Risks associated with International trade

⦁ domestic business will have a strong competition

⦁ exchange rate problems
⦁ new small business will find it hard to survive in the competition
⦁ loss of jobs and output from domestic firms because of competition
⦁ balance of payment

Multinational Business:
a business that has a head office in one country and operates in several countries. e.g KFC,
McDonalds, Adidas, Unilever etc

Why do Businesses become Multinational?

⦁ to reach new customer - to be closer to the main market
⦁ lower production cost
⦁ lower transport cost
⦁ lower operating cost
⦁ lower rents and site cost
⦁ government grants or tax incentives

Problems associated with Multinational while setting up:

⦁ cultural problem
⦁ language barrier
⦁ legal differences
⦁ problem finding right employees

Impact (+, -) of Multinational on HOST country:

⦁ employment creation
⦁ investment will bring i foreign currency
⦁ increase in GDP
⦁ source of tax revenue
⦁ management expertise
⦁ new ideas and technology introduction
⦁ local business will improve quality because of competition
i. local employees will be exploited
ii. pollution
iii. small local firms may be squeezed out from the competition
iv. profits will be sent back to the home country
v. depletion of raw material

Privatization:
selling off state owned and controlled businesses to investors in private sector e.g PTCL ----->
Etisalat

Arguments for:
⦁ profit making motive will lead to much greater efficiency
⦁ decision making is faster
⦁ does not need to run a loss making business
⦁ access to capital from private investors leading to more investment in private sector

Argument against:
⦁ production of more demerit goods
⦁ decisions will not be made to benefit the whole country
⦁ because profit making is the primary objective - policies would change which would
increase price for the customers
⦁ affordability of people will be affected.
⦁ customers can be exploited with high prices

Problem associated with rapid growth:

FINANCIAL:
⦁ Business expansion can be expensive, capital may be required
⦁ business may run out of working capital
⦁ cash flow will be negatively affected
Managerial:
⦁ lack of coordination
⦁ business may find it harder to adapt to other business management style
⦁ disagreement
⦁ controlling may become a problem

Marketing
⦁ a new marketing strategy which means old one will not be applicable
⦁ time consuming
⦁ If a suitable strategy is not adapted- business may fail.
⦁ likelihood of the owner losing control of the business

Chapter 8: External Influences on Business Activity

STEEPLE ANALYSIS - PESTLE Analysis

Social
Technological
Ethical
Environmental
Political
Legal
Economical

LEGAL FACTORS:
⦁ employment law - recruitment, termination
⦁ health and safety law
⦁ minimum wage law
⦁ trade union law

⦁ all laws are made to make employees feel more safe and secure about their jobs
⦁ reduce the risk of accidents - health and safety laws
⦁ following these laws prevents a business from heavy fines and penalties.

Monopoly: a situation in which there is only one supplier, this is usually redefined as a
business controlling at least 25% of the market.
Creation of Monopoly:
⦁ merger/takeover
⦁ a new invention that is patented or has a copyright
⦁ legal protection
⦁ barriers of entry in an industry.
Drawbacks of Monopoly:
⦁ limited choice offered to customers
⦁ customers are often exploited with higher prices
⦁ less investment in new products.
Restrictive Practices: (unethical)
1. full line forcing
2. refusal to supply to retailers on price agreed with them. (supplying on higher prices)
3. price fixing agreements
4. predatory pricing
Social Audit: a report on the impact a business has on society e.g pollution level. health and
safety record, impact on society etc

Adv:
⦁ improves public image
⦁ makes the business socially responsible
⦁ allows the business to set targets for improvement

Disadvantages:
⦁ costly
⦁ time consuming
⦁ it is sometimes not taken seriously by most stakeholders
⦁ Some customers are interested in businesses that sell cheaper products than a
business that is socially responsible but sells products at higher prices.
Environment Audit: : assess the impact of a business’s activities on the environment

Advantages of being environment friendly business:

⦁ avoid pressure groups
⦁ attract ethical customers
⦁ positive publicity
⦁ low pollution
⦁ lower external cost leading to more loyal customers
Disadvantages:
⦁ costly
⦁ not required by law so it's also time consuming
⦁ cost increases leading to higher prices - may face loss of customers
⦁ will not attract customers looking for cheaper products.
Pressure Group: when a group of people join in together to stand up against businesses
being unethical. e.g business is paying lower wages, business is using dangerous chemicals
for producing cheaper products etc.

CHAPTER 7 EXTERNAL ECONOMIC INFLUENCES ON BUSINESS ACTIVITY

Government Objectives:
⦁ economic growth
⦁ low price inflation
⦁ low rate of unemployment
⦁ maintain balance of payment
⦁ exchange rate stability
⦁ wealth and income transfer

ECONOMIC GROWTH: measured by Gross Domestic Product (GDP)

total value of output that a country produces in one year.

Importance of economic growth:

⦁ increases employment
⦁ living standard of people improve
⦁ exchange rate stability
⦁ balance of payment - country have more chances for export
⦁ reduces absolute poverty
⦁ reduces the burden of government.
Factors that lead to increase in economic growth
⦁ technological advancements
⦁ increase in productivity
⦁ increase in economic resources
Business Cycle: the regular swings in economic activity, measured by real GDP, that occur
in most economies, varying from boom conditions (high demand and rapid growth) to the
recession when total national output declines
1. Overheating boom:
⦁ increase in income
⦁ increase in profits
⦁ increase in inflation
⦁ increased interest rates
2. Recession
⦁ profits fall
⦁ increased interest rates and inflation
⦁ living standard of people decreases
⦁ real GDP growth slows down
⦁ income of consumer falls
⦁ firms may also record losses

3. Slump
⦁ prolonged downturn/ recession
⦁ Real GDP falls
⦁ assets and land prices decrease
⦁ government unable to take corrective actions
4. Growth
⦁ Real GDP increases
⦁ government takes corrective actions
⦁ living standard of people improve
⦁ profits
Recession may not always be bad. Advantages of recession
⦁ firms can invest in land and equipment as their prices decreases (cheaper purchase)]
⦁ demand for 'inferior goods' increases
⦁ improves employer employee relation because of insecurity of job
⦁ increases employee efficiency.

Inflation; an increase in the average price level of goods and services – it results in a fall in
the value of money.

Deflation: : a fall in the average price level of goods and services

Types of Inflation
1. Cost push inflation: when there is an increase in the cost of raw materials leading to
general increase in the price of the product. cost push inflation could be a result of:
⦁ higher wages demand
⦁ prices increasing globally
⦁ lower exchange rate

2. Demand pull inflation: when suppliers and retailers increase the prices of the product due
to high demand.

Benefits of Inflation
⦁ real value of debts decrease
⦁ value of assets held increases
⦁ value of inventories brought before increases
⦁ cost increase can easily be passed on to customers

Drawbacks of Inflation:
⦁ higher demand for wages
⦁ customers may become price sensitive- may bargain
⦁ higher inflation will lead to higher interest rates
⦁ cash flow problems may occur for businesses - can go into liquidity
⦁ business will lose competitiveness in overseas market
⦁ customers may stockpile some items
Business Decision in Inflation:
⦁ business should defer capital spending
⦁ cut profit margins to stay competitive
⦁ reduce borrowing to make interest payments more manageable
⦁ reduce the time period for credit customers to pay ⦁ reduce labor cost
Is deflation good?
⦁ customers delay purchases
⦁ future probability of new investments appear doubtful
⦁ inventories of material and finished good will fall in value

Unemployment:
when the working population are willing to work but are unable to find a job.
Causes of Unemployment - (Types of unemployment)
⦁ Cyclical Unemployment
unemployment resulting from low demand for goods and services in the economy during a
period of slow economic growth or a recession.

⦁ Structural Unemployment
unemployment caused by the decline in important industries, leading to significant job losses
in one sector of industry

⦁ Frictional Unemployment
unemployment resulting from workers losing or leaving jobs and taking a substantial period of
time to find alternative employment
Cost of Unemployment:
● economy could have produced more products - could have increased GDP
● government will have to pay unemployment benefit - burden
● social problems- crimes, robbery
● reduce aggregate demand for goods
● low living standard
● if a person is unemployed for a longer period of time- skills may get out of date.
loss of income

Balance of Payment: Import = Export

What happens to the country if imports are more than exports?

Lead to deficit in balance of payment (imports>exports)

Effect of deficit in balance of payment?

⦁ fall in the value of currencies exchange rate
⦁ foreig investors will not be willing to invest in to the country
⦁ decline in country foreign reserve.

$1 = Rs150 new 165Rs

5$ = 600rs

5$ =825Rs

Exchange Rate: is the value of ones currency in comparison to the price of other currency

Exchange Rate Depreciation: a fall in the value of a currency against another currency

Exchange Rate Appreciate: a rise in the value of a currency against another currency
Benefits of Currency Appreciation:
imports will be cheaper

Disadvantages:
Exports will be expensive- may result in less exports- balance of payment -deficit

Advantages of depreciation of currency:

more chances for export
less competition from internal competitors in the domestic market.

Disadvantages:
prices may increase for products using material imported from another country

Businesses that gain from appreciation of currency:

● Importers

Businesses affected from appreciation of currency:

● Exporters
● Domestic market business

Businesses that gain from depreciation of currency:

● Exporters
● Domestic market Businesses

Businesses affected from depreciation of currency:

● Importers
Fiscal Policy
concerned with decisions about government expenditure, tax rates and government
borrowing.

Monetary Policy: concerned with the decisions about the interest rate and supply of money

Government Budget Surplus:

the value of government spending exceeds income tax revenue

Government Budget Deficit:

the value of tax revenue exceeds the government spending

Expansionary Fiscal Policy:

● this is used when the country is in recession
● aim of this policy is to increase the aggregate demand
● tax rates are lowered down
● government increases its spending to increase employment
● this leads to increase in gdp
● leading the country to go into growth

Contractionary Fiscal Policy:

● this is used when the country is in boom
● aim of the policy is to reduce aggregate demand
● government decreases its spending
● increases the tax rates
● this leads to reduced employment
● reduced output GDP
 ● and leading to reduced inflation

Exchange Rate Policy:

● can either be floating or fixed
● in real life its always floating

Floating exchange rate means that the currency value changes on daily bases

Disadvantages of Floating Policy

● hard to determine the price of imported raw materials and components making pricing
difficult - prices are fluctuating
● fluctuation in prices may lead to unstable level of demand
● uncertainty over profits
● businesses may delay their spendings
● different exchange rates add to the cost of the businesses - comision cost, hedging
cost.
● business will also have to devise strategies to adapt to fluctuating currency prices.

Advantages of joining a common currency:

Euro used in different countries within europe

● prices will be the same

● costing is easy for businesses
● tax policies are same across common currency zone
● no dual pricing. •no dual taxation

When a country/government is trying to improve or increase industrial competitiveness they

make policies which are called "supply side policies"

Example supply side policy

 ● lower down income tax
● lower down corporation tax ( tax on businesses)
● increase labour market flexibility and labour productivity - this can be done through
providing training, paying for higher education of labour, encouraging immigration of
skilled workers.

How does government support businesses:

● by providing grants
● by providing subsidies to loss making companies to keep them running
● provides subsidies to keep the prices down
● financial support for consumer to buy products.

Market failure: when the market fails to achieve the most efficient allocation of resources and
there is under or over production of certain goods or services

Reasons of Market Failure

● External Cost
● Lack of Laboour Training
● Monopoly producers

External Cost: cost of business activity that is not paid for by the business but by the rest of
the society.

Income Elasticity of DEMAND: MEASURES THE RESPONSIVENESS OF DEMAND FOR

A PRODUCT AFTER A CHANGE IN CONSUMER INCOME

% change in demand
%change iin income

Luxury goods: Positive greater than one

Normal goods : Between 0 and 1
Inferior goods: Negative

Chapter 13 Further Human Resource Management

Two kinds of HRM:

1. Soft HRM: an approach of managing staff that focuses on developing their skills by providing
training so that they reach their self fulfillment and are motivated to work. (hire full time staff)

2. Hard HRM: an approach of managing staff that focuses on cost cutting by hiring part time and
flexi employees

Different kinds of working contracts:

 ● Full time - SOFT HRM
● Part time: employment contract that is for less than the normal full working week of, say, 40
hours, e.g. eight hours per week

● Temporary employment contract: employment contract that lasts for a fixed time period, e.g.
six months.

● Felxi time contract: employment contract that allows staf to be called in at times most
convenient to employers and employees, e.g. at busy times of day

● Teleworking: work from home

● Zero hours contract: there is no fixed cos element in a workers pay.

Advantages to the business of having part time employees:

● Cost saving
● More staff can be called in at times of sickness or other causes of absentenism
● Employees can be assessed before offering them full time contract
● Saves overheads cost by teleworking.

Disadvantages to the business of having part time employees:

● Business culture cannot be set or fixed.
● No loyalty from employees
● Motivation level may be adversly affected.
● Effective communication will become difficult as all employees will not be present all the time.
● Employees will be working in different companies and may not be readily available if they are
immediately called in.

Advantages to the employee of having part time contracts:

● Feasible for workers with young children, students and elderly people who do not wish to work
full time
● More job opportunites- can work for more than 1 employer.
Disadvantages to the employees of having part time contract:
● Earn less than full time workers
● Paid lowers rate than full time workers
● No job security.

Measuring Employee Performance:

1. Labour Productivity: total output in time period

Total number of workers

Ways to increase productivity:

● Increase labour motivation
● Better trainings
● Introduction of automation
● Introduce democratic culture
● Improve internal efficiency - cell production, jit etc

2. Absenteeism Rate: number of employees absent x100

Total number of employees
● More absenteeism rate means demotivated employees- leading to lower productivity.
● And vice versa
Ways to improve employees performance
● Trainings
● Regular employee appraisal
● Quality circle
● Financial incentive or non financial incentives
● Introduction of cell production
● Adapt management by objective (MBO)
● Invest in advance technology

Management by Objectives (MBO)

Division of corporate objectives into individual objectives
 ● Aimed to motivate and coordinate a workforce
● Every employee has targets to fulfil- acts as a benchmark

Limitations of MBO
● Division of objective is time consuming
● Objectives become outdated very easily
● Setting targets does not ensure success.

Labor Management Relations

There are different ways of managing the labor/employees
1. Hard or “Autocratic Management Style”
● Take it or leave it attitude.
● Workers are hired on contracts
● No job security offered
● Practiced in countries with weak labor legislation
● Leads to low labor cost (advantage)
● Low motivation, no common objectives between employees and employer, no opportunities for
training and job enrichment

2. Collective bargaining
When representatives of the union and employer negotiate wage level and working conditions for the
whole industry.
● Makes trade union leader powerful- as they are able to threaten for strikes
● Cannot always be affordable or suitable
● Strikes may cause disruption and lost of output

3. Cooperation between labor and management

● Mutual respect, understanding
● Common aims
● Employee involvement (democratic)
Workforce Planning: analyzing and forecasting the number of workers and skills of those workers
that would be required by the organization to achieve its objectives.
Workforce audit: checking on the skills and qualifications of all existing workers.

Number of workers:
● Demand for the product
● Productivity level of employees
● Objective of the business
● Changes in law regarding workers rights
● Labour turnover and absenteeism rate

Skills:
● Pace of technological change
● Need for multiskilled workers

Trade Union: an organization of working people with the objective of improving pay and working
conditions of their members.

Single Union Agreement: an employer only recognises just one union for the purpose of collective
bargaining

Advantages of trade union to management

● Time saving for employer - negotiation with trade union only on behalf of the members
● Provides channel of communication with the workers
● Union can impose discipline
Advantages of trade union to members:
● Unions provide power through solidarity to members
● Provision of legal support for unfair dismissal or poor working conditions
● Put pressure on employer that all legal requirements are met

Actions in conflict:

Employer Trade Union

 1. Negotiation 1. Negotiations
2. Public relation 2. Public relation
3. Redundancy threat 3. Strikes
4. Closure 4. Go slow
5. Change of contract 5. Work to rule
6. Lock out 6. Overtime ban

Stronger in conflict resolution

Employer Trade Union

● Unemployment is high ● Most workers are part of the trade

● There is public support union
● Profits are low and threats of ● Labour cost are low
closure is taken seriously ● Inflation is high
● Threats of relocation to low cost ● Public support
country taken seriously ● Business is operating at full
capacity- strikes or go slow will
impact output

Chapter 14 Organisational Structure

Organizational Structure is the internal formal framework of a business that shows the way in which
,management is organized and linked together and how authority is passed down through
organization

Organizational Structure shows:

● Who has overall responsibility
● Formal relationship between different people
● Accountability and authority
● Formal chain of communication
● Identifies supervisors or manager a person is directly responsible for reporting.

Different kinds of Organizational Structure

1. Hierarchical or bureaucratic structure
● Product
● Department
 ● Place - country or division
Advantages:
Shows decision making start at the top of hierarchy
Role of each individual is well defined
Shows formal channel of communication
Shows who direct supervisor is. • Based on ‘role culture’
Disadvantages:
One way communication (top to bottom)
Few horizontal links- lack of coordination
Managers are focused on their tunnel vision
Inflexible structure
Change resistance
2. Matrix Structure: an organizational structure that creates project teams that cut across
traditional functional departments.
Advantages:
➔ Allows total communication between all members
➔ Less chances on people focusing on just what is good for their department
➔ Crossover of ideas
➔ Can respond quickly to changing market conditions
➔ Teams are empowered
Disadvantages:
● Less direct control from the top
● Less control
● Two different leaders to report to- can lead to conflict of interest.

Key Principles of Organisational Structure

Level of hierarchy: a stage of the organisational structure at which the personnel on it have equal
status and authority.
● Represents a grade or rank of the staff.
● Greater the number of levels - greater the different ranks in organisation.
● Narrow organisational structure has large number of hierarchy
● Wide has small number of hierarchy
Chain of Command: this is the route through which authority is passed down from top to bottom.
● Taller organisations have longer chain of command - slow communication

Span of control: the number of subordinates directly reporting to the manager

➔ Wide span of control
➔ Narrow span of control

*Delegation*:passing authority down the organisational structure

Advantages:
● Employees more motivated as authority is provided to them
● Help the employees achieve self fulfillment Help and train the staff for more senior positions
● Gives senior managers more time to focus on important and strategic roles
Disadvantages:
● If the task is not well defined- delegation is unlikely to be successful
● accountability still remains with the senior managers
● Senior managers are likely to delegate only boring task

Centralisation: when orders are passed from the head office and the rest of the branches follow
them.
Advantages:
➔ Fixed set of rules leading to quick decision making
➔ Consistent policies -no conflict between divisions
➔ Senior managers tend to make decisions in the interest of the whole organisation
➔ It allows for economies of scale
Disadvantages:
➔ Decisions do not take into account the local conditions
➔ No flexibility

Decentralisation: when branches of a business have delegated authority to take their decisions.
Advantages:
➔ More local decisions can be made
➔ Junior managers can be developed for more challenging roles
➔ Delegation and empowerment has positive impact on motivation
➔ Its flexible
Disadvantages
➔ No consistency in policies
➔ Can create confusion in the mind of the customer

**Delayering: removing one or more of the level of hierarchy from an oragnsational structure
Reasons for delayering:
● Downsizing- cost saving
● Tall to flat structure
● Increased span of control
● Better communication

Informal organisation:
The network of social relationships that are developed between the people within an organization.

Chapter 15 Business Communication

Effective communication:
● Sender
● Message
● Receiver
 ● Mode of communication
● Feedback

Importance of Effective Communication

● Speed up decision making
● Staff motivation
● Speed of response to market changes
● Cross over of business ideas
● Reduces the risk of error
● Lead to effective coordination between departments

Mode of Communication
1. Oral Communication:
● One to one conversation, interviews, sessions
● It allows for two way communication- encourages motivation
● Speedy way of communicating
● Message can be reinforced with appropriate body language

➔ No evidence for oral communication

2. Written Communication: (newsletters, notice boards )

● Evidence for this communication
● Can be reread for clarity
● Detailed data

➔ One way communication

➔ Does not allow for immediate feedback
➔ There's no evidence if the receiver understood the message.

3. IT and Web based Communication (e-mails)

● Fastest way of communication
● Written record
 ● A message can be sent to 100s of people at a time
● Can be reread
● Can be a detailed message

➔ Requires employees to be trained to use this mode of communication.

➔ Direct contact is lost
➔ Threat of viruses
➔ There can be information overload.

4. Visual Communication
● Includes diagrams, charts, pictures etc
● Eye catching
● More chances of retaining information

➔ Difficult to understand for visually impaired employees.

`Factors influencing the choice of appropriate media:

● Importance of message- written record
● Cost
● Communication interactive or not- one way communication or two way.
● Urgency of message
● Quantity of data to be communicated
● Size and geographical spread of receivers.

Barriers to Effective Communication

● Medium chosen might be inappropriate
● Receiver forgot part of message
● Incomplete or misleading message
● Use of technical language
● Too much of information
● Channel of communication is long
● Poor attitude of the receiver or sender
● Noisy surroundings
Formal Communication
➔ Chain network
➔ Vertical Network
➔ Wheel Network
➔ Circle Network
➔ Star Network/Integrated or Connected Network

Chain Network
● usually used in hierarchical structure
● one way communication
● discourages two way communication
● used by autocratic leaders
● discourages employees - demotivation
● no horizontal communication
● used by police army etc
● gives control to the leader over organisation
● top to bottom communication

2. Vertical Network
● allows for direct communication
● boss can communicate directly with subordinates- individually
● well suited for small departments

3. Wheel Network
● leader is at the center
● could be two way communication
● no horizontal communication.
● leader is in control of communication
 ● leader can limit formal contact between others
● e.g regional manager in contact with each branch or site manager.

4. Circle Network
● every person is in contact with only two others.
● there is no obvious leader
● this makes it difficult for all members to agree to one strategy
● slow rate of communication
● does not allow the receiver to question the message or ask for further explanation.
● no assurance if the message was received or understood.

5. Integrated or Connected Network

● also called star network
● allows for full two way communication
● every person is in contact with everyone
● usually used in team meetings
● allows for brainstorming
● allows participation from staff.
● used in solving complex problems.

Informal Communication: unoffical channels of communication between informal groups within an

organisation.

Unit 6 Strategic Management (20 MARKS- Section B)

CHAPTER 36 WHAT IS STRATEGIC MANAGEMENT

Strategic Management: the role of management when setting long-term goals and implementing
cross-functional decisions that should enable a business to reach these goals.
Strategy: a long-term plan of action for the whole organisation, designed to achieve a particular goal
Tatic: short-term policy or decision aimed at resolving a particular problem or meeting a specific part
of the overall strategy.

Influences on business strategy:

1. Resources available
2. Objectives of the business
3. Strengths of the business
4. Competitive environment

Strategy Tatic

Long term Short term

Irreversible reversible

Made by directors/senior manager Less senior managers

Cross-functional Interdepartmental

Strategic management assists in:

● Planning of future
● Responding logically to changing environment
● Help in making decisions.

Competitive Advantage: a superiority gained by a business over its competitors at a lower price, or
can charge higher prices by providing greater value through differentiation (USP)

Chapter 38 Strategic Analysis

business Models
1. SWOT
2. PEST
 3. BCG Matrix
4. Porter five force
5. Core competence

SWOT ANALYSIS: a business model that analyses business internal strengths and weaknesses and
external opportunities and threats

Strengths Weaknesses

Opportunities Threats

Limitations:
● 2 managers may not agree to the same swot analysis
● Not a quantitative model
● Cannot be compared with other business

PEST ANALYSIS: Done in detail in chapter 8

Boston Matrix:
Star (high market share, high market growth): hold - keep selling the product- a new product in
expanding market.
Problem child( low market share, high market growth): build - from the cash from cash cow- a
product that consumes resources but generates little returns
Cash Cow (high market share, low market growth): milk - well-established product in a
well-established market- take out money and invest in problem child
Dog (low market share, low market growth): divest- a product that has low sales and low profit.

Porter Five Force Analysis:

This is a model similar to PEST. managers can use this model before entering a market.

Core competence: an important business capability that gives a firm competitive advantage

Chapter 39 Strategic Choice

Models:
● Ansoff Matrix
● Force Field Analysis
● Decision Tree
● Investment Appraisal (Unit 5)

Strategic choice is part of strategic management and involves the process of identifying and deciding
between different options.

Ansoff Matrix: shows the degree of risk associated with growth strategies.
Most risky= diversification
Safest- market penetration

Force Field Analysis: technique for identifying and analysing the positive factors that support a
decision (‘driving forces’) and negative factors that constrain it (‘restraining forces’).
● Change is written in the center (square)
● One side list down all forces for
● The other side lists all forces against
● A number is allocated to them based on their importance
● Business is able to make strategies to allow a smooth change in the business.
Limitation:
● Based on assumption
● 2 managers may not agree to the same force field analysis
● Only a planning tool
● Does not ensure success

Decision tree: inclusion of probability to calculate the monetary outcomes from investments and
make choice based on quantitative data

Limitations:
● Expected value based on estimates
● Probability is based on past data

Chapter 40 Strategic Implementation

Strategic Implementation: the process of planning, allocating and controlling resources to support
the chosen strategies.

Business Plan: a written document that describes a business, its objectives and its strategies, the
market it is in, and its financial forecasts.

Importance of business plan to existing business

● Can be used to attract partners or potential investors
● Financial forecasts in a business plan can be used as a benchmark for the business
● Can be used to revise strategies.

Importance of business plan to new business

● Gives sense of direction
● Used to obtain loans
● Attract investors

Contents of Business Plan:

1. Executive summary
2. Marketing strategies
3. Financial forecasts
4. Description of business opportunity
5. Management team and personnel

Corporate plan: this is a methodical plan containing details of the organisation’s central objectives
and the strategies to be followed to achieve them.

Contents of Corporate Plan:

1. Overall objective (could include growth, survival, profit)
2. Strategies to meet those objectives
3. Main objective from key department
Advantages:
● Sense of focus and direction
● Acts as a benchmark
● Can act as “control and review” progress
● Effective planning
● Communicate sense of purpose

Disadvantages:
● Does not incorporate unforeseen activities
● Only a planning tool
● inflexible

Main influences on corporate plan:

● Amount of finance available
● Skills and management experience
● Operating capacity
● Culture of organization
● Staff number and skills
External
● Macroeconomic conditions
● Government policies
● Competitor actions
● Technological changes

Types of corporate culture:

1. Power Culture:
● Authority amongst few people
● Linked to autocratic leadership

2. Role culture
● Every member has a clearly defined job title and role
 ● Used in bureaucratic organization
● Every person works according to their role

3. Task culture
● Based on cooperation and teamwork
● Encourages employees to work in teams
● Revolves around synergy

4. Person culture
● individuals are given the freedom to express themselves fully
● make decisions for themselves
● Might be a conflict between individual goals and organization goals

5. Entrepreneurial culture
● Encourages management to take risk, come up with new ideas and implement the change
● Test out new business ventures
● Tries to bring out the best in employees.

Possible reasons for changing organizational structure:

❖ Business converted to a public limited company
❖ Privatization of the company
❖ Declining profits or market share
❖ Merger or takeover
Ways to implement change organizational structure:
1. Concentrate on the positive aspect of the change in culture
2. Train the staff
3. Encourage bottom-up approach
4. Change the staff reward system
5. Motivate the staff

Importance of Organizational Culture:

★ Establishes values and norms of the business
★ Determine how managers treat employees
 ★ Distinctive culture supports brand image
★ Closely linked to organizational success in long term

Change Management: planning, implementing, controlling and reviewing the movement of an

organization from its current state to a new one.
Kinds of Change:
1. Incremental Change/ Evolutionary Change
● Slowly over time
● Change can be anticipated
● Changes can be announced in advance
● Easy to anticipate
● Easy to accept
● Easy to implement

2. Dramatic Change/ Revolutionary Change

● One off change
● Cannot be anticipated
● Huge jump from one state to another state
● Changes may lead to business re-engineering: (fundamentally rethinking and redesigning
the processes of a business to achieve a dramatic improvement in performance)
Causes of Change:
1. Technological change
2. Macro-Economic change - fiscal policy, interest rate, change in business cycle.
3. Legal changes
4. Competitors changes

Change Process:
➔ Where is the business right now and why is change necessary
➔ New vision and objectives
➔ Ensure resources are available for the change to happen
➔ Give warnings about the change
➔ Communicate
➔ Involve staff in the change process.
 ➔ Focus on training
➔ Sell the benefits
➔ Always remember the effect on individuals
➔ Keep a check on individuals on how they are coping with the change.

Techniques for implementing change, managing, and controlling change.

1. Understand what change is (incremental/one-off)
2. Recognize major causes of change
3. Understand what the change process means
4. Lead change and just not manage it
5. Assign Project champions: (a person assigned to support and drive a project forward, who
explains the benefits of change and assists and supports the team putting change into
practice)
6. Project teams/group

Promote Change:
1. establish a sense of urgency
2. create an ef effective project team to lead the change
3. develop a vision and a strategy for change
4. communicate this change vision
5. empower people to take action
6. generate short-term gains from change that benefit as many people as possible
7. consolidate these gains and produce even more change
8. build change into the culture of the organization so that it becomes a natural process.

Resistance to change:
➢ Fear of the unknown
➢ Fear of failure
➢ Losing something valuable
➢ False belief about the change
 ➢ Lack of trust
➢ Inertia

Contingency Planning:preparing an organization’s resources for unlikely events

Steps for Contingency Planning/Crisis Management

1. Identify the potential disaster that can affect the business
2. Assess the likelihood of these occurring
3. Make strategies to minimize the impact of crises
4. Plan for continued operations

Advantages:
● Minimizes the impact of the disaster on business
● Reassures that safety is a concern for the business
● Public relation most likely to be accurate and quick
Disadvantages:
● Time consuming
● Costly
● Needs to be updated constantly
● Staff training required

UNIT 5 Chapter 36 - Done on Board (INVESTMENT APPRAISAL)

Chapter 32 COSTS

Cost Center: section or department of a business to which only cost can be allocated. Different
businesses will use different cost centres appropriate to their needs e.g
● In a hotel- restaurant, reception, bar, room letting
● In a school- different subject department

Profit Centre: section or department of a business to which both cost and profit can be allocated. E.g
 ● Branch of a business
● A separate department of departmental store

Advantages of division of centers into cost and profit centers:

★ Managers have target to work toward
★ Targets can be compared with actual performance
★ Individual performance can be assessed and compared
★ Work can be monitored

Limitations:
● managers/employees consider their division more important than the business
● Some costs are impossible to allocate
Overheads (Indirect Cost): costs that are not directly related to the production of the product
1. Production Overheads:: factory rent, depreciation.
2. Administration Overheads: administration salaries, office rent,
3. Selling and Distribution Overheads: warehouse packaging, distribution cost, salaries of
sales staff.
4. Finance overheads: interest in loans

Unit Cost: cost of producing a product

Number of units produced

Full costing/Absorption Costing: a method of costing in which all fixed and variable costs are
allocated to products, services or divisions of a business

● Easy to calculate
● Easy to understand
● Takes into account all kinds of costs
● Useful for businesses with single product
● Cost can be compared time to time if the same model of allocation of costs is used
Limitations:
● If the actual number of unit changes from that used in the calculation- leads to inaccurate
results
 ● Requires to use same allocation method over time
● Risky to make decisions based on full costing- it can be misleading

Contribution Costing: costing method that allocates only direct cost to cost centers and profit
centers (not overheads)

Contribution= selling price - direct cost

Called contribution because this contributes to the fixed cost
Marginal Cost: cost of producing an extra unit - (variable cost)

E.g Fixed Cost 10000

Direct cost 5/unit
Selling price 10/unit

Contribution= 10-5 =5

Example

Total indirect cost 12000

Total contribution =10+5 =15
Total profit 15000-12000=3000

Advantages:
● Avoids inaccuracies
● Overheads are allocated to cost centers
 ● Decision regarding a product is made on basis of contribution
● Excess capacity is likely to be effectively used.
Disadvantages:
● Some products utilize more fixed overheads than the others. This costing ignore overheads till
the final calculation
● Decision made on basis of contribution- managers may keep producing a product because of
its positive contribution whereas a new product should be launched.

Chapter 33 Budgets

Budgeting: detailed financial plan for the future.

Planning future activities by establishing performance targets, especially financial ones.

Benefits of Budgeting:
★ Assists in planning
★ Allocating resources
★ Setting targets (by budget holder)
★ Coordinating
★ Controlling and monitoring a business
★ Measuring and assessing performance

Budget Holder: individual responsible for initial setting and achievement of the budget

Drawbacks for Budget:

● Unnecessary spending
● Lack of flexibility
● Focuses on short term
● Training cost for managing budgets
● Requires budget for every new project
Stages in Budgeting:
1. Set objectives for coming year
2. Decide on key or limiting factor (important factor which influences business growth and
success usually sales)
3. Sales budget is prepared
4. Subsidiary budgets are made (labor cost, purchases, material cost etc)
5. All budgets are coordinated for consistency
6. Master budget is made
7. Budget sent to the board for approval

Kinds of Budgets:

Incremental Budgeting: uses last year’s budget as a basis and an adjustment is made for the
coming year.
Zero budgeting: setting budgets to zero each year and budget holders have to argue their case to
receive any finance
Flexible budgeting: cost budgets for each expense are allowed to vary if sales or production vary
from budgeted levels.

Variance: the difference between actual figures and budgeted

Favourable Variance: a change in the budget that leads to higher than planned profit
1. Expenses —> actual < budgeted
2. Revenue —> actual > budgeted

Adverse Variance: a change in the budget that leads to lower than planned profit
1. Expense —> Actual > Budgeted
2. Revenue —> Actual < Budgeted

Reasons for Favorable Variance:

● Overheads were lower than expected- low interest rate
 ● Lower wage rate- lower wage rate or quicker completion of work
● Lower raw material cost -output below budgeted or raw material discounts.
● Sales volume increased - competitor closed down
● Selling price increased- economic growth

Reasons for Adverse Variance:

● Overheads were higher - higher interest rate or rent increased
● Higher wage rate- high wage demand because of shortage of workers or slow completion of
work.
● Higher material cost -material cost increased or output was above budgeted
● Sales volume decreased -low demand
● Selling price decreased- competitor entering the market

Advantages of Variance Analysis:

➔ Measures the difference from planned performance.
➔ Finds out the reason for the variance - may help in setting more realistic budgets in the future
➔ Reason for variance helps in better decision making

Chapter 34 contents of Published Accounts

Depreciation: general decrease in the value of assets over its useful life because of wear and tear or
technological advancement

Calculation:
1. Straight line method: a constant amount of depreciation is subtracted from the value of the
asset each year.
original cost of asset-expected residual value
expected useful life of asset (years)

2. Reducing Balance Method: not in course

Net Book value: the current Statement of financial position value of a non-current asset
original cost – accumulated depreciation.
Intangible Assets: Assets that cannot be touched e.g goodwill, patents, copyrights, etc. part of non
current assets

Goodwill: The reputation and prestige of a business that has been operating for some time also give
value to the business over and above the worth of its physical assets.
(part of Non-Current Assets)

Intellectual property: the amount by which the market value of a firm exceeds its tangible assets
less liabilities – an intangible asset.

Expenses: two kinds

Capital expenditure: any item bought by a business and retained for more than one year, that is the
purchase of fixed or non-current assets.

Revenue expenditure: any expenditure on costs other than non-current asset expenditure.

Valuing inventories: inventories should be valued at lower of

● Historic cost or
● Net realizable value

Net realizable value: the amount for which an asset (usually an inventory) can be sold minus the
cost of selling it

Chapter 35 Analysis of Published Accounts

Ratios:
Profitability Ratio:
● Return on Capital Employed
Liquidity Ratio
● Same as AS (Current Ratio, Quick Ratio)
Financial Efficiency Ratio
● Inventory Turnover
● Inventory Days
● Debtors days
Shareholder or investment Ratios:
● Dividend Yield Ratio
● Dividend cover ratio
● Price/earning ratio (PE Ratio)
Gearing Ratio
Interest cover ratio

Profitibility Ratio

Gross profit margin: gross profit x 100

revenue

Net Profit Margin: net profit x 100

Revenue

Return on Capital Employed: operating profit x 100

Capital employed

● The higher this ratio- the better it is

● Ways to improve this ratio: increase operating profit by increasing selling price or decreasing
expenses
● OR decrease capital employed by selling unwanted assets.

Liquidity ratios:

Current Ratio: current assets

Current liabilities
Acid Test Ratio: current assets-inventories
Current liabilities

The rest on the board

Chapter 21 Marketing Analysis

Elasticity of demand: measures the responsiveness of change in demand follwind a change in price

% change in quantity demanded

% change in demand

PED Classification Explanation

0 Perfectly inelastic demand Same amount demanded no

matter what price.

0-1 Inelastic demand % change in price is greater

than % change in demand

1 Unitary % change in price is equal to %

change in demand

1 and infinity Elastic demand % change in price is less than

% change in demand

infinity Perfectly inelastic demand Large amounts demanded at

one price and demand falls to
zero if price increases.
Factors determining price elasticity of demand
● Number of substitute products
● How necessary the product is
● Customer loyalty
● Consumer income

Income elasticity of demand

% change in quantity demanded

% change in consumer income

● Demand for inferior goods increases as consumer income decreases

● Expensive products have positive income elasticity- referred to as normal goods
● Basic necessities have a positive low-income elasticity of demand.
● During economic growth- production and consumption of luxury goods increases
● During economic recession - demand for inferior goods increases.

Promotional Elasticity of Demand:

% change in quantity demanded

% change in promotional spending

● If the answer is greater than 1 - demand for the product is responsive following a change in
promotional spending (elastic)If the answer less than one - inelastic

Limitations of measures of elasticity

● It assumes that nothing else changes in the external environment
● PED calculation becomes outdated very quickly- requires recalculation
● Based on past sales data- not accurate

New Product Development: the design, creation and marketing of new goods and services
Stages in NPD:
1. Generating new ideas - through market research, brainstorming sessions, employees
2. Ideas screening
3. Concept development and testing - cost to produce, who to sell, what features to add, how
consumers react
4. Business analysis- enough finance available, will it fit in the existing marketing mix, patented
or copyrighted
5. Product Testing- creating a prototype, testing of a product
6. Test marketing - small-scale launch before full launch to test customer reaction
7. Commercialisation/ marketing- full launch

Research and Development: has two strategies

1. Offensive R&D Strategy: when businesses research and develop a product to lead the
industry with innovative products. Helps the business in gaining market share, and market
dominance, and leads to healthy profits.
2. Defensive R&D Strategy: attempt to learn from initial innovators' mistakes and weaknesses.
The aim of this strategy is to improve the original product or develop a slightly different
product.
Factors influencing the expense of Research and Development
★ Resources available
★ Nature of industry
★ Competitors' expense on R&D.
★ Business expectations
★ Risk profile of business
★ Government policy towards grants for R&D

Sales Forecasting: predicting future sales level and sales trend

Importance of Sales forecasting:

Helps business:
★ making decisions regarding pricing and promotion
 ★ predicting maximum capacity
★ preparing resources needed by business
★ Planning future workforce

Methods of forecasting:
1. Extrapolation
2. Moving averages
3. Sales force composite
4. Delphi method
5. Jury of experts

Extrapolation: most basic method of predicting sales based on past results.

Chapter 26 Location and Scale

Optimal location: a business location that gives the best combination of quantitative factors and
qualitative factors.
Quantitative Factors:( measured in Monterey terms)
1. Site and other fixed costs
2. Labour cost
3. Transport cost
4. Potential revenues
5. Government grants
6. External economies of scale
7. Investment appraisal
8. Break-even analysis

Qualitative Factors: (not measurable in financial terms)

1. Safety
2. Space for further expansion
3. Managers' preference
4. Ethical considerations
5. Infrastructure
6. Environmental concerns
 7. Planning restrictions

Multi-site location: when businesses operate on more than one site.

Offshore: the relocation of a business process from one country to another country.

Reasons for offshoring:

● Reduce cost
● Supply of well-qualified workforce
● Accessing global market
● Avoid trade restrictions
● Government support for relocated businesses

Reshoring: transferring a business operation that was moved overseas back tot he country where it
originally located

Reasons for reshoring:

● Cultural differences
● Language or communication barrier
● Product quality and level of service concern
● Supply chain concerns
● Ethical considerations

Economies of scale: all 5

Internal economies of scale:

Chapter 27 Quality Management

Quality Product: a goor or service that meet customers expectations and therefore fulfill its intended
purpose,
Quality Standard: minimum acceptable production or service standard.

Importance of Quality:
 ● Can compete to be a market leader
● Customer loyalty
● Minimum returns
● Minimum complaints
● Reduces the cost of advertisement
● Businesses can charge higher prices
● Prolongs the product life cycle
● Can also become USP for a business
Quality Control Techniques
Quality Control: inspecting for product quality by the end of production
Quality Assurance: checking for quality at each stage of production

Quality Control Method:

1. Prevention
2. Inspection
3. Correction and Improvement

Impact of Quality Control

● Inspection cost
● Inspection looks for problems and is negative in culture
● Inspectors may become demotivated due to the tedious job
● Reduced worker's responsibility towards quality
● Inspection done at the end- faulty products may pass through several production processes
before being picked up.

Quality Assurance Methods

1. Designing fault-free products
2. Aims for zero defects
3. Establishes quality standards
4. Checking for quality at each stage
 ● Product design
● Quality of input
● Production quality
● Delivery system
● Customer service

Impact of Quality Assurance:

● Reduces wastage
● Reduces inspection cost
● Fault can be traced easily
● Workers take responsibility for quality
● Increased worker motivation
● Can gain ISO 9000 award

Total Quality Management (TQM): emphasis on involving all employees in quality improvement
Focuses on
● Involving all employees
● Get it right the first time
● Continuous improvement
● Quality improvement
● Focuses on customers

Benchmarking: comparing a business against the performance standards of the best business in the
same industry.
Stages of benchmarking:
1. Identify business performance indicators (BPI) to be benchmarked
2. Measure performance in these areas
3. Identify the best businesses in the industry
4. Use BPI for comparison and list down weaknesses of the business
5. Set standards for improvement
6. Change process to achieve standard
7. Re-measure
Adv:
● Help business increases international competitiveness
● Lead to the useful crossover of ideas
● Increased worker's motivation

Limitations:
● Time-consuming
● Merely copying ideas and not being innovative
● Depends on up-to-date relevant industry data
● Cost attached

Chapter 28 Operation Strategy

Strategic decision Operation Department takes:

● Outsourcing
● Offshoring or reshoring
● Location or relocation of business
● Expanding or reducing capacity
● Changing production methods
● Application of Information Technology and Artificial Intelligence

Computer Aided Designing: the use of computer programs to create two or three-dimensional
graphical representations of physical objects

★ Improved product quality

★ Lower product development cost
★ Increased productivity
 ★ Greater accuracy
★ Reduced errors
★ Quicker development of the product - less time taken to introduce the product
★ Good visualization of the product

Limitations
● Cost attached
● Complexity of the program
● Requires large amount of computer processing power- expensive

Computer Aided Manufacturing (CAM): the use of computer software to control machine tools and
related equipment in the manufacturing of products.

★ Precise manufacturing
★ Reduced quality problems
★ Faster production
★ Increased productivity
★ Flexible production

Limitations:
● Expensive
● Hardware failure and machinery breakdown can interrupt with production and can be time
consuming
● Quality assurance is still required.

Operational Flexibility: the ability of the business to vary both the the level of production and thr
range of products following change in customer demand

Can be achieved by
1. Hiring flexible and multi-skilled employees
2. Invest in technology, machinery
3. Hire employees on flexible contracts.
Operational flexibility improves business efficiency by:
 ● Adapting to the volume of output following a change in demand
● Changing delivery time schedules to meet changes in the timing of customer demand
● Responding to the demand of customers for unusual or unique product specifications.

Ways to improve operational flexibility:

1. Increase capacity by extending the building and buying more equipment
2. Employ an adaptable workforce
3. Holding high inventories just in case consumer demand increases

Process Innovation: the use of new or much-improved production methods or service delivery
methods

Includes:
● Use of robots in manufacturing
● Computer tracking of inventories
● Tracking of the exact location of parcel

★ Lower cost
★ More efficient production method
★ Makes the business more competitive

Enterprise Resource Planning (ERP)

The use of a single computer application to plan the purchase and use of resources in an
organization in order to improve operational efficiency.
● Link together all systems of s business
● More accurate costing
● Reduction in cost at sll stages of supply chain
● Management information is increased
● Better coordination of departments as they are interlinked through a software.
● Greater workforce flexibility
● Avoid wasting- supply according to demand
● Just in time
Limitations:
 ● Cost of database
● Employee training cost
● Flexible ways of different department operation may narrow down to one common way
● Time consuming as full implementation may require upto 3 years
● Chosen software may become obsolete while full implementation of ERP

Lean Production: production technique which aims for higher quality and less waste. Also aims at
reducing duplication of work and elimination of unnecessary non added value activities
Kinds of waste
1. Excessive transportation of components and products
2. Unnecessary movement by employees
3. Waiting time
4. Overproduction
5. Over-processing
6. defects
7. Excessive inventory holding

Lean Production Methods

➔ Kaizen
➔ Quality Circle
➔ Simultaneous Engineering
➔ Cell Production

Kaizen: a japanese word which means “continuous improvement’

Conditions for Kaizen:
1. Employee involvement
2. Teamworking
3. Empower kaizen groups
4. Management culture should allow for employee involvement

Limitations:
 1. Some changes cannot be introduced gradually.
2. Resistance from senior management to empowerment
3. Employee training cost

Quality Circle: when employees discuss quality problems and come up with solutions and present it
to the management.
● Improves quality through joint discussion ideas
● Improved employee motivation
● Business make full use of employee knowledge and experience

➔ Circle members should be committed to improving quality

➔ Requires training for members
➔ Need ful support from management
➔ Teams should be empowered to implement the recommendations.

Simultaneous Engineering:method of developing a new product which aims at completing tasks

(design, market research, costing and engineering task) at the same time rather than sequentially.
● Saves time
● Less time required to launch a product

Cell Production:flow production split into self-contained groups that are responsible for a complete
unit of work.
Advantages:
★ Increased teamwork
★ Increased sense of ownership
★ Job rotation within cells
★ Increased productivity
★ Increased worker motivation
★ Improved worker communication

Just in time inventory control: calling in for supplies as and when required.

Waste management: waste can be reduced by

 1. Adapting to TQM
2. Use of recyclable materials
3. Use of JIT

Advantages of Lean production:

➔ Reduced time wastage
➔ Wastage of material is minimized
➔ Increased efficiency
➔ Reduced average cost
➔ Less risk of damage to inventory
➔ New products launched easily
➔ Improved quality

Limitation of Lean Production:

● Can result in job losses
● Can be expensive to set up
● Require special machinery
● Businesses may have difficulty forecasting accurate demand

Network Analysis

Network Diagram: the diagram used in critical path analysis that shows the logical sequence of
activities and logical dependencies between them, and the critical path can be identified

Critical Path Analysis: planning technique that identifies all tasks in a project, puts them in a correct
sequence and allows for identification of critical path.

Critical path: the sequence of activities that must be completed on time for the project to be
completed on an agreed date.