raw materials
● Threats from nature (or natural disasters)
● Waste disposal/recycling

political:
● Laws (employment, consumer, business) & policies (fiscal and monetary)
● Changes brought about by new government
● Possible effects of political unrest

Legal:
● Employment or contract laws
● Trade unions
● Environmental protection regulations

Ethical:
● Client confidentiality
● Bribery and other forms unethical (and possibly illegal) business transactions
● Fair competition

How changes in STEEPLE factors affect a business’s objective and strategy:

16
 ● Changes in trends, social norms, public opinion, views on ethics can affect the
company’s products, business activities, and the way they market their products.
● Changes to legal or political factors may force businesses to change the way they
operate to comply with new laws or regulations

1.6: Growth and Evolution

Scale of Operations/Business:
● Maximum output that can be achieved using available resources
● Scale can only be increased in the long term by employing more of all inputs
● Producing more =/ increasing scale of production
● Increase scale of operations attains economies of scale

Economies of Scale:
● Increase in efficiency of production as the number of output increases
● Average cost per unit decreases through increased production
● Fixed costs are spread over an increased number of output
● Cost per unit = (total variable costs + total fixed cost) ÷ units produced
● Importance: customer enjoy lower prices due to the lower costs which in turn increases
market share or business could choose to maintain its current price for its product and
accept higher profit margins

Types of Economies of Scale:

Internal: (achieved by the organization itself

● Purchasing economies: Wholesale discounts
● Technical economies: Investing in technology to reduce costs
● Financial economies: Easier for large companies to receive loans from banks
● Marketing economies: More efficient to advertise a large number of products

17
 ● Managerial economies: Larger firms are able to hire specialists who help improve
efficiency.

External:
● Improved infrastructure (e.g. transportation)
● Advances in the industrial efficiency due to better training,
● innovations in processes/machinery, etc.
● Growth of other industries that support the organization

Diseconomies of Scale:
● Economies of scale have peaks, if this point is passed, diseconomies of scale are
experienced.
● Can occur when a company or even the whole industry becomes too big and unit costs
begin to increase rather than decrease
Possible due to:
● Communication problems leading to poor coordination
● Overworked machinery and laborers
● Alienation of workforce and slower decision-making (for larger
● businesses)

● Diminishing marginal returns: Decrease in the marginal (per-unit) output of a

production process as the amount of a single factor of production is increased, while the
amounts of all other factors of production stay constant.

Small vs. large organizations:

Advantages:
Small business:
● Easily managed & controlled by the owner
● Quicker to adapt to changing customer needs and feedback
● Offer personal service to customers

18
 ● Establishes better employer-worker relationships
Large business:
● Can afford to employ specialist, professional managers
● Benefit from more economies of scale
● More access to varied sources of finance
● Can diversify in several markets, thus spread out the risks
● Can afford more formal research & development

Disadvantages :
Small business:
● Can’t afford to employ specialist, professional managers
● Doesn’t benefit from more economies of scale
● Less access to varied sources of finance
● Can’t diversify in several markets, thus spread out the risks
● Can’t afford more formal research & development
Large business:
● Difficult to be managed & controlled by the owner
● Slower to adapt to changing customer needs and feedback
● Can’t offer personal service to customers
● Establishes poorer employer-worker relationships

Reasons for mergers:

● They want to increase revenue
● Fight the rising of prices together
● Increased customer satisfaction (new and better content)
● Bigger market

Reasons for failure:

● The companies could not synergize
● The competition was stronger than the merged business
● Conflicting cultures
● Poor management and leadership
● Poor timing/recession

Franchising:
● An individual buys the right to operate under another business’ name.
● Franchisee pays a franchise fee and is given a license to operate by the franchiser.
● Franchisee is a different type of entrepreneur.
● Franchiser provides marketing, training and equipment to set-up.

19
Franchisor:
Benefits:
● Grow cheaply and quickly
● Less manpower to directly manage
● Income from franchise fee, royalties, and supply purchases
Downside:
● Not easy to revoke
● Less control over quality or performance of franchise
● Conflict in profit vs. volume

Franchisee:
Benefits:
● Known brand results in strong start-up sales
● Support from franchisor
● Easy financing options
● Lower cost of supplies because of economies of scale (though sometimes the franchisor
charges high for supplies)
Downsides:
● Little freedom/flexibility in running
● Franchise/start up fee may be too costly
● Bad management in headquarters affects all branches
● Still not guaranteed success

Multinational Corporations (MNCs): MNCs are businesses with operations in two

or more countrie

Advantages:
● Expand customer base beyond the domestic market
● Achieve greater economies of scale
● Work around government barriers to imports
● Access to cheaper or more abundant raw materials and labor
● Spread risks in any one market through diversification

20
2.1: The functions and evolution of human resource
management

Human resources:

● Management function of recruiting capable, flexible and committed people, managing

their performance.

Human Resource Management (HRM):

● is the strategic approach to the effective management of an organization’s workers so

that they help the business gain a competitive advantages.

Human Resources Planning:

● Analyzing both the current and future number of employees needed and both the skills
needed to achieve the organizations objectives.

Steps: Human Resource Plan

● Work from corporate objectives: what are the overall aims for the upcoming year?
● Human resource audit: current HR situation in terms of the number of the employees
they have and their skills.
● Forecast the number of required employees.
● Forecast the skills required.

Labor Turnover:

● Movement of employees into and out of the business in a given time period. Indicator
how stable a business is.
● Labor turnover = #staff leaving / total # staff x 100

High Turnover:

21
 ● Causes: 1. Underpaying 2. Few promotion 3. Discrimination. Advantages: new staff =
new ideas Disadvantages: expensive - time consuming
● Effects: Advantages: younger enthusiastic staff Disadvantages: lack of experience is
professionalism
● Reducing Turnover: 1. Hire the right people from the first place. 2. Shouldn’t be
achieved at a high cost.
● Voluntary Turnover: 1. Low skilled work can be replaced easily. 2. Professionals are
harder to replace.

Factors that influence human resource planning:

● Internal: 1. Staff needs: Jobs need to be done to achieve corporate aims. 2. Finance
available: recruit within budget. 3. Productivity: how can they improve this.
● External: 1. Communication tech: employees working from home. 2. Law regulations:
change in laws about health. 3. Labor mobility: workers can move between jobs or ability
to move locations.

Recruitment:

● Identifying the need for a new employee, and job be filled and the type of person
needed.

Steps:

● Job analysis: details of the job, and outside of the employees specification.
● Applications: creating advertisement, candidates applying for the job, short list of
candidate is determined
● Selection: interviews are held, references contacted, then a job offer is made.

Types of recruitment:

● Internal: fill the vacancy within its existing workforce.

● Pros: cost-effective, less time, less risk and motivational

22
 ● Cons: fewer applications, time consuming and internal politics
● External: fill the vacancy outside the business.
● Pros: wider experience and more applications
● Cons: more uncertainty, Time consuming and expensive

Job Advert:

● The Business Will Need To Consider: Where to place the advert so it is seen by the right
people. What should be included in the advert so the applicants have sufficient
information.
● The legal requirements that have to be met.

Training: keep the employees up-to-date with the latest ideas on technology, It
can:

● Improve the quality of the work

● Greater productivity
● Motivation
● Reduce turnover

Types of training:

● Induction: training how the business works.

● On the job: training while doing their normal job, done by experienced employee.
● Off the job: given time off to attend training away from the job.

Cognitive training:

● Helps employees develop their thinking skills and they will be able to make quicker and
more effective decisions

Behavioral trainings:

● Apps employees develop their interpersonal skills and interpersonal skills.

23
Appraisal:

● Formal assessment of an employees performance in fulfilling their job.

● Employees may respond to or discuss it with the managers.

Types of appraisal:

● Formative: continuous
● Summative: according to set standards, end of a project contract or a specific goal, test
knowledge and skills
● 360 degree
● Self-appraisal

Final stage in HR plan when employee leave the business:

● Resignation: employee choose to leave

● Dismissal: business decides that employee should no longer work there
● Retirement: workers retired from work force due to their age
● Redundancy: The job ceases to exist

Reasons of dismissal:

● Incompetence: lack of ability and caring out the job

● Misconduct: unacceptable behavior
● Gross misconduct: theft, fraud, sexual harassment, and alcohol at work
● Legal requirements: don’t have the necessary skills

Steps to dismiss an employer:

● An initial warning
● Official written warning and formal meeting with employer
● Further cases of misconduct result in dismissal

Types of redundancy:

24
 ● Voluntary: employee choose to be redundant
● Involuntary dismissal can be based on age, years of service and etc.

Factors of changes in work patterns:

● External factors: social trends

● Privatization: move from public to private sector
● Increase migration in a country
● Increasing number of finals in workforce

Changes in work practices: work practices indecline

● Permanent contracts: employee has been hired for a position without a predetermined
time limit.

Work practices in increase:

● Part-time work: employees work less than the full-time max hours.
● Temporary: work that’s on a fixed term contract of temporary nature.
● Freelance: someone that self-employed work for several businesses at the same time.
● Teleworking: Work taking place from home, requires core number of hours in the center
● Work from home: employee working from home, expectation for some time in the office.

Changes in work preferences:

● Career breaks: employee decides to stop working for a time

● Jobs share: two or more employees share a job to free up time for other activities.
● Downshifting: employee gives up a senior position.
● Study live employee is granted time off work to acquire a new qualification.

Outsourcing:

● Having external organization perform some aspect of a business.

● Business contracts out an activity to another business.

25
Off shoring:

● Relocating business functions and processes done in one counting to another country.
● Reduce cost
● Harder to manage

Restoring: Human resources brought back to the origin country

Reasons for reshoring:

● Product recalls
● Mass media coverage of unethical business practices
● Transportation costs are increasing

Innovative:

● Can I have major impact on an HR plan.

● An innovative business should focus media on HR

Ethical considerations:

● Discrimination: all employees must be treated the same way

● Fairness: treat employees fairly
● Legal guidelines: work hours, breaks, sick leave and paid holidays.
● Cultural expectations: treating employees regarding to their country of origin

Globalization:

● Requires HR managers to think about how ICT contributes on workforce planning.

● Multinational companies use ICT to improve the capabilities, efficiency and functions.

2.2: Organizational structure

Why is organizational structure changing:

26
 ● Employees are becoming better qualified and more knowledgeable.
● Centrally made decisions means local factors aren’t taken into account.
● Communication tech are becoming quicker and more mobile

Organizational structure:

● Internal formal framework of a business that shows a management organization.

Hierarchical structure:

● Has different layers of the organization with fewer people on each higher level.

Organizational chart:

● Diagram that outlines the formal rules and reporting lines

● Accountability: This shows who is responsible for a certain job.
● Responsibility: shows who is in charge of whom and in what role.

Levels of hierarchy:

● How many levels of responsibility are in a business.

Line managers:

● Who have the authority to make decisions

Chain of command:

● Line down which instructions are passed through layers

Span of control:

● How many subordinates are directly under the authority of a manager

Delegation:

● Managers give authority for particular decision but not responsibility.

27
 ● Advantages: more time to focus on important stuff, motivate employees and
train stuff.
● Disadvantages: task not defined delegation —won’t succeed, delegate boring job
— not motivating.

Centralization:

● Manager maintain higher level of control over decision making.

● Advantages: better control and better sense of direction.
● Disadvantages: delay in decision making and increased pressure on managers.

Decentralization:

● CEO delegate decision making to manager in different ares of the business.

● Advantages: encouragement of team work and faster in decision making.
● Disadvantages: loss of control and greater chance of mistakes.

Bureaucracy:

● Rules, policies and producers that exist in an organization.

● Associated with governmental organizations in the military.
● Decisions are made Centrally then put in action by staff.

Delayering:

● Manager remove layers from hierarchy to make it flatter.

● Effects: reduce business costs, increase span of control of managers, improve
communications and more delegated decisions.

Tall: traditional form of a business

● Many levels of hierarchy

● Narrow span of control

28
 ● centralized decision-making

Flat: modification of the more traditional structure

● Fewer levels of hierarchy

● Wider spans of control
● Short chains of command
● Increase delegation

Organizational structure (hierarchy):

● Individuals at the top of more authority than the people below.

Organizational structure (function):

● Presented by function indicating what employees do, grouped by departments.

Organizational structure (product):

● Presented by what businesses do, produces.

Organizational structure (region):

● Presented according to where the business operations are located.

Changes in organizational structure:

● Project-based organization: 1. flexible to market demands 2. run teams

focusing on individual projects 3.after the project team is split up 4. each team
can “borrow” members of different departments.

Matrix based structure:

● Manage projects they’re working on by drawing on specialist employees from

different parts of the business.

29
Sharm rock organization:

● Business can reduce cost king competitive advantage and increase responsive.

Three leafs:

● Core managers, technicians and employees

● Flexible workforce

2.3: Leadership & Management

Functions of management:

1. Planning: managers set objectives and plan.

2. Organizing: Managers organize resources to meet the objectives.
3. Directing: Managers guide, lead and oversee employees to ensure that the
organizational goals are met.
4. Coordinating: Managers coordinate activities to bring together the various departments
to achieve objectives.
5. Controlling: Managers control and measure performance.

Mintsberg’s Management Roles:

● Interpersonal Role: Dealing With and motivating staff.

● Informational Role: Acting as a source receiver and transmitter of information.
● Decisional Role: Making decisions and allocating resources to meet the organization’s
objectives.

Management:

● Responsible for planning and overseeing the work of a group, they’re task-oriented.

30
 ● Instruct, coordinate people.
● Resolve problems.
● Make the organization function

Leadership:

● Emotional role, they inspire people to follow them voluntary, relationship-oriented.

● Motivate people
● Rely on instincts
● Have vision

Leadership Styles:

Autocratic:

● Decision making at the center of the organization.

● Features: leader makes all decisions, One way communication Supervise Workers.

Paternalistic:

● Share features with autocratic leadership, but they view employees as a family.
● Features: Provide employees with sense of safety.

Democratic:

● Active participation of workers in making decisions.

● Features: Participation is encouraged, two way communication.

Laissez-faire:

● Decision making to the work force.

● Features: Managers. Give very little input to subordinates.

Situational Leadership Style:

● Situational leaders adapt their styles to each situation.

31
 ● Features: Style of leadership depend on the task.

Effectiveness of Leadership Styles:

● There isn’t one leadership style that’s best in all circumstances and for all businesses.
● Training and experience of the work force and responsibility they’re willing to take.
● The management culture and business background of managers.
● Personality of managers.
● Importance of the issue.

Ethical considerations:

● Ethical influences on leadership and management are based on the principles and moral
values held by the different stakeholders in an organization.

2.4: Motivational Theories

● If managers can motivate their employees, its more likely that those managers
will achieve their goals.

The two types of motivation is:

Intrinsic: Motivation comes from satisfaction of doing a particular activity.

Extrinsic: Motivation derived from external factors such as money.

Motivation theories:

Frederick Taylor Theory:

● The starting point for the study of motivation is Fredrick Wilson Taylor.
● His method was known as Scientific Management.
● A lot of businesses practices in the US, Europe, Japan and former communist countries
are based on his work and writings.

32
 ● Taylor's approach to management is it is the managements' task to decide exactly how
every task should be completed.
● Then they need to design the tools needed to enable the worker to achieve the task as
efficiently as possible.
● Taylor believed that people work for one reason only MONEY.
● He felt that people were only motivated by economic motives of self-interest.
● This resulted in him being known as "economic man."
● He was a trained engineer and was interested in output and productivity.
● Taylor also introduced the concept of piece-rate system of incentive pay.
● Henry Ford was largely influenced by Taylor.
● His Model T was the first mass produced motor car.
● In every case where the Taylor method was implemented productivity greatly improved
for several years.
● Eventually workers rebelled in being treated like machines.
● Taylor is most famous for his time and motion study.
● This involved breaking the job into small repetitive parts and measuring the time
needed for each task.
● Each worker had one task and wouldn't do any other task to minimize waste on
movement.
● Skill has been removed from the equation so that employees can be employed at low
cost with little training.

Abraham Maslow Theory:

● Abraham Maslow's research was not based solely on people in the work environment.
● He was concerned with trying to identify and classify the main needs that humans have.
● He thought that: “Our needs determine our actions, we will always try to satisfy them
and we will be motivated to do so. If work can he organized so that we can satisfy some
or all of our needs at work then we will become more productive and satisfied.
● Maslow summarized the human needs into this hierarchy:

33
 1. Self Actualization: The need to actualizing one's potential and becoming all one is
capable of becoming.
2. Esteem Needs: The need for self respect, achievement, attention, recognition, and
reputation.
3. Social Needs: The need to feel loved and appreciated by others. The need to have friends
and family
4. Safety Needs: Like living in a safe area, medical insurance, and job security.
5. Physical Needs: Like food, water, shelter and the needs required to sustain life.

Frederick Herzberg Theory:

● Herberg said that there are two types of factors that affect workers motivation Motivator
Factors - Factors which if present will motivate staff Hygiene Factors - Factors
which will not in themselves motivate, but will demotivate staff if they are not
present.

Motivators Hygiene Factors

Achievement Company policies

Recognition Supervision

The work itself Relationship with supervisor and peers

Responsibility Work conditions

Advancement Salary

Growth Status

Security

Daniel Pink Theory:

● Pink is the author of the 2009 book Drive: The Surprising Truth About What Motivates
Us.

34
 ● In the past it was believed that work was a series of uninteresting tasks and the best way
to get people to work was to give them rewards and carefully monitor their performance.
● Productivity is increased by offering more rewards or increasing punishment for failure
to perform.
● According to Pink, work today has changed, the tasks are more complex and challenging
requiring creativity and problem-solving skills.
● The old system of reward and punishment is ineffective and may actually have negative
results for both employees and for the business. Employees lose motivation and get less
satisfaction from their work.
● Pink argues that businesses have to tap into employee's intrinsic motivation.
● Pink proposes that businesses should adopt self determination theory.
● Businesses should create settings that allow:
1. Autonomy: an environment that permits employees to shape their own lives freedom in
when they work (time) , how they do their jobs (technique) , who they work with (team)
and what they do (task).
2. Mastery: opportunities that will allow employees to learn, innovate and create new
things.
3. Purpose: a sense that their work betters their own lives and the world.

Adams Equity Theory:

● Employees are demotivated if they believe their inputs are greater than their outputs.
● Inputs (Brought by the employee): effort, loyalty, commitment, skill.
● Outputs (Brought by the organization): financial rewards, recognition, security and
sense of achievement.

35
2.5: Organizational Culture (HL ONLY)

Organizational Culture:

● The values, attitudes and beliefs of the people working in an organization that control
the way they interact with each other and with external stakeholder groups.

Types Of Organizational Cultures

Charles Handy:

36
 ● The Management scholar and theorist Charles Handy introduced a highly memorable
way of viewing organizational culture when he described four organizational cultures:
Power Culture, Role Culture, Task Culture, and Person Culture.

Power Culture:

● Exists when a few individuals retain the essential power in an organization. Power
cultures have few rules and procedures, and decision making tends to be swift.

Role Culture:

● Refers to organizations where employees have clearly defined roles and operate in a
highly controlled and precise organizational structure.

Task Culture:

● Refers to an organizational culture focused on specific problems. In this context, power

shifts from person to person as different people are suited to different tasks or issues.

Person Culture:

● Exists where individuals believe themselves to be superior to the organization and just
want to do their own thing. These organizations are where employees simply go to work,
they see themselves as separate from the organization.

Levels Of Organizational Cultures

Edgar Schein:

● Edgar Schein described three levels of organizational Culture they are, Organizational
Attributes, Professed Culture, and Organizational Assumptions.

Organizational Attributes:

● This refers to the behavioral aspects of a business that is easily recognised but not easily
understood, such as dress code, methods of interactions, interior decor etc.

37
Professed Culture:

● The desired or ideal values that an organization feels is important, such as the brand’s
mission statement and slogans. This is promoted throughout the business in hope that
the workforce will begin to reciprocate them.

Organizational Assumptions:

● This part of culture is usually not seen or at least not easily identified as it is well
integrated with the organization. It contains subcultures and a defined culture that is
invisible to new employees. Schein believed that it was at this level that culture drives
an organisation.

Cultural Clashes

Reasons for culture clashes

When individuals enter an organization or when two or more organizations merge together,
“Culture Clashes” can occur. Reasons for these clashes include the following:

Different Comfort Levels With Diversity:

● Some organizations are used to diversity, others are biased.

Different Degrees Of Formality:

● Some organizations are highly formal whereas others are informal.

Different Languages:

● organizations typically have a language that is the norm. Individuals who do not speak
the language well often experience difficulties. Misunderstanding can also occur if
differences exist in modes of non-verbal communication.

Different Leadership Styles:

38
 ● when two organizations merge, individuals can experience changes in leadership styles.
For example, if an organization with an authoritarian leadership style acquires a
company accustomed to democratic leadership, both leaders and employees will find the
situation difficult.

Different Orientations To Tasks And To People:

● some organizations are task-orientated, and others are relationship-orientated.

Different Practices:

● all organizations, even those from the same country, have some differences in practices
compared to other organizations. These differences can be greater when organizations
are from different countries or cultures.

Different Sense Of Time:

● in some cultures, time is fixed: exact appointment times and schedules are taken very
seriously. Other cultures have a more fluid sense of time.

Consequences Of Culture Clashes

● Misunderstanding and miscommunications

● Unhappy/Demotivated staff
● Need for Compromises (time consuming, possibly expensive)
● Resistance to change
● High costs of training staff and implementing change

Organizational Culture And Individual

Individuals such as leaders can have a great impact on culture, and can also be greatly impacted
by cultures in turn. Strategies to influence a shared vision or the people can be summarised by
the acronym MOVER:

39
Mentor:

● Leaders need to act as mentors to their workforce and support them to help shape a
healthy, trustful organizational culture.

Outreach:

● Communicating the ideal vision to the workforce to help coordination and create set
values.

Vision:

● The vision of where the business wants to be is in itself of primary importance as they
need to know what they want, and how to achieve it.

Engaging:

● The ideal culture must be exciting and engaging for the workforce, by promoting
self-worth and commitment. If the workers do not want to share the same vision, the
culture will take a hit.

Role Model:

● The leader needs to be a role model for their employees, as this would help them
associate themselves with what an ideal employee and culture should be.

2.6: industrial/employee relations (HL)

Sources of conflict in the workplace:

● There are a number of common causes of conflict within a workplace. These include:

Value:

● People have different beliefs and values and make different judgements about what is
important in life and work.

40
 ● If people’s values are ignored, then tension can arise and workers will feel aggrieved and
resentful towards their employers or towards each other.

Communication:

● If people don’t communicate with each other, it will create a downward spiral of
misunderstanding and hostility.

Power:

● some individuals abuse their power to victimize others in the workplace.

Insufficient resources:

● There are limited resources and unlimited wants. This can lead to managers having to
make decisions about what is essential in order for an employee to do their job.
● The manager’s decision about resources may clash with the employee’s own perception
of what they need, which is where problems can arise.

Perceptions:

● People have different ways of interpreting decisions and events. As a result, when
people see a situation quite differently, conflicts can occur.

Change:

● Change can be stressful, and people respond to change in different ways.

Performance:

● When people do not perform their job in a satisfactory manner, problems will occur.
How this situation is handled can cause disruption in the work environment.

Inequity:

● If workers feel that they are not given a fair chance to secure promotions, take on extra
responsibility or receive fair pay, then tensions can result.

41
 ● In some industries, discrimination may be the source of grievance for some workers who
may voice their displeasure at being unfairly overlooked.

Redundancies:

● Economic downturns may cause declines in consumer demand. As a result, businesses

may need to cut costs, including labor costs.

Toxic workplace culture:

● In some organizations there may be a toxic environment.

● Poor decisions, tensions between colleagues and management, recent redundancies,
bullying or discrimination are all things that can lead to conflict.

Approaches to conflict in the workplace:

● When significant conflicts arise in the workplace and are not quickly resolved, both
employees and employers may take industrial action.
● Industrial action is a form of protest that puts pressure on the other party to resolve a
dispute.

Collective bargaining:

● One of the ways to avoid damaging industrial action is through collective bargaining.
Collective bargaining is when employees work together with management to negotiate
wages and working conditions.
● Collective bargaining can occur through formal trade unions and it can also occur when
no formal union is present.

Trade unions:

● An organized group of workers formed to protect and improve worker interests and
rights.

42
Employee industrial action:
There are various actions that employees can take to put pressure on the business to resolve
disputes. While these actions can be effective tools to resolve disputes, they share similar
downsides for both the employer and the employee, including:
● increased costs of production
● loss of output and sales revenue (and thus profits)
● damage to the reputation of the business, permanent loss of customers and difficulties
with recruiting
● damaged relationships with employees
● job losses if profits decline or losses occur due to the industrial action

Work-to-rule:
● Employees often go above the minimum required in their work to support the business.
● A work-to-rule action is when employees only work at the minimum level required by
their contract.
● If you work in a factory, for example, you might work an extra 30 minutes at the end of a
shift in order to fulfill an order. In work-to-rule, you would stop your work and go home.

Overtime ban:

● An overtime ban is when workers refuse any overtime work. Like go-slow and
work-to-rule, this is a very effective method when there are fast-approaching deadlines
for work to be completed.
● During periods of high demand, the impact on customer service would be great. Poorer
delivery of service could then result in loss of business reputation.
Strike:
● A strike is when workers refuse to work. It is the most radical action that employees can
take to reach their objectives.

43
 ● Strike action is the most disruptive form of industrial action for a business’s output.
Strikes typically receive a lot of media attention and can also lead to public relations
issues for both the employer and the employees.

Employer industrial action:

On the other side of the bargaining process, the business also has objectives. The business may
wish to reduce costs of production, increase productivity, and reduce labor turnover. It is in the
management’s interest to do what it can to ensure employees are happy at their jobs; however,
the management may have objectives that run counter to what the employees want. This may
result in differing perspectives which, as mentioned earlier on, may lead to conflict.

Redundancy:
● Redundancy refers to when a business cuts back on personnel where their roles are no
longer necessary or there is no longer any work available.
● Management can use the threat of redundancies as a means of coercion and control.
Contract changes:
● These may result when an employee ends their contract and a new contract needs to be
negotiated.
● At this point, the terms of the contract can be altered. This may include changes in pay
and benefits.
Closure:
● This occurs when management shuts down the business in response to employee
strikes.
● This is extreme and is not often used because it creates animosity between managers
and employees.
Lock-out:
● A lock-out occurs when an employer locks out its employees, preventing employees
from coming to work, with a loss of pay, until an agreement is found.

44
 ● This can have the effect of breaking the unity of the workers; some employees may need
the work more than others.

Approaches to conflict resolution in the workplace:

Conflict resolution involves actions taken to reduce tensions and manage conflict in the
workplace.

Common methods of conflict avoidance include:

● Employee participation and industrial democracy: These involve workers making

decisions and sharing responsibility and authority in the workplace. This is often
referred to as ‘team working’; workers can participate in running the business.
● No-strike agreements. Many unions include a no-strike clause in their contracts to
combat negative publicity from stoppages. This means precisely what it says: workers
will not strike.
● Single union agreements. These are agreements whereby the employer will only
negotiate with a single recognised labor union.

Table 1. Strengths and weaknesses of conflict avoidance methods

Method of conflict strengths: weaknesses:

avoidance:

Employee participation and 1. Employees feel more 1. Democratic systems

industrial democracy: motivated and with greater employee
empowered. input could delay
2. Employees feel like decision-making,
they belong and may which may be a
have better job competitive
satisfaction if their disadvantage in
input is valued and fast-moving
considered. industries.
3. Organizations with 2. Employees may not
greater employee agree on a strategic
participation tend to direction or

45
 have fewer strikes, consensus, which may
less conflict. create issues between
workers.

No-strike agreement: 1. This reduces the risk 1. This may limit the
of disruption caused impact or bargaining
by strike action. It will power of the union. It
help to avoid any may also reduce the
issues of production union membership
being halted by over time and weaken
striking staff. labor power.
2. It also reduces the
possible risks of poor
public relations
created as a result of
strike action.

Single union agreement: 1. This avoids wasting 1. Some workers may

time negotiating with feel the union that is
and managing doing the negotiating
multiple unions that is ineffective in
represent employee defending their
groups. It also avoids interests.
rivalry between 2. It may limit the
unions to negotiate union’s power to
better pay for interfere with
members. management
functions.

The two main methods of conflict resolution are conciliation and arbitration:
● Conciliation: a third party acts as a go-between and attempts to listen the demands of
both sides, relay those demands to each party and then, through negotiation, reach a
compromise that is satisfactory to both parties.
● Arbitration: it is similar to conciliation but, both parties agree beforehand that they will
abide by the third party’s decision. You can think of the arbitrator as someone who is
acting like a judge, listening to both sides, weighing the evidence and then rendering a
decision.

46
Table 2. Strengths and weaknesses of conflict resolution methods

Method of conflict strengths: weaknesses:

resolution:

conciliation: 1. The privacy of the 1. There is no legally

parties is preserved, binding obligation to
so there is no risk to observe the
reputation. agreements made.
2. The conciliator is 2. There is no guarantee
normally a legal that such action will
expert in the disputed result in a favorable
area. outcome or will
resolve the dispute.

arbitration: 1. This method is much 1. The final decision is

cheaper and quicker made at the discretion
than a lengthy court of the arbitrator,
battle. which may leave room
2. Parties have greater for bias.
control over the 2. It is not possible to
conflict resolution appeal the final
process. decision.
3. The arbitrator is
selected by the parties
and will usually be
someone with
expertise in the
matter.

3.1: Introduction to finance

Capital Expenditure:
● is money spent to acquire fixed assets in a business, including machinery, land,
buildings, vehicles, and equipment.

Revenue Expenditure:

47
 ● is money spent on the day-to-day running of a business, such as rent, wages, raw
materials, insurance, and fuel.

3.2: Sources of finance

Internal sources of finance (obtained within the business) include personal loans, retained
profits, and the sale of assets.

Personal funds:
● money that comes from the business owner’s personal savings.
● Advantages: the sole trader knows exactly how much money is available to run the
business.
● Disadvantages: it poses a large risk to the owners or sole traders because they could be
investing their life savings.

Retained profits:
● The profit that remains after a business pays out the dividends to the shareholders. It
can be reinvested in the business for growth purposes.
● Advantages: it is a permanent source of finance as it does not have to be repaid.
● Disadvantages: start-up business will not have any retained profit as they are new
ventures.

Sale of assets:
● when a business sells off unwanted assets to raise funds.
● Advantages: no interest or borrowing costs are incurred.
● Disadvantages: this option is only available to established businesses as new businesses
may lack excess assets to sell.

External sources of finance (obtained outside the business) include share capital, loan capital,
loan capital, overdrafts, trade credit, crowdfunding, leasing, microfinance providers, and
business angels.

Share capital:
● money raised from the sale of shares of a limited company.

48
 ● Advantages: there are no interest payments and this relieves the business from
additional expenses.
● Disadvantages: shareholders will expect to be paid dividends when the business makes a
profit.

Loan capital:
● sourced from financial institutions like banks.
● Advantages: loan capital is accessible and can be arranged quickly for a firms specific
purpose.
● Disadvantages: the capital will have to be redeemed even if the business is making a
loss,

Overdrafts:
● When a lending institution (bank) allows a firm to withdraw more money than it
currently has in its account.
● Advantages: it is a flexible form of finance as its demand will depend on the needs of the
business at a particular time.
● Disadvantages: banks can request for the overdraft to be paid back at very short notice.

Trade credit:
● An agreement between businesses that allows the buyer of goods or services to pay the
seller at a later date.

Crowdfunding:
● when a business is funded by a lot of people who each contribute a little bit.

Leasing:
● where a business enters into a contract with a leasing company to use certain assets
(like machines).
● Advantages: a firm does not need to have a high initial capital outlay to purchase the
asset.

Microfinance providers:
● offers banking services to low-income or unemployed individuals who would otherwise
have no access to financial services.

Business angels:
● Rich people who provide money to businesses in return for ownership equity.

49
Short-term finance:

● (lasts for a year or less) provides a business with the working capital that it needs.

Long-term finance:
● (duration of more than one year) is funding obtained for the purpose of purchasing
long-term fixed assets or other expansion requirements of a business.

- In deciding on the appropriate source of finance to use, businesses need to consider

the purpose of the funds, cost, flexibility, status and size, the amount required,
gearing, and the state of the external environment.

3.3: Costs and Revenue

Fixed costs:
● are costs that do not change with the amount of goods or services produced and paid
regardless of any business activity the firm engages in.

Variable costs:
● are costs that vary with the number of goods or services produced or that change in
proportion to business activity.

Total cost:
● represents the total fixed and variable costs.

Direct costs:
● are expenses that can be directly traced to a particular product, department, or cost
center.

Indirect costs:
● are not clearly identified with the production of specific goods or services.

Total revenue:
● is the total income gained from the sale of goods and services. It is also known as sales
revenue or sales turnover.
Descriptive statistics:

50
 ● involve the use of statistical data and help to present large amounts of data in simplified
and manageable forms.

3.4: Income statements

Internal stakeholders:
● are groups within the business that are interested in the final accounts. They include
management, owners and shareholders, and employees.

Management: They might use the final accounts to identify the following:
● how easily a business can cover its immediate, short-term and medium-term debts to
ensure that the company does not become insolvent
● the profit earned during the year
● the value of assets owned by the company
● the amount of money invested by shareholders

Owners and shareholders: These stakeholders might use the final accounts to identify the
following:
● how effectively their money has been invested
● how much they will receive in dividends

Employees: They could be interested in the final accounts for the following reasons:
● to know the overall financial stability of the business and how secure their jobs are
● to be able to negotiate for better wages based on the profits of the business

External stakeholders:
● are groups outside the business that are interested in the final accounts of a business.
They include the government, competitors, banks, the business’s suppliers and the local
community.

Government: the government authorities of the country, region, or city where the business is

located will be interested in the final accounts for several reasons.

51
 ● The government may wish to assess taxes on the business, based on the business’s

profits. These taxes are used to fund essential public services like education and

infrastructure that businesses depend on to be able to function.

● The government may also want to assess the health of businesses, because businesses

provide jobs and contribute in other ways to the community.

Competitors: They would be interested in the company’s final accounts for the following

reasons:

● to assess the overall financial strength of the company.

● to compare profits for the year of businesses in the same industry as themselves.

Banks:

● Banks would be interested in final accounts to check the ability of a business to repay

loans.

Suppliers: They would be interested in the final accounts of the company

● to assess how effectively the company would be able to pay for the goods supplied to it

on credit.

Local community:

● They are interested in the wellbeing of the community. So they want to know whether

the business is financially stable and will remain in the community to provide jobs and

the goods and services that the community needs.

Income statement: (profit or loss)

1. Sales revenue: q x sp =

52
 2. Cost of sales: if it says per then cost per x all sold
3. Gross profit: sales revenue - cost of sales =
4. Expenses: given
5. Net profit before tax and interest:gross profit - expenses=
6. Interest: given
7. Net profit before tax after interest: net profit before tax and interest - interest =
8. Tax: given
9. Net profit after tax and interest: net profit before tax after interest - tax =
10. Dividends: given
11. Retained profit: net profit after tax and interest - dividend=

Balance sheet:

accumulated retain profit $14

cash $3

cost of good sold $2

creditors $20

debtors $12

expenses $2

long-term liabilities (debt) $20

net fixed assets $60

sales revenue $5

share capital $26

stock $5

Fixed assets: 60

53
Current assets:

● Cash: 3
● Debtors: 12
● Stock: 5
● Total = 20

Current liabilities:

● Creditors: 20

Working capital:

● CA - CL = 20 -20 = 0

Total assets less current liabilities:

● Fixed assets + current assets = 60 + 20 = 80

● Then total assets - current liabilities = 80 - 20 = 60

Fix liabilities: 20

Net assets:

● (Total fixed assets + total current assets) - (total current liabilities - total fixed liabilities)
= (60 + 20) - (20 - 20) = 80 - 40 = 40

Equity:

● Share capital + retained profit = 26 + 14 = 40

Assets:

Intangible: non-physical items (forms or patents)

Tangible: physical items

54
Depreciation:

● Falls with fixed assets on balance sheet

Straight-line method:

Units of production method:

3.5: Profitability and liquidity ratio analysis

Profitability ratios:

● Gross profit margin = Gross profit / sales revenue x 100

● Net profit margin = profit before interest and tax / capital employed x 100
● Capital employed = Noncurrent liabilities + equity

Liquidity ratios:

● Current ratio: current assets/current liabilities

Acid test (quick ratio):

● (Current assets - stock) / current liabilities

Gearing ratio:

55
 ● Loan capital / capital employed x 100

3.6: Efficiency ratio analysis (HL)

Stock turnover ratio (Number of times):

● Cost of sales / average stock

Stock turnover (number of days):

● Average stock / cost of sales x 365

Average stock:

● Opening stock + closing stock / 2

Debtor days:

● Debtors / sales revenue x 365

Creditor days:

● Creditors / cost of sales x 365

Strategies to improve the stock turnover ratio:

● Supplying a narrower range of goods

● Selling obsolete stock, stocking goods in high demand
● Just-in-time stock control

Strategies to improve debtor days:

● Having customers pay in cash

● Shortening the credit period
● Improving credit control

56
Strategies to improve creditor days:

● Negotiating longer credit periods

● Goodstock control system
● Looking for different suppliers

3.7: cash flow

Constructing cash flow:

● Expenses: are given

● Total cash inflow: cash + revenue
● Total cash outflow: expenses added
● Net cash flow: inflow - outflow
● Open cash balance: given for the first month and then it is the closing balance of the
month before
● Closing balance: net cash flow + opening balance

Reasons for poor cash flow:

● Poor stock management

● Poor pricing strategy or low sales
● Expanding top fast
● High expenses
● Seasonal demand

Increasing cash inflow:

● Effective debt collection

● Cash transactions only
● Increase promotion
● expanding product portfolio
● Going public
● overdraft

57
 ● loans
● government assistance

Reducing cash outflow:

● Better stock management

● Renegotiate credit terms
● switch to cheaper suppliers
● Reduce expenses
● Lease rather than purchase equipment

3.8: investment appraisal

Calculating payback period:

Average rate of return (ARR):

Net present value:

First find the present value:

Then:

58
Pay back period:

Advantages:

● It is simple and fast to calculate

● It helps firms with cash flow problems because they can choose the investment projects
that can pay back more quickly than others.

Disadvantages:

● It does not consider the cash earned after they pay back period which could influence
major investment decisions.
● It ignores the overall profitability of an investment project by focusing only on how fast
it will pay back.

ARR:

Advantages:

● It shows the profitability of an investment project over a given period of time.

● It allows for easy comparisons with other competing projects, for a better allocation of
investment funds.

Disadvantages:

● The effects on the time value of money are not considered.

Net present value:

Advantages:

● The Opportunity cost and time value of money is put into consideration in its
calculation.

59
 ● All cash flows including their timing are included in it computation.

Disadvantages:

● It is more complicated to calculate than the pay back period and ARR.
● It can only be used to compare investment projects with the same initial cost outlay.

3.9: Budgets HL

Budget:

● Is a plan for the future costs, revenues and use of resources by a business.
● They are set for the coming year during the current year.

The importance of budgets for organizations:

1. Controlling revenue and costs:

2. Managing resources effectively:
3. Setting targets:
4. Measuring performance:

Cost and profit centers:

● Management separate business departments into two categories cost centers and profit
centers. They do this to be able to evaluate the performance and effectiveness of the
department and management.

Cost center:

● Is a department within a business that does not generate revenues but only incurs costs.
● Example: are the accounting, Human Resources, or IT departments.
● businesses can be divided into cost centers in some of the following ways: by
department, by product, and by geographical location.

60
Profit center:

● Is a department within an organization that both incurs costs and generates revenues.
● Example: would be the sales department in a business.
● Profit centers have a responsibility to control costs and ensure revenues will achieve the
budgeted profit.
● Profit centers can be divided according to department, product, or geographical location
as long as, in addition to costs, revenue is also generated.

The role of cost and profit centers:

● Aiding decision making: cost and profit centers help in providing managers with
financial information about the different parts of a business and this information can
assist them in deciding whether to continue or discontinue producing a particular
product.
● Better accountability: cost and profit centers help to hold specific business sections
accountable.
● Tracking problem areas: can lead to a quick solution.
● Increasing motivation: empowering and delegating control as well as bonuses or
promotion for meeting targets.
● Benchmarking: comparing the performances in the many cost and profit centers can
help check areas of most or least efficiency.

Problems of cost and profit centers:

● Indirect cost allocation: indirect costs such as advertising, rent or insurance are difficult
to allocate specifically to particular cost centers. They may be allocated unfairly.
● External factors: factors beyond the control of the business such as competition may
affect specific cost and profit centers differently (such as higher competition in one).
● Center conflicts: staff and managers may consider the performance in their own center
to be superior. This could lead to unhealthy competition between the centers.

61
 ● Staff stress: The pressure of managing a cost and profit center may be very high for
some staff.

Variance analysis:

● A variance is where a business has a difference between an actual figure achieved in its
operation in an accounting year and a budgeted figure.
● it is essential because: It measures differences each month and at the end of the year.
● variance = budgeted amount - actual amount

Favorable variance:

● It is where the actual figure achieved is different to the budgeted figure, which causes
the actual profit figure to be higher than the budgeted figure.

Adverse variance:

● It is where the actual figure is different to the budgeted figure which causes the actual
profit figure to be lower than the budgeted figure.

Possible causes of adverse variances:

● Sales revenue is below budget either because units sold were fewer than planned for or
the selling price had to be lowered due to competition .
● Actual raw material costs are higher than planned for either because output was higher
than budgeted or the cost per unit of materials increased.
● Labor costs are above budget either because wage rates had to be raised due to shortages
of workers or the labor time taken to complete the work was longer than expected.
● Overhead costs are higher than budgeted, perhaps because the annual rent rise was
above forecast.

Possible causes of favorable variances:

62
 ● Sales revenue is above budget either due to higher than expected economic growth or
problems with one of the competitors products.
● Raw material costs are lower either because output was less than planned or the cost per
unit of materials was lower than budget.
● Labor costs are lower than planned for either because of lower wage rates or quicker
completion of work.
● Overhead costs are lower than budgeted, perhaps because advertising rates from TV
companies were reduced.

Calculating the budgeted profit and actual profit:

● Profit = revenue - expenses (costs)

Calculating variances:

● variance = budgeted amount - actual amount

The role of budgets and variances in strategic planning:

● Strategic planning is where a senior managers in an organization set out the corporate
aims of the organization and put in place a plan to set out how the Business is going to
achieve its corporate aims.

● budgets are an important part of a business’s strategic planning because they set out the
precise financial targets needed to achieve the corporate aims of the business.

Advantages:

budgets:

● Help to control revenue and expenditure.

● provide realistic targets understood by all internal stakeholders.
● help in the coordination of various business departments.

variance analysis:

63
 ● Aims to compare actual performance to budgeted performance. Helping to assess
organizational performance.
● provides an objective way of appraising budget holders responsible for their various
departments.

Disadvantages:

budgets:

● Inflexible budgets that do not consider any unforeseen changes in the external
environment may be unrealistic.
● Setting budgets without involving some people could result in their resentment and
affect their motivation levels.

4.1: Introduction to marketing

What is a market:

● A market as place where buyers and sellers come together or interact

● A market as a location
● A market as a type of product

Marketing:

● Marketing is the processes involved in identifying and satisfying customer needs.

Product orientation:

● It is a situation where a business prioritizes research and development of high quality,

specialized products, rather than prioritizing market research.

Advantages:

● Unique selling point and quality

● Lack of competition

64
Disadvantages:

● High risk
● High costs

Market orientation:

● It is a situation where the sole focus of a business is on the needs and wants of a market
segment.

Advantages:

● low risk
● repeat customers

Disadvantages:

● No unique selling point

● Market research must be right

Market share:

● Market share measures the value of a single company’s sales or revenues compared with
the sales of all businesses in a market.

The formula for calculating market share:

Calculating market share by looking at the volume (number of products):

Market growth:

65
 ● Market growth refers to the increase in sales revenues or sales volume in an individual
market over time.

Market growth is represented in percentage change compared to a previous time period (T). The
formula is:

Market leadership:

● The market leader is the product or brand with the highest market share. There are
several of advantages of being the market leader for a business. However, when one
company dominates a market, there can be disadvantages for other stakeholders.

Advantages of market leadership for a business:

● Accessing distribution channels

● Brand recognition
● Economies of scale
● Price leadership

Advantages and disadvantages of strong market leadership for

customers:

Networks:

● Advantages for customers: The business may create network effects, where the product
becomes more valuable the more people use it.
● Disadvantages for customers: Larger businesses may continue to dominate and abuse
their power in networks.

Price:

66
 ● Advantages for customers: The business may reach economies of scale with low costs of
production. The business may be able to lower prices for customers.
● Disadvantages for customers: Even if a large, dominant business achieves economies of
scale, there is no guarantee it will lower prices for consumers. The business may simply
take higher profits.

Innovation:

● Advantages for customers: The Business may achieve high sales and profits, which allow
for investment in product research and development.
● Disadvantages for customers: If the business dominates the market, it may have little
competition. It may not have the incentive to innovate.

Disadvantages of market leadership for the business, the

economy, society and the environment:

● Businesses that are market leaders at one point in time may not stay market leaders.
● Large dominant businesses may lack the incentive that newer businesses have to
innovate.
● Their high profits may also attract new competitors who are able to innovate more
quickly.

4.2: Market planning

Marketing plan:

● is a document that outlines the entire marketing process of a business.

● The main elements of the marketing plan include:
1. the marketing objective
2. the marketing budget
3. segmentation and the target market
4. market research

67
 5. marketing strategies
6. control tools

Market research:

● Gathering information to support marketing decisions.

Marketing mix:

● The decisions of a business regarding its product, price, promotion, place, people,
processes and physical evidence.

Market segmentation:

● The process of splitting a market into distinct groups of buyers in order to better meet
their needs.
● The main methods of market segmentation are based on demographic, geographic and
psychographic factors.

Advantages of market segmentation:

● Businesses can define their target market precisely and design and produce goods that
are specifically aimed at these groups leading to increased sales.
● It helps to identify gaps in the market – groups of consumers that are not currently
being targeted – and these might then be successfully exploited.
● Small firms unable to compete in the whole market are able to specialise in one or two
market segments.

Limitations of market segmentation:

● Research and development and production costs might be high as a result of marketing
several different product variations.
● Promotional costs might be high as different advertisements and promotions might be
needed for different segments – marketing economies of scale may not be fully
exploited.

68
 ● Production and stock holding costs might be higher than for the option of just
producing and stocking one undifferentiated product.

Niche marketing:

● Niche marketing targets specific and well-defined market segments Concentrating all
marketing efforts on a small but specific and well defined segment of the population.

Advantages of niche marketing:

● When a specific market segment is targeted in a firm’s marketing, the marketing tends
to be more focused and likely to have greater appeal within the targeted segment.
● Businesses can become highly specialized at finding out the needs and wants of a niche
market they are targeting. With needs and wants being better met, customer loyalty can
ensue.

Limitations of niche marketing:

● Niche markets, by their definition, are small. The number of total potential customers in
the markets is limited.
● Profitable niche markets with low barriers to entry are likely to attract new competitors
into the industry. Niche markets are small and cannot sustain a relatively high number
of competitors.

Mass marketing:

● Mass marketing is an attempt to appeal to an entire market with one basic marketing
strategy using mass distribution and mass media.

Advantages of mass marketing:

● Economies of scale may be obtained in mass markets due to their relatively large size.
Thus, the average cost of bringing the product to market will be lower and thus, profit
margins higher.

69
 ● Providing products for a mass market could enable a successful firm to establish a larger
base of customers. This will generally increase profitability.

Limitations of mass marketing:

● Competition can be intense. A broader customer base can sustain a larger number of
competitors.
● Mass marketing tends to be less focussed. Resources may be used inefficiently by
reaching individuals who are never likely to purchase a firm’s products.

Differentiation:

● Differentiation is the process of distinguishing a product or business from competitors

in the market or industry.

Product differentiation:

● Product differentiation is the marketing process that showcases the differences between
products. Differentiation looks to make a product more attractive by contrasting its
unique qualities with other competing products.

The process of establishing a differentiated product in the minds of consumers will see the firm
focus on different elements of the marketing mix:

● Product: The design, quality, functions, branding and performance are all features of a
product that can differentiate it from other competitive rivals.
● Price: There are a wide range of pricing strategies that a business may consider.
Businesses can be the price leader in a product category or it could use a premium
pricing strategy to match the perceived high quality of the product or brand.
● Place: A wider range of customers can be reached through differentiated marketing
through retailers, wholesalers and distributors.
● Promotion: Promotion is often associated with informing potential customers that a
particular product is different in a better way from the competition, and persuading
customers to purchase on this basis.

70
Advantages:

● Brand recognition and loyalty

● price advantages
● distribution advantages

Disadvantages:

● Economies of scale
● differentiation
● excessive differentiation

4.3: Sales forecasting HL

Sales forecasting:

● It is a quantitative technique used by businesses to predict the levels of sales that they
may expect in future years.

The three types of sales forecasting methods that specialists use are:

1. Casual models: both internal and external factors affect sales

● Internal factors that affect sales include costs of production, labor turnover, and
product pricing, among others.
● External factors include economic factors such as incomes, or sociocultural factors such
as demographic changes .
2. Time series analysis: It is a statistical technique used by businesses to identify trends in
historical data, such as sales revenue figures of previous years. By assuming that past
trends will continue, businesses can forecast sales in the future.
● Seasonal variations: seasonal variations in data occur when products have higher sales
volumes at certain times of the year.

71
 ● Cyclical variations: Cyclical variations in sales data occur when sales are affected by the
economic cycle.
● Random variations: Random variations are marked changes to sales data caused by
unpredictable events. Such events include a natural disaster, a major sporting event.
3. Qualitative techniques:
● Businesses cannot rely only on past quantitative data to make sales forecasts and
decisions about their marketing mix. Businesses must ensure that they understand
broad trends in the external environment that might affect product sales. They also
need to identify and forecast the buying preferences and behaviors of consumers.

Uses of sales forecasting:

● Based on past data

● Effective future planning
● Increase budgets to increase

Limitations of sales forecasting:

● Not enough data

● Changing markets
● Flexibility

4.4: Market research

Market research:

● Concerned with finding out whether consumers will buy a product or service, and is
done by analyzing consumer reactions.

Reasons for market research:

● Reduce the risks associated with new product launches

● Predict future demand changes

72
 ● Explain patterns in sales of existing products and market trends
● Assess the most favored designs, flavors, styles, promotions for a product

Market research process:

● Identify consumer needs and tastes

● Product idea and packaging designs
● Brand positioning and advertising testing
● Product launch and after launch period

Types of market research:

Primary research: Gathering data or feedback first-hand, through

1. Questionnaires (short and focused, allows open-ended questions)

2. Observation (foot traffic, queuing time)
3. Sampling (new product or campaigns)
4. Focus groups (asking groups of people)
5. Interviews

Advantages:

● Up to date
● More relevant/direct
● Confidential and unique
● Objective

Disadvantages:

● Time consuming
● Costly
● Questionable validity

Secondary research: Collecting second-hand information from other sources like

73
 ● Market analyses (shows relevant market data)
● Government publications
● Academic journals
● Media articles

Advantages:

● Cheaper and faster

● Range of sources
● Insight to trends

Disadvantages;

● May become obsolete or out of date quickly

● May be in an inappropriate format
● Partial information
● Widely available to competitors

Qualitative vs. quantitative research:

Qualitative research:

● Used to get feedback to understand motivation , behavior, perception through focus

groups, expert panels, in-depth interviews of credible individuals.
● Qualitative explores attitudes and opinions and can be very deeply relevant even if only
few are interviewed.

Quantitative research:

● Used to get statistical data from total (for figures) or representative sample (for opinion,
decisions), using interviews that have closed questions or use ranking or sliding scales
● Quantitative can only ask factual answers but may not reveal reasons why.

Sampling:

74
 ● Consumer surveys ask consumers for their opinions and preferences.
● It can obtain both qualitative and quantitative information.

Sampling methods:

Random sampling:

● Random selection, based on the principle that everyone is given equal chance.

Stratified sampling:

● Segmentation with number of respondents per group based on proportion to the

population.
● Majority of the population will compose of majority of the survey.

Cluster sampling:

● Used for localized surveys (towns and regions).

● Sample based on a geographic location.

Quota sampling:

● A certain number or quota is set, made up of samples from each segment or random.

Snowball sampling:

● Respondents are networked from a respondent’s referral.

Convenience sampling:

● Respondent’s are chosen based an accessibility and proximity.

4.5: The seven Ps of the marketing mix

75
 1. Place:
● How a product reaches its end customer from the manufacturer.

Distribution channels:

● The different ways the product reaches the customers.

● Has different levels depending on how many steps are required before the product
reaches the customer.

Zero level distribution:

● Manufacturer sells directly to consumers.

● E-commerce makes this more simple, feasible, cost effective and have a wider market
coverage.
● e.g. restaurants, Apple, car manufacturers

Types of direct marketing:

1. Telesales and marketing:

● More expensive
● Direct to consumer, pitch and add more products
2. E-commerce:
● Cheaper, less cost
● Wide market coverage
3. Direct mail or email:
● Cheapest (no specialized skill involved)
● Usually ignored, low success rate
4. Vending machines:
● Physical product can be seen, attracts more customers.
● Cost of machinery
● Prone to theft and vandalism

Advantage:

76
 ● business has control over price, how product is sold, etc.

Disadvantage:

● more costly

One level distribution:

● Manufacturer to retailer to consumer

● Advantage: product can reach more markets because of many retailers
● Disadvantage: less control

Two level distribution:

● Manufacturer to warehouse/wholesaler to retailer to consumer

● Can be one level if consumers purchase directly from warehouse

Intermediaries:

● Wholesalers – buy products in bulk, sell to retailers

● Direct agents – independent businesses w/ exclusive right to trade a product in
territory; agents may act on behalf of buyer or seller
● Retailers – outlets that sell directly to customers

Distribution Strategy:

● Most businesses will use multichannel distribution strategies

● This is affected by:
1. Cost and benefits of each level of distribution
2. Nature of products: Perishables are best at zero or one level - FMCG’s are best at bulk
wholesalers
● Type or size of market
● Urgency of use of the product

Firms must decide on the type of distribution that is most suitable:

77
 ● Intensive (mass produced products)
● Selective (positioning or branding)
● Exclusive (for large investment or premium products)

2. Promotion:

● Communicating to the market w/ the purpose of selling a specific product or brand

● Role is to inform, persuade, remind

Types of Promotions:

1. Above the line (ATL):

● Use of mass media for promotions
● Very wide reach, but also very expensive
● Also called “pull promotions”
● e.g. TV, radio, newspaper, magazine, outdoor, cinema, etc.
2. Below the line (BTL):
● Use of non-mass media promotional activities focused at target market
● Also called “push promotions”
● e.g. price deals, money-off coupons, direct Marketing/direct selling, sponsorship, loyalty
programs, word of mouth, buy-one-get-one-free offers

Promotional mix:

● Promotional mix is the combination of promotional techniques that communicate

benefits from a product
● Elements:
1. Advertising – information and persuasion
2. Public relations – image building and goodwill
3. Sales promotions – stimulate sales and activities
4. Personal selling – sales forces and agents

Guerilla marketing:

78
 ● Use of unconventional, surprise, and memorable interactions in order to promote a
product
● Generally used by smaller businesses who have a smaller budget available for
promotions
● Uses smaller teams of promoters in a specific area, rather than through mass media
campaigns or involving the use of traditional forms of media
● Emphasizes on attracting media attention and creating a good or memorable impression
on the consumers

Benefits:

● Relatively low in cost and risk

● Helps engage in networking with not only customers, but even other potential business
partners as well, depending on how viral the campaign becomes

Limitations:

● Success depends highly on market research

3. Price:

● Self-explanatory – price of the product

● Must consider a product’s costs, how much customers are willing to pay, profit targets,
competition, etc.

Pricing strategies:

Cost-plus pricing:

● Adding a percentage or predetermined amount (markup) to average cost per unit to set
the selling price
● Ensures a product will produce contribution

Competition-based pricing:

79
 1. Price leadership:
● Set by the market leader and other firms simply follow
2. Predatory pricing:
● Temporary reduction in price to drive away competition
● Can be as aggressive as to sell below cost/at a loss
3. Going-rate pricing:
● Simply pricing at about the average price level of most products in the market

Market-led pricing:

1. Penetration pricing:
● Newcomers set their prices low to entice people to buy
● Price changes from low to high
● Risk: lower prices = lower reputation

2. Price/market skimming:
● Get a feel for what the market is like, set the price high, then as you understand the
market better your prices will slowly decrease.
● Prices changes from high to low

3. Price discrimination:
● The price of a product varies per country, which depends on the market; however, the
products should not be easily traded
● Results to the government applying taxes/tariffs

4. Loss leadership:
● Products are sold at a loss, but regain their losses through their other products
● e.g. PS3 sold at a loss, but profits are gained through games

80
 5. Psychological pricing:
● Some numbers are more appealing

6. Promotional pricing:
● Offer discounts, rebates, promotions, etc.
● Assure that your market likes discounts, otherwise there will be no reason in offering
the promotions

4. Product:

● A product is any good or service that satisfies the needs or wants of consumers.

Types of products:

Consumer products (they are sold directly to consumers):

● Fast-moving consumers goods: Soap, shampoos pencils - usually cheap

● Consumer perishables: seasonal products - products with limited shelf-life
● Consumer durables: Long lasting and expensive products - since they are long lasting,
not many are sold, so they are more expensive
● Specialty goods: most expensive - unique products

Producer products:

● Goods purchased by businesses for production process (raw materials & inputs)

Product life cycle:

● Product life cycle is a model that helps businesses make decisions about a product’s
marketing mix.

Product life cycle stages:

81
 1. Research stages:
● Design, development and testing
2. Introduction:
● Costs of heavy marketing
● Cost of research and development
3. Growth:
● Rapid volume increase due to better awareness and expansion of distribution channels.
4. Maturity:
● Sales may begin to peak/stabilize
5. Decline:
● Sales and profits decline due to shifts in demand, new technology, or new models

Extension strategies:

● Price reduction
● Redesigns
● Repacking
● New markets
● Promotions

Branding:

● is a name, symbol or design that is used to identify a product or company.

Aspects of branding:

Brand awareness:

● An important aspect in being able to successfully promote a product.

Brand development:

● Long term marketing strategy meant to build and strengthen the image.

Brand loyalty:

82
 ● When customers buy products of the same brand repeatedly.
● Benefits: higher market share - premium pricing by keeping loyal customers.

Brand value:

● The value added premium that customers are willing to pay for a product of a well
known brand as opposed to a generic equivalent.

Packaging:

● Serves as protection for the product before reaching the end consumer.
● Makes it easier, more efficient, and safer to transport.
packaging must perform the following roles:
● Protect the product
● Communicate information
● Promote the product and communicate its unique selling point
● Make the product easy to use

4.6: International marketing HL

International markets:

● Many successful businesses are able to generate revenue from outside their home

country.

International market entry strategies:

● When a business decides to operate in other countries, it needs to choose a strategy for
entry into foreign markets
● The entry strategies described below are some of the most common strategies used by
businesses when entering overseas markets.

Exporting:

83
 ● Exporting can be either direct or indirect. Indirect exporting occurs when a business or
an exporting agency purchases products from a country with the purpose of trading
those products overseas.
● Direct exporting is the most common approach for companies that wish to ensure a
long-term place in international markets.

Franchising:

● Franchising is a form of external growth where a franchisee buys the rights to use the
name and business model of a franchisor.

Licensing:

● Licensing involves one company producing another company’s products and using its
brand name, patents and expertise under license.

Direct investment:

● Direct investment is a long-term investment in a foreign country by a multinational

company (MNC) and involves setting up factories and distribution facilities in the
foreign country.

Joint ventures:

● In a joint venture, companies from two different countries combine their resources to
create a new, larger company with the purpose of launching a product into a new
market.

Mergers and acquisitions:

● A merger occurs when two companies legally consolidate into one company. An
acquisition occurs when one company purchases the shares of another company.

Takeovers:

84
 ● A takeover occurs when one company purchases a majority or all of the shares of
another company in order to gain control of the business.

International marketing strategies:

Standardization:

● Offer their customers high added value by providing them with better benefits than
those of competitors, especially local competitors.

Adaption:

● Most businesses use the marketing strategy of adaptation when entering foreign
countries.
● This approach ensures that some or all elements of the marketing mix are adapted to
meet the needs of local consumers.

Opportunities from entering and operating internationally:

● Large pool of customers and greater sales revenue

● Lower costs of production and economies of scale
● spreading risks
● improved brand reputation

5.1: Introduction to operations management

Operations Management:

● Concerned with producing the right goods and services in the right quantities and the
right quality level all in a cost effective and timely manner.

Productivity:

● measures the level of labor and capital efficiency of a business by comparing its level of
inputs with the level of output.

85
Production process:

● also known as the transformation process, refers to the method of turning inputs into
outputs by adding value in a cost effective way.

Purchasing:

● the buying of raw materials, components, and/or equipment needed for the production
process. Large firms will often centralize the function to allow the business to negotiate
better prices with suppliers in order to gain purchasing economies of scale.

Specialization:

● means the division of a large task or project into smaller tasks that allow individuals to
concentrate on one or two areas of expertise. This (specialization) is an important part
of mass production

5.2: Operations methods

Job production:

● It refers to the production of unique items that are tailor made to meet the needs of
individual customers.
● Advantages: flexibility and choice - high quality - high profit margins - High worker
motivation
● Disadvantages: High costs - time consuming - cash flow problems

Batch Production:

● involves producing atoms in groups of identical products.

● Advantages: some flexibility and variety - economies of scale - lower risks
● Disadvantages: less flexibility and variety than job production - higher storage costs -
lower work motivation

Capital Intensive:

86
 ● means that the manufacturing or provision of a product relies heavily on machinery and
equipment, such as automated production systems. Hence the cost of capital accounts
for a higher proportion of a firm's overall production cost.

Mass/Flow Production:

● Mass production (also known as flow production) involves a production of large

amounts of standardized products on an assembly line.
● Advantages: large scale production - standardize quality - lower costs of production
● Disadvantages: set up, and storage costs - less flexibility - lower worker motivation

Line Production:

● is a form of flow production whereby a product is assembled in various stages along a

conveyor belt (or assembly line) until a finished product is made.

Mass customization:

● It involves producing large quantities of goods that can be adjusted to customer

specifications.

Types of mass customization:

● Collaborative customization: this is where there is close interaction between the

business and customer.
● Adaptive customization: customers can choose from pre-set customizations provided by
the business.
● Cosmetic customization: this is where the face of the product, often the packaging is
changed to suit the needs of the customer.
● Transparent customization: personalize items are recommended to the customer based
on their online shopping cart.

Advantages of mass customization:

● Customer satisfaction and Loyalty

87
 ● lower costs
● higher prices and profits

Disadvantages of mass customization:

● Handling returns
● higher costs for customization
● time

5.3: Lean production and quality management HL

Types of waste:

● Transportation
● inventory (stock)
● Motion
● waiting
● over processing
● over production
● defects

Lean production:

● Lean production refers to a set of strategies to reduce waste in the production process.
● The methods of lean production are:
1. Kaizen:
● It involves Business is holding regular, scheduled meetings where staff are invited to
give their opinions and suggest improvements.
● benefits: diversity of ideas - better ideas - employee motivation
● limitations: lower productivity - higher labor costs
2. Just-in-time:
● It aims to minimize costs by reducing or eliminating the stock being held by a company.

88
 ● benefits: improved cash flow and reduces costs - improved operations - increase
capacity
● limitations: reduced economies of scale - high risk - reduced resilience

Created to cradle design and manufacturing:

● It is a model of designing and creating products in a way that minimizes waste and
negative affects on the environment and on all stakeholders.
● It is a model that focuses on sustainability. This could include making products durable
so they do not have to be replaced, using recyclable materials or choosing production
methods that reduce pollution.

Quality control:

● refers to the inspection of a product in order to find defects and remove them before
they are delivered to retailers or customers.

Quality assurance :

● includes strategies to prevent defects and improve products.

Methods of quality management:

Quality circle:

● is a group of employees who meet regularly to discuss potential improvements to

product quality.
● Benefits: motivation - improved quality - Reduced costs
● Limitations: reduced productivity - training costs - not suited to every company

Benchmarking:

● Is the process by which a business compares itself with the industry leaders to see what
it can learn from other’s techniques.

89
 ● Benefits: improved quality - understand competitors and consumers - customer
satisfaction
● Limitations: lack of transferability - lack of information - selecting the right benchmark

Total quality management (TQM):

● It is where every employee is jointly responsible for maintaining the overall quality of
the final product.
● Benefits: motivation - improved quality - reduced costs
● Limitations: reduced productivity - training costs - not suited to every organization

5.4: Location

There are many reasons why a business would choose one location over another, including:

Sociocultural factors:

● Sociocultural factors relate to the way people live and what they believe and value,
including religion, cuisine, family life, demographics, health education and leisure.

Technological factors:

● Access to efficient transport networks allows customers to visit stores and suppliers to
deliver raw materials. This has the double advantage of increasing potential sales while
reducing costs.

Economic factors:

● The costs of land and facilities are factors for businesses’ decisions about location. Some
retail locations are very desirable and command high prices.

Environmental and ethical factors:

● The location of a business can have significant ethical implications for the business. If a
business chooses to locate in a particular region due to lower cost labour or weaker
environmental protections, these would not be ethical location decisions. While the

90
 lower production costs may be attractive for the business, it is not ethically acceptable
to choose a location so as to exploit people or the planet.

Political and legal; factors:

● Political stability in a country is an important factor for businesses because of the

importance of a predictable political environment.

Outsourcing:

● involves a business hiring an external company to carry out a task that it could do itself.

Insourcing :

● is the relocation of a business function to another country.

Offshoring:

● involves ending contracts with external suppliers to undertake previously outsourced

business functions. Insourcing is the opposite of outsourcing.

Reshoring:

● involves bringing back production to a country from a location abroad. Typically, this is
done so that a business can manage its supply chains more effectively.

91
5.5: Break-even analysis:

5.6: Production planning HL

Supply chain:

● refers to all the stages of production through which a product passes, from the
extraction of raw materials to the delivery of finished products or services to customers.

Supply chain management:

● is the process of working with all of a business’s suppliers to ensure reliable and quality
production and delivery of components and final goods.
Supply chain managers will consider many different factors when selecting suppliers,
including:
● Impact on multiple stakeholders
● Cost
● Reliability

92
 ● Product quality
● Lead times

Local versus global procurement :

● Some companies are now choosing to procure their supplies locally rather than globally.
Procurement refers to the processes required in order to acquire the necessary resources
to conduct operations.

Local supply chain advantages:

● Greater control, less risk

● lower transport costs

Local supply chains disadvantages:

● Higher production costs

● Less choice

Global supply chains advantages:

● Greater choice
● lower costs production

Global supply chains disadvantages:

● Greater risk
● lack of transparency and control

Just-in-time (JIT) production:

● production is the principle of placing smaller, regular orders for resources, which are
delivered just in time for them to be used.
● benefits: improved cash flow and reduces costs - improved operations- increased
capacity
● limitations: reduced economies of scale - high risk - reduced resilience

93
Just-in-case (JIC) production:

● stock control involves holding relatively large levels of buffer stocks so that a business
can continue to operate when faced with an unforeseen event.
● benefits: resilience - economies of scale - less risk
● limitations: less working capital - higher storage costs - waste

Stock control chart:

● is an easy way to monitor and analyze stock levels and better control costs.

The main parts of a stock control chart are:

● Maximum stock level

● Buffer stock level
● Lead time
● Reorder level
● Reorder quantity

Businesses use a number of common performance indicators for operations including:

Productivity:

● Productivity rate: measures the average efficiency of production and is expressed as a

ratio of output to inputs within the production process. Productivity rate is calculated
using the following formula:

● Labor productivity: measures the output per worker over a defined period of time (for
example, per hour). It is calculated using the formula:

94
 ● Capital productivity: measures how efficiently a business utilizes its capital (such as
machinery or other fixed assets) to generate output.

Productivity and costs:

● Productivity: is an important metric for business. The more productive labor and
capital is, the lower the unit costs. The value of unit costs is measured using the
following formula:

Defect rate:

● There is a risk that pushing workers and capital to produce more can cause more
mistakes, called product defects.
● The defect rate is calculated using the following formula:

Operating leverage:

95
 ● The measure of a company’s fixed costs relative to total costs.
● Operating leverage is calculated using the following formula:

Capacity utilization:

● A measure of the extent to which a business is using its productive capacity,

expressed as a percent.
● The capital utilization rate can be calculated using the following formula:

Factors affecting make or buy decisions:

Quantitative factors:

● Total and average costs

● Defect rates

● Capacity utilization

● Productivity rates

● Profitability

Quality management:

● Quality management

● Reputation and public relations

● changing demand

● Supply chain reliability and lead times

96
Cost to make (CTM):

● is the total cost of production if manufacturing is kept in house. The formula for cost to
make is as follows:

Cost to buy (CTB):

● is the total cost of subcontracting production to a supplier. The formula for cost to buy
is:

Reasons to make:
There are a number of reasons why a business would want to make, instead of buy, a product:
● Quality and cost control through vertical integration
● Protecting intellectual property
● Meeting global and local responsibilities

Reasons to buy:
There are, however, times when buying products from a subcontractor makes more sense for a
business. These include:
● Specialization and expertise.
● Low costs due to economies of scale
● Lower fixed costs

5.7: Crisis management and contingency planning HL

Crisis management:

97
 ● Involves the steps a business or any organization can take to limit the damage caused by
an unpredicted event or crisis.

Contingency plan:

● When an organization create an action plan to follow in case a crisis occurs.

Crises may come in many forms, for example:

● a cyber attack
● a product recall due to defects
● war/conflict
● employee conflict, misbehavior or mistreatment
● a natural disaster or environmental damage
● a lawsuit or a public accusation

Effective crisis management depends on the following:

Communication:

● Effective communication with both external and internal stakeholders is essential in

times of crisis. Initially, internal one-way communication with employees ensures that
everyone understands the problem, the plan and their responsibilities. After this,
two-way communication may also be necessary. Listening to the viewpoints of
employees can help managers fully understand a problem.

Transparency:

● Transparency and full disclosure of the seriousness of the situation may be the best
option in a crisis. When disaster strikes, people are generally sympathetic. However, if
they later discover that information has been hidden, this sympathy will disappear.

Speed:

98
 ● The goal of crisis management is to return to normal business operations as soon as
possible. Rapid decision-making and effective implementation of those decisions will
help achieve this aim. The use of a contingency plan can help.

Control:

● An organizational structure that is well understood by all members of an organization

may be helpful in times of crisis because it makes the chain of command and
responsibilities clearer.

Impact of contingency planning on an organization:

● Cost: If a crisis does occur, contingency plans are designed to help managers make
rapid, well-judged decisions and minimize the cost of a crisis, such as paying out
damages, or losing staff, machinery and customers
● Time: At times of crisis, a detailed plan should aid swift decision-making. This can be
invaluable. If solutions to potential problems are evaluated in advance, then rapid
implementation should be possible.
● Risk: An effective plan can help to minimize the risk of potential accidents or loss of life.
Specific contingency plans will therefore need to be in place to contain the spill while
protecting employees, equipment, machinery and the general public.
● Safety: Your school probably has a contingency plan for dealing with extreme weather
conditions or a student being seriously injured on the sports field. These plans exist to
keep everyone as safe as possible.

99