BM 1.

1 Notes - Introduction to business management

BM 1.2 Notes - Types of organizations
BM 1.3 Notes - Organizational Objectives
BM 1.4 Notes - Stakeholders
BM 1.5 Notes - External Environment
BM 1.6 Notes - Growth and Evolution
BM 1.7 Notes - Organizational planning tools
Fishbone model
Decision trees
Force field analysis
Gantt charts
BM 2.1 Notes - Functions and Evolution of HR
BM 2.2 Notes - Organizational structure
BM 2.3 Notes - Leadership and Management
The following steps are the five functions of the management (Henri Fayol):
According to Ducker managers have five basic functions (Peter F Drucker):
There are five common styles of leadership:
Factors that affect situational leadership styles
BM 2.4 Notes - Motivation
BM 2.5 Notes - Organizational culture
BM 2.6 Notes - Employer and Employee Relations
BM 3.1 Notes - Sources of finance
BM 3.2 Notes - Costs and revenues
BM 3.3 Notes - Break–Even Analysis
BM 3.4 Notes - Final accounts
BM 3.5 Notes - Profitability and ratio analysis
BM 3.6 Notes - Efficiency ratio analysis
BM 3.7 Notes - Cash Flow
BM 3.8 Notes - Investment Appraisal
BM 3.9 Notes - Budgets
BM 4.1 Notes - The role of Marketing
BM 4.2 Notes - Marketing Planning
BM 4.3 Notes - Sales Forecasting
BM 4.4 Notes - Market research
BM 4.5 - The Four Ps (Product, Price, Place, Promotion)
BM 4.6 - The Extended Marketing Mix
BM 4.8 Notes - E-Commerce
BM 5.1 Notes - The Role of Operations Management
BM 5.2 Notes - Production Methods
BM 5.3 Notes - Lean Production and Quality Management
BM 5.4 Notes - Location
BM 5.5 Notes - Production Planning
BM 5.6 - Research and Development
BM 5.7 - Crisis Management and Contingency Planning

BM 1.1 Notes - Introduction to business management

The role of business
Decision-making organization involved in the process of using inputs to produce goods/services.
● Inputs: The resources that a business uses in the production process. Examples: labour, raw material.
● Processes: Turning the input into the provision of services of the manufacture of goods. Examples:
Factories
● Outputs: Of final goods and services. Examples: Phones, computers, haircuts

Business exists to satisfy needs and wants of the people, organization and government.
● Needs: what we will need to survive (food).
● Wants: the desire that we have (holiday)

Business grows it needs to develop functions to carry specialist tasks (Human recourses management and
Marketing)
Affected by external factors beyond their control (oil price rises)
Customers, they buy and use the products.
When firms are able to add value (see: Definitions), they are able to sell goods for more than they cost.
● Value come from
o Speed, quality of service, product of prestige, a feel good factor, quality (finished product), brad image, design,
taste…
· Businesses have to make decisions; they affect daily operations and long-term prospects.
· A business will need to decide among the various ways of spending the allocated budget. And it should choose
the one that gives the highest benefit for the business.
· Businesses will aim to provide goods and services (satisfy needs and wants) and make sure that they will gain
profit to earn their investment in return.
The main functions of business
• If a business is to operate effectively, tasks must be carried out by functional areas, this are: Production,
marketing, finance and human resources.
Human resources
· Managing the personnel, they will deal with the following issues: workforce planning, recruitment, training,
appraisal, pay and benefits, equal opportunities, health and safety matters, working relations.
· Large organizations allocate resources to each functional area, so they would be easily identified. But in small
organizations, one person would carry out all the functions. In a business the four functional areas depend on
each other. Product department needs the marketing staff to sell the products and inverse.
Finance and accounts
· Managing the business’s money. The accurate recording and reporting of financial documents take place.
Comply with legal requirements (taxes) and to inform those interested.

Marketing
· Identifying and satisfying customers wants and needs and that the firm’s product sell. This is done through
market research, test marketing, packaging and advertising. The four P’s
o Product – the goods and services meet the customer's requirements.
o Price – pricing methods to sell the product, depending on level of demand, number of substitute products and
the costs of production.
o Promotion – customers needs to know about the product. Mass media
o Place – available in convenient places, appropriate ways to distribute the product to the marketplace.
Production (Operations)
· Converting of raw material into finished goods à ready for delivery to customers.
· Plus: providing services to the customers.
· Example for what production includes: Extraction of crude oil, construction of roads and provision or finance
services.
· Production department (production manager à important job, to make sure that production plans and efficient
production)
● How the good will be made or how the service will be delivered.
● What resources to be used/needed. (Equipment)
● Timescale (when/duration)
● Organizing stock management and control
● Organizing quality inspection and control
● Arranging delivery of finished product
● Meeting targets and deadlines
● Research and development into new products and work processes.
Business sectors
· Businesses can be classified according to the stage of production that they are engaged in.
● Primary – businesses in this sector are involved with harvesting, extraction and conversion of natural
resources. Like fishing, forestry… this sector account for a large percentage of outputs and employments
in LEDCs. The businesses that operate in the primary sector in MEDCs, use mechanisation and
automation.
● Secondary sector – manufacturing or construction of products. Like construction firms. Output is then sold
to the customers that could be other businesses, foreign buyers or domestic customers. Developing
countries = dominant secondary sectors. The secondary sector is the wealth sector; manufactured goods
can be exported all over the world, to earn income. Value is added. The importance of this sector tends to
decline in terms of employment and output.
● Tertiary sector – providing services for the customers. Like transport and travel.
NB: goods can be transformed in the process of a product.
In Canada and Italy the Tertiary sector is most substantial sector in terms of employment and percentage of GDP.
● Quaternary sector – a sub category of tertiary sector, businesses in the quaternary sector are involved in
intellectual knowledge based activities that generate and share information. It is also the sector in which
businesses invest for further growth and evolution.
· The four business sectors are linked through the chain of production
· From extraction of raw material to the product that goes to the customer.
● The sectors are interdependent.
· Sectoral change refers to a shift in the relative share of national output and employment that is attributed to
each business sector over time.
The role of entrepreneurship and intrapreneurship
· An entrepreneur is an individual who plans organizes and manages a business, taking on financial risks in doing
so.
· Entrepreneurship describes the trait of business leaders who tend to be distinctive in their temperament, attitude
and outlook who drive the business.
· Entrepreneurs have the skills needed to oversee the whole production process, whilst having the ability and
willingness to take potentially high risks.
· Successful entrepreneurs tend to be creative, innovate and passionate.
· Intrapreneurship is the act of been an entrepreneur but as an employee within a large organization.
· An intrapreneur is an employee who thinks and acts as an entrepreneur within a section of the organization.
Reasons for starting a business
· There are several reasons why people decide to set up a business or an enterprise. The reasons can be
remembered by the mnemonic GET CASH
● Growth: Entrepreneurs benefit personally when there is an appreciation in the value of their assets.
● Earnings: the potential returns from setting up your own business can easily outweigh the costs, even
though the risks are high.
● Transference and inheritance: self-employed entrepreneurs view their business as something that they
can pass onto their children.
● Challenge: some people might view setting up and running a business as a challenge.
● Autonomy: being self-employed means that there is autonomy in how things are done within the
organization.
● Security: there is usually more job security for someone who is his or her own boss.
● Hobbies: some people might want to pursue their passion or to turn their hobby into a business.
Steps in the process of starting a business
· The steps in the process of starting up a business or an enterprise will vary from one country to another.
Nevertheless, the common steps in the process of starting up a business.
1. Write a business plan: the ideal is officially formulated in a business plan.
2. Obtain start-up capital: starting a business requires money.
3. Obtain business registration: before a business can trade or hire workers, it must satisfy registration and
licensing requirements.
4. Open a business bank account: to facilitate the financial operations of the new business, the owners need to set
up a business account.
5. Marketing: potential customers need to know about the business and its products.
Factors to consider when setting up a business
● Business idea : a feasible business idea is needed.
● Finance : is needed to fund business activities, such as manufacturing and marketing of the firm’s
products.
● Human resources : are needed at all stages of business activity, from the design and development of a
product to delivering it to the consumer.
● Enterprise : entrepreneurial skills are required to successfully plan, organize and manage the business.
● Fixed assets : are needed, such as premises and capital equipment.
● Suppliers : are needed to provide the business with its raw material, finished stock of products and support
services.
● Customers : need to be attracted because without them the business will fail.
● Marketing : is essential, irrespective of how good a business idea might be.
● Legal issues : legal issues also need to be considered. (e.g. consumer protection laws)
Problems that a new business may face
· A new business is likely to face problems that must be dealt with immediately to prevent them from escalating
and threatening its survival include:
o Lack of finance: All businesses need finance for the purchase of fixed assets, however most owners of new and
small businesses do not have the credentials to secure external funding without major difficulties.
o Cash flow problems: financing working capital is also a major problem for many new businesses. Many
businesses might have assets such as raw material and semi-finished products that cannot easily be turned into
cash.
o Marketing problems: marketing problems arise when businesses fail to meet customers’ needs, thereby
resulting in poor sales.
o Unestablished customers base: a major problem facing new businesses is attracting customers.
o People management problems: new businesses may lack experience in hiring the right staff with all the
necessary skills.
o Legalities: it is necessary for business to comply with all necessary legislation.
o Production problems: it can be difficult for new businesses to accurately forecast levels of demand so they are
more likely to overproduce or underproduce.
o High production costs: new businesses are likely to experience high production costs due to the large amount of
money needed to pay for the cost of fixed assets.
o Poor location: the areas with the most customers are the most expensive once.
o External influences: all businesses, irrespective of size or how long they have been in operation, are prone to
exogenous shocks that create a difficult trading environment.
· In summary, people set up their own businesses to satisfy their personal desires.
The elements of a business plan
· A business plan is a report detailing how a business sets out to achieve its goals and objectives.
· It’s a useful planning tool as it requires the owners to consider the marketing, financial and human resources of
the business.
· The business plan helps to reassure financial lenders, such as banks and venture capitalist.
● The elements of a business plan
o The business, product, market, finance, personnel marketing.
· It helps financiers to make a more objective judgement regarding the firm's likely success and hence its ability to
repay the loans.
Introduction to business management and the CUEGIS concepts
· Turning factor inputs into outputs of goods and services to meet wants and needs of different customers.
· The functional areas are all instrumental in demanding the success.
· Opportunity costs, makes the decisions in the business.

BM 1.2 Notes - Types of organizations

The private and public sectors
● Organizations that operate in the private sector are owned and controlled by private individuals and
businesses rather than by government.
● The main aim of most, although not all, private sector organizations are to make profit.
● Organizations that operate in the public sector are under the ownership and control of the government.
● Organizations that are wholly owned by the government are called state-owned enterprises.
Profit-based organizations
Sole traders
● A sole trade is an individual who owns her/his own personal business.
● Sole traders may work alone, or employ someone to work with them
● They are held responsible for the successes and failures of the business
● The owner is legally the same as the business, they do not have unlimited liability. This means is the
business is in debt the owner may be forced to sell her/his own personal assets to repay the debt.
● Advantages of being a sole trader
○ Few legal formalities: sole traders are quite easy to set up and start-up cost are usually must lower
in comparison to starting other types of business organizations.
○ Profit taking: the sole trader is the only owner and therefore receives all of any profit made by the
business.
○ Being your own boss: sole traders do not take orders from anyone.
○ Personalised services: sole traders can provide a personalised services to customers.
○ Privacy: unlike other types of business ownership, sole traders enjoy privacy, as they do not have to
make their financial record available to the public.
● Disadvantages of being a sole trader
○ Unlimited liability: as an unincorporated business, there is no limit to the amount of debts that a sole
traders is legally responsible for if the business fails.
○ Limited sources of finance: could be hard to raise capital beyond personal savings.
○ High risks: lots of competition due to the large numbers of sole traders.
○ Workload and stress: Owners often have to do their own accounts, marketing and human
recourses.
○ Limited economies of scale: sole trader cannot benefit from large scale productions.
○ Lack of continuity: If the owner dies, is sick or goes on holiday the business may have troubles
continuing service.
Partnerships
● A partnership is a profit-seeking businesses owned by two or more persons.
● For ordinary partnerships, the maximum number of owners is 20.
● Financed mainly through the funds of the owners
● Most partners sign documents such as the Deed Of Partnership which includes:
○ The amount of finance contributed by each partner
 ○ The roles, obligations and responsibilities of each partner
○ How profits or losses will be shared
○ Conditions for introducing new partners
○ Clauses for the withdrawal of a partner
○ Procedures for ending the partnership
● Advantages of being in a partnership
○ Financial strength: more then sole traders as there are more partners then can provide funds
○ Specialisation and division of labour: shared expertise, shared workload and moral support.
○ Financial privacy: like sole proprietorships, partnerships do not have to publicise their financial
records.
○ Cost-effective: partnerships can be more cost-effective than sole traders as each partner
specialises in certain aspects of their businesses, thus rising productivity.
● Disadvantages of being in a partnership
○ Unlimited liability: legally partnerships are responsible for their debts. (Except for select partners
who have been elected to have limited liability)
○ Lack of continuity: problems might still exist if a partner dies or leaves the firm as the partnership
deed becomes invalid.
○ Prolonged decision-making: Decision making is likely to take longer as all partners need to be
consulted, there may be some disagreements
○ Lack of harmony: Disagreements are conflicts within partnerships are common.
Companies (corporations)
● Companies are businesses owned by their shareholders.
● Corporations are sometime called joint stock companies because the shares of the business are jointly
held by numerous entitle.
● Company is treated as a separate legal entity from its owners.
● Company benefits from having limited liability – shareholders to not stand to lose personal belongings if
the company goes into debts.
● Can be complicated and expensive.
● A board of directors (BOD) is elected by shareholder who then run the company on behalf of the
shareholders
● A private limited company is a company that cannot raise share capital from the general public. The
shares cannot be traded without the prior agreement from the BOD, so that the directors can maintain
overall control of the company.
● By contrast a public limited company is able to advertise and sell its shares to the general public via stock
exchange.
● Before companies can begin trading, two documents must be produced and submitted to the appropriate
authorities:
○ Memorandum of Association: a relative brief document outlining the fundamental details of the
company.
○ Articles of Association (Articles of Incorporation): the longer of the two documents, stipulating the
internal regulations and procedures of the company.
● Once authorities are satisfied with the above documents and an application fee has been paid a
Certificate of incorporation is issued to the company.
● Flotation occurs when a business first sells all or part of its business to external investors, a process known
as an initial public offering (IOP). The IOP makes the company is listed on a stock exchange.
● All companies must hold an Annual General Meeting to allow the owners to have a say in the running of the
business. There are three main processes at a typical AGM:
○ Shareholders vote on and re-election of the board of directors.
○ Shareholders ask question of the chief executive officer directors and chairperson about various
aspects of the company.
○ Shareholders approve previous year’s financial accounts after the directors present the annual
report containing information about the company’s performance.
● Advantages of companies
○ Rising: companies can raise large amounts of capital through selling shares that doesn't need to
be repaid.
 ○ Limited Liability: As all companies have this, it is easier to attract investors as they risk are relatively
low for investors.
○ Continuity: a company and its owners means it can continue to operate as a separate entity, even
when change of owners.
○ Economies of scale: companies can benefit from economies of scale.
○ Productivity: companies can hire specialist directors and managers to run the firm, as there is no
need for the owners to be directly involved in the production.
○ Tax benefits: sole traders and partnerships pay income tax on their profits. By contrast, companies
pay corporate tax on their profits. The highest income tax tends to be higher than the rate for
corporate tax.
● Disadvantages of companies
○ Communication problems: in large companies services and relationships with customers can often
become impersonal to both customers and employees.
○ Added complexities: it's more expensive and more bureaucratic to run a company.
○ Disclosure of information: financial data must be provided to all shareholders.
○ Bureaucracy: there is far more bureaucracy involved in setting up and running a company.
○ Loss of control: Whilst sole traders and partnership, retain control of their businesses, public limited
companies face the potential threat of takeover by a rival company that purchases a majority
stake in the business.
For-profit social enterprises
● Social enterprises are revenue-generating businesses with social objectives at the core of their operations.
● Social enterprises strive to return a surplus for social gains.
● Social enterprises can be operated as a non –profit organization or as a for – profit company.
● Social enterprises have two main goals:
○ To achieve social objectives and
○ Earn revenue in excess of costs.
● There are three main types of for-profit social enterprises:
Cooperatives
● Cooperatives are for-profit enterprises owned and run by the members, such as employees or customers
with the common goal of creating for their member by operating in a socially responsible way.
● All employees have a vote
● Cooperatives share any profit with their members.
● There are three main types of cooperatives, all of which are democratically owned and controlled:
○ Consumers cooperatives: are owned by the customers who buy the goods and services for
personal use. In most cases members gets a discount on the products.
○ Workers cooperatives: are set up, owned and organized by their employee members. By operating
as an enterprise, members are provided with work.
○ Producer cooperatives: are cooperatives that join and support each other to process or market
their products.
● Advantages of cooperatives
○ Incentives to work: Employees have a key stake in the cooperative so are more interested in how it
performs. Staff motivation and productivity.
○ Decision-making power: improve the members’ commitment and motivation.
○ Social benefits: create social gains that can be enjoyed by the wider community.
○ Public support: there tend to be public support, people want to help them succeed because they
believe in the case.
● Disadvantages of cooperatives
○ Disincentive effects: cooperatives do not pay high salaries and bonuses as incentives to work.
○ Limited source of finance: the source of finance can be limited to the amount contributed by their
members.
○ Slower decision-making: the democracy slows down the decision-making progress.
○ Limited promotional opportunities: there are fewer opportunities for employees to progress in their
professional careers.
Microfinance providers
 ● Microfinance is a type of financial services aimed entrepreneurs of small businesses, especially females
and those on low incomes. As a social enterprise, microfinance providers enable the disadvantaged
members of society to gain access to essential financial services to help eradicate poverty.
● Advantages of microfinance providers
○ Accessibility: helps those in poverty become financially independent.
○ Job creation: can help create new jobs, this benefits society.
○ Social wellbeing: applicants who receive microfinance are less likely to take their children out of
school.
● Disadvantages of microfinance providers
○ Immorality: some argue that it’s unethical because they are for-profit organizations.
○ Limited finance: high risks of default
○ Limited eligibility: not all individuals qualify for microfinance.
Public-private partnerships
● Public-private partnerships occur when the government works together with the private sector to jointly
provide certain goods or services.
● They are hybrid organizations of both the private and public sector.
● Public-private partnership can benefit from the dynamics, finance and efficiency of the private sector
alongside the benefits of public sector funding and support.
Non-profit social enterprises
● Non-profit social enterprises are businesses run in a commercial-like manner but without profit being the
main goal. Instead, non-profit organizations use their surplus revenues to achieve their social goals.
● Surplus is retained in the business for self-preservation and growth.
Non-governmental organizations (NGOs)
● A non-governmental organization is a non-profit social enterprise that operates in the private sector.
● NGOs are set up to and run for the benefit of others in society.
● There are two types of NGOs:
○ Operational NGOs: are established from a given objective or purpose.
○ Advocacy NGOs: take more aggressive approach to promote or defend a cause, striving to raise
awareness through direct action.
Charities
● A charity is a non-profit social enterprise that provides voluntary support for good cause, such as the
protection of children.
● Its key function is raising funds from individuals and organizations to support a cause that’s beneficial to
society.
● Advantages of charities
○ Social benefits: charities provide financial support for the welfare society.
○ Tax exemptions for NPOs: they are exempt from corporate tax.
○ Tax incentives for donors: this raises the incentive for donors to give money to charities.
○ Limited liability: they can be registered as limited companies to protect interest of employees and
managers that have limited liability.
● Disadvantages of charities
○ Bureaucracy: charities must be registered before they can operate.
○ Disincentive effects: the lack of a profit motive can cause problems.
○ Charity fraud: the charity, donors and governments have a risk of experiencing charity fraud.
○ Inefficiencies: the people who run the charity are not personally held responsible for the debt.
○ Limited sources of finance: most charities survive solely on one source of finance – donations.

BM 1.3 Notes - Organizational Objectives

Vision statements and mission statements
● Vision statement outlines where the business wants to be and the attainment of success.
● Mission statement gives a clear purpose, of existence and purpose. (No time frame)
● The main differences between vision and mission statements are:
○ Vision addresses where do we want to be? Mission asks: what is our business?
○ Vision are focused on the very long run, Mission can focus on the medium/long term
 ○ Mission statements are updated more frequently compared to Vision.
○ Mission gives the purpose: be realised, Vision sees what it could be.
○ Mission highlights the values of the business.
● There are some limitations of vision and mission statement.
○ Some argue that they are no more than public relations stunts.
○ It can be very time consuming to create the statements.
○ Possibly not suitable for all stakeholders and hence working against the objective.
Aims, objectives, strategies and tactics
● Aims are the general and long – term goals. General purpose and direction (mission) set by the senior
director of the business.
● Objectives are specific goals for an organization, based on the aims. Quantifiable and measureable. Set by
senior or middle management.
● Organizational aims and objectives are important for three reasons:
○ To measure and control: The firm’s planes and control the performance of the workforce,
management and the whole business.
○ To motivate: inspire to reach a goal, plan for the long term.
○ To direct: clear sense of direction or purpose.
● Strategies are the plans of actions to achieve the strategic objectives of an organization. Tactics are short-
term methods used to achieve an organization’s tactical objectives. There are several levels of business
strategy:
○ Operational strategies: are day-to-day methods used to improve the efficiency of an organization.
These are aimed at trying to achieve the tactical objectives of a business.
○ Generic strategies: are those that affect the business as a whole.
○ Corporate strategies: are targeted at the long-term goals of a business.
● Tactical objectives: are short-term goals that affect a section of the organization. They are specific goals
that guide the daily functioning of certain departments or operations. Tactical objectives tend to refer to
targets set up for 12 months, such as:
○ Survival: new and unestablished businesses are likely to encounter a number of problems such as
limited recognition from customers and/or intense competition from existing firms.
○ Sales revenues maximisation: new businesses strives to maximise their sales revenue to establish
themselves in the marketplace.
● Strategic objectives are the longer-term goals of a business.
● Some typical strategic objectives (vary between businesses)
○ Profit maximisation
■ Short-term: season firms will strive to maximise profits during busy times.
■ Long-term: some of the profits will be ploughed back into the business to finance expansion
plans. Benefit for owner, employees and suppliers.
■ Difficult and time consuming to find the max profit.
■ Choose not to do it; strain on the resources, require more work.
○ Growth
■ Increase in sales or by marked share
■ Business survival à failure gives declining competitiveness.
■ Economies of scale, Reduced risk and…
■ Market power – monopoly power, like charge higher prices.
○ Image and reputations
■ Bad image or reputation = smaller incomes.
■ To remain competitive, it needs to consider the needs (customer)
■ Positive image = proud employees, more suppliers.
○ Market standings
■ Presence in the marketplace à feel that the business offers something special.
■ Liked with image and reputations
○ Combination of the aforementioned strategic objectives.
● Tactical objectives are short – term that affects a division of the organization. Like a department.
● Specific goals – guide the daily function of certain operations.
● Departments tactical objectives by them self. Tactical objectives=6-12 months.
 ● Common tactical objective is survival. Threats like; takeover, economic recession, new companies: limited
recognition by consumers or competition
● Tactical objective: sales revenue maximisation, earning likely to level. NB: sales revenue is not profit.
The need for changing objectives
● Factors that can affect the aims and objectives of a business (internal)
○ Corporate culture – flexible workforce = varying objectives over time
○ Type and size of organization
○ Age of the business – different objectives
○ Finance – scale of the objectives
○ Risk profile of key stakeholders – more ambitious objectives
○ Private versus public sector – provide to public vs. profit max
● Factors that can affect the aims and objectives of a business (external)
○ State of economy
○ Government constraints – rules and regulations can limit
○ Presence and power of pressure groups
● These factors change the organization's objectives over time.
● Change in business direction = change in business strategy
● Change objectives because the old once are achieved
Ethical objectives
● Moral principles guide the decision-making and strategy. à Right or wrong
● Business ethics = actions that are considered to be morally correct.
● Examples: pollution, recycling, disposal of waste, give staff breaks, fair trades
● Pressure from: within the business or external factors
● Examples of unethical behaviour
○ Financial dishonesty – mismanage the finances
○ Environmental neglect – harmful consequences to the nature
○ Exploitation of the workforce – neglect of the employee welfare.
○ Exploitation of suppliers – forcing to cut prices (LEDCs)
○ Exploitation of consumers – harmful side effects or excessive prices
● Ethical code of practice – in the annual report. Important to know what is considered acceptable or not
within the business.
● Advantages
○ Improved corporate image – the reputation of a business.
○ Increased customer loyalty
○ Cost cutting – recycling, avoiding litigation (action taken) costs.
○ Improved staff morale and motivation
● Disadvantages
○ Compliance costs – costs from acting ethical
○ Lower profits – higher prices, less customers
○ Stakeholder conflicts – not full agreement, conflict with profit max
● How to meet social responsibility
○ Providing accurate information and labelling
○ Active community works – charity work.
○ Consideration for the environment
○ Adhering to fair employment practices
● Ethical behaviour is subjective. Beliefs and principles by individual
● Legislation – guidelines about what is socially accepted.
Corporate social responsibility (CSR)
● Socially responsible businesses act morally towards stakeholder
● Reputation can give important competitive edge à acting responsible
● The role of businesses delivering CSR:
○ The self interest attitude – profit is what counts, government are responsible for social problems
○ The altruistic attitude – do what they can to improve the society. Regardless of what is does to the
profit.
○ The strategic attitude – social responsible if it makes them more profitable.
● Complicated therefore work in different countries with different acceptations.
 ● *No role because managers risk their money in what makes profit, not what they personally believe.
● Internal factors whether a business acts in a socially responsible manners.
○ The involvement and power of pressure groups (stakeholders)
○ Corporate culture and attitude towards CSR
○ The general public’s awareness of CSR
○ Exposure and pressure from the media
○ Experience – critics or bad experience and hence attention to CSR
○ Compliance costs
○ Laws and regulations
SWOT Analysis

(Image source: BPlans.com)

● Useful tool for decision making after assessing the current and future situations
● Internal and external factors that are relevant to issue/problem
○ Strengths: internal factors that are a benefit from the competitors. Helps to better achieve the
objectives, they need to be developed and protected.
○ Weaknesses: internal factors that competitors have an advantage on. Delay from achieving their
objectives. Need to be reduced or removed.
○ Opportunities: the external possibilities and prospects for future development. SWOT can help
create strategy.
○ Threats: external that can hinder the prospects of an organisation.
● SWOT could help for investigating a lot of problems in a business
○ Competitor analysis: threats or strengths of a rival
○ Assessing opportunities: development and growth of the org.
○ Risk assessment: the probable effects of investing certain project.
○ Review corporate strategy: position or direction of business
○ Strategic planning: decision diversify/expand overseas
● Advantages of SWOT
○ Simple and quick
○ Wide rage of applications
○ position in the marketplace and therefore the long term strategy
○ Encourage foresight and proactive thinking in decision – making
○ Reduce risk though demanding objectives and logical thought process.
● Disadvantages of SWOT
○ Simplistic and not detailed
○ The environment is always changing
○ Only useful if decision are open about weaknesses and willing to act upon them.
○ SWOT is used in isolation is better decisions if there are more information
The Ansoff matrix
 ● A tool to devise the products and market growth strategies.
● Market penetration – low risk
○ Selling existing products in the existing markets. To increase the market share of current products.
More competitive prices, attract more customers and try to make ore frequently purchases.
○ Advantages: familiar market and product, less costs from market research, safest.
○ Limitations: strong rivals will respond to firm trying to take away their customers (price wars can
harm profits). Existing markets become saturated this can be a new strategy to gain growth.
● Product development – medium risk
○ Selling new products in an existing markets
○ Product extension strategies or new product development
○ Suitable for products that have reached the saturation of their product life cycle.
○ Use brand to promote new products.
● Market development - Medium risk
○ Selling existing products in new markets
○ New distribution channels, promotion, prices
○ Advantages: familiar with the product
● Diversification – high risk
○ Selling new products in new markets
○ To spread the risk by having a well balanced product portfolio.
○ Seeking new opportunities for growth
○ Holding company: owns a controlling interest in other diverse companies. Take control and
management over other companies.
○ Two categories
■ Related diversification: new customers for confidence in the same industry. (Less risk)
■ Unrelated diversification: growth by selling new products in untapped markets.
○ Most risky because it's not familiar with the market or the success of the product.
● Four different growth strategies, and their risk.
● Argue: simplistic and all events do not fit into matrix. Alongside other tools.
● Most widely used management tool.
Organizational objectives and business strategy (SMART)
● Organizations and businesses should strive to set SMART objectives:
○ Specific
○ Measurable
○ Achievable
 ○ Realistic
○ Time constrained

BM 1.4 Notes - Stakeholders

Internal stakeholders
● A stakeholder is a person or organization with a direct interest in, and is affected by, the performance of a
business.
● The main stakeholders include: Employees, shareholders (or the owners of a business), managers,
customers, customers, suppliers, investors, competitors, the local community and the government.
● Some stakeholders do not have authority in the operations of a business e.g. pressure groups. However,
management theorists argue that it is in the best interest of an organization to listen to the needs of all
stakeholders.
● Stakeholders can be categorised as Internal or External. Internal stakeholders are members of the
organization. They consist of employees, shareholders, managers and directors. External stakeholders do
not form part of the business, but have a direct interest or involvement in the organisation. E.g. customers
or government.
Employees
● The staff of a business will have a stake in the organization they work for. They are likely to strive for
improved pay or other financial benefits as well as improved working conditions and better job security
and career progression.
● Many theorists argue that employees are an organisation’s best assets. It is the staff that produces goods
and services for sale; it is the staff who communicate with the customers.
Managers and directors
● Managers are the people who plan, organise and control the daily running of the business. Directors are
senior executives who have been elected by the company’s shareholders to oversee business operations
on behalf of their owners. Managers and directors are likely to aim for maximises profits to get increased
bonuses or salary, which would also please the shareholders.
Shareholders (stockholders)
● Shareholder owns private and public limited companies. They invest money in a company by purchasing
its shares. Shareholders are powerful stakeholders as they have voting rights and a “say” in how the
business is run.
● Shareholders have two main objectives:
○ To maximise dividend payment (a proportion of the net profits paid to shareholders)
○ To achieve a rise in the value of the share price (known as capital gains)
External stakeholders
● External stakeholders do not form part of the business but have a direct interest or involvement in the
organization.
Customers
● Customer relations’ management (CRM) is very important in the retailing sector. Employees of UK
supermarket Sainsbury’s enter the stores by passing huge posters that remind them of two rules:
○ The customer is always right.
○ If the customer is ever wrong, read rule 1
● The purpose is clearly to highlight to Sainsbury’s staff that their customers are a key stakeholder group.
● Ultimately it is the customer who determines the financial performance of a business. A business will not
survive without customers, as they are the ones who provide the business with most of its revenues.
● Hence it is important for a business to pay attention to the need of the customers
Suppliers
● Suppliers provide a business with stocks (raw materials, component parts and finished goods) needed for
production. They can also provide business services, such as maintenance and technical support.
● Suppliers strive for regular contracts with clients at competitive prices. They also request that customers
pay any outstanding bills on time.
Special Interest groups
● A Special interest group (SIG) is an organisation that advocates a particular issue, such as protection of
the environment and or prevention of cruelty to animals.
 ● They consist of members who are passionate about influencing changes for a specific cause.
● Examples of SIGs include:
○ Pressure groups, industry trade groups and the local community.
○ Trade Unions (or labour unions) aim to uphold and enhance the conditions of work for their
members. They may campaign for:
■ Wages and salaries to rise
■ The introduction to minimum wage to raise the earnings of those on low incomes.
■ Better working conditions and job security
Pressure groups
● Pressure groups consist of individuals with a common interest who seek to place demands on
organizations to act in a particular way or to influence a change in their behaviour.
Industrial trade groups
● Industry trade groups (or trade associations) specialise in promoting the aims of a particular industry,
through education and public relations
● An industry trade group is funded by the business that operates in that specific industry.
● The advertisement and promotion carried out by trade associations support the interests of the whole
industry, rather than those of individual companies or brands.
The local community
● The local community will place demands on the business that operate in their community. These may
include:
○ Job creation
○ The need to be considerate of the local environment
○ A wide choice in the provision of products and competitive prices
○ Sponsorship of local and fund-raising events.
● These considerations are paramount to the local community’s acceptance of business operating in the
area.
● Special interest groups are more likely to succeed in achieving their aims and objectives if certain
interrelated factors are accomplished:
○ Funding
○ Public opinion
○ Number of members
○ Commitment of members
● Whether a business should devote time and resources to the demands of an SIG depends on various
factors:
○ The power of the SIG
○ The market power of the firm
○ Compliance costs
○ Stakeholder views
○ Organizational aims and objectives
Competitors
● Competitors are the rival business of an organization. E.g. the main rivals of Cathay Pacific Airways include
Japan Airlines, Singapore airlines, Qantas and Air China.
● Competitors will be interested in the activities of a business for several reasons, including:
○ To avoid anti-competitive practices of rival firms. Larger firms might wish to exploit their monopoly
power, although this may be restricted by government interventions
○ As a stimulus to innovations and product development. Firms may benefit from some competition
as rivalry can lead to more ideas being generated. A monopolist might not have any incentive to
creative new products or to be innovative, due to the lack of competition.
Government
● The government is an important external stakeholder as it can have a large influence on business
behaviour, including assurances that:
○ Unfair business practices are avoided
○ Health and safety standards at work are met
○ The correct amount of corporation tax is paid (from business profits)
○ Business rates are paid (these are property taxes for the provision of local business services such
as maintenance of local road networks).
 ○ Consumer protection laws and employment legislation are upheld.
● Governments might also have a financial stake in a business.
● Ultimately, the government aims to ensure that businesses act in the public’s interest. The government can
stimulate business activity, perhaps by lowering interest rates or taxes to create employment and
investment opportunities.
Stakeholder conflicts
● Since different stakeholders have varying interests in an organization, it is likely that conflict will arise.
Managers make decisions that will address the interest of some stakeholders, but at the same time not
meet the needs of other stakeholders.
● Conflict arises because a business cannot simultaneously meet the needs of all its stakeholders. E.g. if
stakeholders want more profit then this may come about by cutting staff benefits. However this would
upset employees.
● A major cause of potential stakeholders conflict is the remuneration (pay and benefits) of the company
directors. Shareholders and employees might argue that top managers are ‘overpaid’ and that there fairer
distribution of profits.
● Another source of potential conflict is that some stakeholders have more than one interest in an
organisation. E.g. managers are employees of a company, and some employees may also be
shareholders. A customer is also likely to be a member of the local community.
● Modern management thinking suggest that stakeholder conflict is a short term, albeit potentially ever
present, phenomenon. E.g. meeting the needs of both employees and productive workforce with low rates
of absenteeism and staff turnover. This in turn can lead to improved customer relations, corporate image,
market share and profit.
Resolving stakeholder conflicts
● Conflict refers to situations where people do not see eye to eye due to differences in their opinion. Conflicts
exist in every organisation. at times employees will disagree with managers decisions; customers will be
disgruntled; suppliers will fail to deliver the right goods on time; shareholders will be unhappy with the
performance of the business, etc.
● For a business to progress there must be some resolution to the conflict. The outcome of any negotiation
will depend largely on the relative bargaining power of the different stakeholders.
● It is unlikely that the business can fulfil the aims of all its stakeholders at the same time; yet it is undesirable
to only maximise the needs of just one group. If one group is not catered for, then it's possible that they will
cause disruption and problems for the business.

BM 1.5 Notes - External Environment

STEEPLE analysis
● Social: changes in demographics, social and cultural norms.
● Technological: technology and work process becomes more efficient more efficient.
● Economics: inflation, unemployment, economic growth, international trade. The level of confidence and
the rival firm's activity.
● Environmental: the natural environment can mean both opportunities and threats for business activity.
● Political: Governmental legislation, employment law, rights, taxation and interest rates.
● Legal: governmental rules, regulations and laws.
● Ethical: business ethics and ethical behaviour according to society.
● The key advantage of STEEPLE analysis is that it is quite simple to use.
Social opportunities and threats
● Social, cultural and demographics factors can directly affect the activities of a business.
● The values and attitudes of society towards a wide range of different issues can present both
opportunities and threats for businesses. Examples include:
○ Growing support for environmental protection.
○ More liberal and modern attitude towards women.
○ Increased awareness and acceptance of multiculturalism
○ Pressure for businesses to act more ethically.
○ Demographic changes.
Technological opportunities and threats
 ● The entire technological environment presents constant threats and opportunities for business activities.
● The Internet opportunities:
○ Speed of access to information: Easy spread over the world
○ Reducing language and cultural barriers: translated into languages
○ Reducing production costs: e – commerce. Any time or place
● The internet threats:
○ Price transparency: competition when it’s easier to compare prices
○ Online crime: Hackers cost a lot of money
○ Higher costs of production: maintenance and training costs.
○ Reduced productivity: workers have access to social media.
● Other opportunities then internet:
○ New working practises: working from home.
○ Increased productivity: robots (conditions, motivation, hours)
○ Quicker product development time: CAD/CAM
○ New products and new markets: invention and communication
● Other threats then internet
○ Not always reliable/secure: computer failure/hacked files
○ Shorter product life cycles: obsolete and therefore need upgrade.
○ Might be costly: short life hence more money for new products.
○ Job losses: Technology takes jobs.

● Factors to consider when adopting technologies

○ Costs: purchase, installation, maintenance, replacement & insurance
○ Human relations: impact on change, moral, patterns workforces
○ Recruitments and training
Economical opportunities and threats
● Large scale economic factors affecting a nation as whole.
● Four key macro - economic objectives
● Controlled inflation (1)
○ Inflation: continual rise the general level of prices in an economy, low
○ Sustainable inflation: achieving the other tree macro economic objectives.
○ Causes of inflation
■ Demand-pull inflation: excessive aggregate demand in the economy. Rise In consumption.
More spending means more confidence, hence fuelling inflation.
■ Cost-push inflation: higher cost of production means higher prices.
○ Complicate business planning and decision-making. Non-controlled inflation
○ Threat to the business inflation affects the international competitiveness of a country.
○ Inflation controlled by: limiting demand-pull and cost-push factors
○ Supply side policy improves productive capacity.
● Reduced unemployment (2)
○ Government wants to fix it because it has social cost (high amount of Unemployed)
○ The costs of high unemployment
■ The unemployed themself: stress or depression
■ Families and friends: arguments, separation/divorce
■ Local community: higher crime rates.
■ Opportunity cost: burden on taxpayers and spending on unemployed benefits
■ International competitiveness: lower level gross national output
○ How to tackle unemployment (government)
■ Expansionary fiscal policy: reduce taxes or increase spending.
■ To boost the level of consumption in the economy.
■ Expansionary monetary policy: reduce interest rate.
■ To encourage investment and spending.
■ Protectionist measures: to safeguard domestic Bs and jobs
■ Supply – side policies: aim to increase the output. More permanent effects on the economy.
But longer time.
○ Types of unemployment
 ■ Frictional: Time lag when changing job. Always present.
■ Seasonal: Seasonal changes, like Santa Claus
■ Technological: people losing jobs because of labor saving.
■ Regional: different rates in different areas of country.
■ Structural: demand of products in an industry falls.
■ Cyclical: lack of aggregate demand in economy.
○ Economic growth (3)
■ Increase in a country's economic activity over time. Measured by the change in total output
of the economy per year = GDP
■ The trade cycle: Boom + recession
■ Boom: economy activity rises: expenditure, investment… low unemployment with high
confidence. More profit=more income.
■ Recession: fall in GDP over half a year. Lower aggregate demand, investment, lower
expenditure, and more unemployment.
■ Small range of products, and sensitive to change.
■ A slump: the bottom of the recession, low cash flow and confidence.
■ Recovery: has experienced a slump, GDP rise again, the cash flow will rise.
■ Coping with a recession:
■ Cost reduction: improve cash flow, light and energy bills.
■ Price reduction: increase sales
■ Non – pricing strategies: special offers to improve sales.
■ Branding: maintain sales, loyal to brand.
■ Outsourcing products overseas: lower cost of production.
■ Improving efficiency in the production process leads to economic growth.
■ This requires an investment in:
■ Capital goods: greater level of investment leads to higher economic growth.
■ Education and training: through training and educating the possible and current
workforce can become more productivity and international competitiveness.
■ Health technology: to ensure workers are healthy and therefore productive.
■ Quality of the factors of production leads to more economic growth
■ Factors that affect changes in labor force:
■ Demography: falling birthrates and an ageing population decrease the available
workforce.
■ Participation rate: less benefit from government
■ Net migration: bigger immigration leads to greater workforce.
■ Barriers to economic growth
■ Lack of infrastructure: basic electricity and structure.
■ Lack of technical knowledge and skilled labor force
■ High foreign debt.
■ A healthy international trade balance (4)
■ An improvement in the balance of payments
■ Record of country’s money inflows and outflows per year
■ Export earnings and import expenditure
■ Government strives to avoid deficit on the balance.
■ Exchange rate: directly affects a business.
■ Appreciation: export prices will be higher, reducing the export
competition.
■ Depreciation: domestic firms will suffer from higher prices for raw
material.
■ International trade barriers: to protect the domestic Business.
■ Protectionism: government policy to protect.
Environmental opportunities and threats
● The negative impacts on the natural environment.
● The external costs of Business activity can be injured by the society, social attitude.
● Reputation and image has become increasingly important to business activity.
● Depends on workforce, aims, and objectives of the business.
 ● Weather and seasonal changes present opportunities and threats
○ Suffer from extreme weather
● Health scares and epidemics are threats to business activities.
Political opportunities and threats
● Free market: stimulate healthy competition and interest from foreign investors
● Interventionist: legalization and policies to control the B activity and influence the level of economic growth.
● Fiscal policy
○ Taxation and government expenditure to influence the economy.
○ Direct and indirect
■ Direct taxation: straight from income, wealth or profit of individuals
■ Indirect taxation: personal or commercial expenditure like sales taxes
○ Progressive, Regressive and Proportional
■ P: proportion of tax increases with income. Charged from ability to pay
■ R: Higher income less tax. Same amount on different income.
■ Pr: The percentage of taxes the same no matter what income.
○ Tax money goes to: security, transport, law and order…
○ Increase in government expenditure could give more economic activity.
○ Deflationary fiscal policy: high rate of economic growth and inflation à slowed down by higher taxes
and reduces expenditure
○ Expansionary fiscal policy: boost the economy, less taxes and more expenditure by the
government.
● Monetary policy
○ Control the amount of spending and investment
○ Altering interest rates to affect money supply and exchange rates.
○ Overheating: growing to fast, raise the interest rate. To handle inflation
○ Discretional income being reduced hence, cut in spending, thus a threat to businesses
○ Reasons for varying RATES of interest
■ Risk: greater risk = the higher interest rates
■ Administration costs: higher A costs = higher interest rates
■ Time: longer period of loan = higher real interest (compensate Opp. Cost)
■ Expectations: high expectations = higher interest rates (slow down)
○ Positive correlation between a country’s interest rate and exchange rate
■ Increase in interest rate leads to demand of currency since foreign investors are attracted
by better return on their savings. The price of the currency in higher. Export prices higher
(reduce the demand of export), hence damaging for domestic business in the long run.
○ NB: Some argue that government control business activity may be counterproductive
■ Rules and regulations restrict business activity and discourage foreign investment in the
economy.
■ High taxes or interest rates create limited development, Profit max and invention.
■ Formalities create administrative burden and less finance to other things.
Legal opportunities and threats
● Rules, regulations and laws to ensure that the general public is protected from the negative aspects of
business activity. PS: also the interest of businesses
● Common legislation affecting businesses
○ Consumer protection: illegal to provide false/misleading description (P/S)
○ Employee protection: interest and safety of workers
○ Competition: anti competitive practices, to protect small companies
■ Opportunity: copyright, trademark and patent à legal protection
○ Social and environmental: consumption of demerit goods à social cost.
Ethical opportunities and threats
● Ethical firm have social responsibility to their stakeholders.
● Threats to business activates compliance cost and less profitable options
● Benefits from acting ethical:
○ Good quality workers: from giving them benefits
○ New customers: people are concerned about the environment
○ Good publicity and public relations: use behavior to propel the Business.
 ○ Social audits: reports on social and ethical behavior
The difference and the relationship between PEST and SWOT
● P= all factors in the external business environment, S= a narrower focus
● P helpful for producing S, P identify the Opportunities and threats in S
● P for larger and more complex issues
● P does not directly identify the internal factors.
● Similarity: since similar factors appear in both.

BM 1.6 Notes - Growth and Evolution

Economics and diseconomies of scale
● Lower average cost of production as the firm operates on a larger scale due to an improvement in
productive efficiency.
● The average cost is the cost per unit output.
Formulas:
● Average costs = Total Costs / Quantity
● Average fixed costs = total fixed cost / Quantity
● Average variable costs = total variable costs / Quantity

Internal economics of scale

● Technical economics : large firms can use sophisticated machinery to mass-produce their projects.
● Financial economics : borrow more money because there are seen as less risky projects for the
bank/lender.
● Managerial economics: specialization can lead to the business being more efficient and synergy
● Specialisation economics : division of labour
● Marketing economics : selling in bulk and global marketing economics
● Monophony economics : strong buying power
● Commercial economics : buying resources in bulk
● Risk-bearing economics : Conglomerates

External Economies of scale

● Technological process : increases the productivity in the industry
● Improved communication and transportation : helps to ensure prompt deliveries.
● Skilled labour : people are more educated
● Regional specialization : trustworthy reputation

Internal diseconomies of scale

Diseconomies of scale are the result of higher unit costs as a fir continues to increase in size, so average costs
begin to rise. Also known as the tipping point for the economics of scale.
There are several examples of diseconomies of scale:

● Managerial problems
● Lack of control and coordination leads to slower decision making
● Poor working relationships
● Disadvantages of specialisation
● Paperwork – bureaucracy
● Complacence can lead to one large and dominant player in the market

External diseconomies of scale

● Many businesses in one area à increasing market rents à fixed costs increase.
● Traffic congestion, delayed deliveries, transportation costs
● Higher wages, because workers can act more demanding because of the span of options they have.

Dealing with diseconomies of scale

● Reduce level of output
 ● Remove productive ineffectiveness

Method depends on workers are slacking: outsourcing, performance related pay or motivational strategies.

How to measure the size of a market

● Market share: size compared to industry
● Total revenue: the annual sales turnover for a business over time
● Size of workforce: number of employees
● Capital employed: amount invested in the business
● Market value: the balance sheet valuation of business.

The size of a business can be measured compared to competitors in the same industry.
● Large Businesses benefit from economies of scope: it's cheaper to produce a range of related products,
foundation to diversify into other activities

Advantages of being a large company.

● Brand reorganisation: familiarity with the brand allows large businesses to sell to a wider market.
● Brand reputation: more trusted because of their image and reputation
● Added convenience: wide rage of services
● Greater choice: lower prices can give a more loyal customer base.

Potential advantages of being a small company.

● Cost control: it can be easier to monitor costs, though unit costs can be higher
● Financial risk: Less financial risk
● Government aid: grants and subsidies
● Local monopoly power: only firm in that location
● Personalized service: more time to customers
● Flexibility: more adaptive to change
● Small market size: not attractive to the large Bs: no competition

The optimal size of a business depends on several factors

● o The internal structure, costs and size of market, aims and objectives
● o If it goes beyond the size it can possibly can lead to diseconomies of scale

Reasons why it’s not optimal: Lack of resources, finance productive capacity or insufficient demand.

Internal (organic) growth

● Grows internally using own resources
● Changing price : more customers when lower prices NB: price elasticity of demand. PS: raise in price also
an option (few substitutes)
● Promotion : more reminders and information
● Better products : market research, invention and new design.
● Placement : more available more buyers.
● Credit payment terms : “buy now pay later” can lead to more customers
● Investment : new location, new customers
● Training and development: more competent and motivated employees

Advantages of organic growth

● Control and coordination: easier to grow internally
● Relatively inexpensive: source in profit,
● Maintains corporate culture: no cultural crash

Disadvantages of organic growth

● Diseconomies of scale: higher unit costs
● Overtrading: beyond it means, inefficiency
 ● Need to restructure: time, effort and money
● Dilution of control and ownership: more conflicts.

External growth
This comes in the form of alliances or mergers or the takeover of other Businesses. Merges and acquisitions are
sometimes known as amalgamations or integrations of firms.

Advantages of external growth

● Faster way of growing
● Quick way of reducing competition
● Greater market share
● Sharing of ideas
● Share of risk

Disadvantages of external growth : there are huge costs of external growth compared to internal growth.
External growth methods
1) Mergers and acquisitions
● Merger takes place when two companies agree to form one.
● Takeover, acquisition: by buying a controlling interest in another firm.

Reasons why some businesses become takeover targets

● Growth potential, but lack of funds for internal growth
● Small rival with large growth potential
● Recognized corporate names, facing financial critics.
● Vulnerable à drop in profit and their share price
● The purchaser might also be sought by the company.

The four types of integration that can occur in merger or takeover

1) Horizontal: amalgamation of firms in the same industry. Larger market share for the amalgamated Business.
concentration ratio. Larger market share, thus more market power
2) Vertical: different stages of production (Primary – Secondary –Tertiary) forward: amalgamation toward the end
of the stage. Backwards: opposite
3) Lateral integration: similar operations, but no direct competition
4) Conglomerate: distinct or diversified markets.

Advantages of Mergers and acquisitions

● Greater market share: more market power and larger customer base.
● Economics of scale: lower unit costs.
● Synergy: access to each other’s resources to improve areas of the business activity.
● Survival: protect the survival of a business.
● Diversification: allows firm to diversify their product mix.

Disadvantages of Mergers and acquisitions

● Loss of control: some degree of control as the new board of directors will need to be reconstructed.
● Culture crash: people and processes need to adapt their cultures.
● Redundancies: job losses, because there is no need for two people per job assignment.
● Conflicts: potential disagreements within the contrasting workforce.
● Diseconomies of scale: large firms might reach tipping point for economics of scale.
● Regulatory problems: government don’t like monopoly within an industry.

Joint ventures
A joint venture occurs when two or more businesses decide to split the cost, risks, control and rewards of a
business project. Businesses in a joint venture can enjoy some of the benefits from mergers and acquisitions.
Higher market share without having to lose identity.

Advantages of joint ventures

● Synergy: pooling of experiences, talents and resources. Benefits for both firms.
● Spreading costs and risk: reduce the financial burden on an organization.
● Entry to foreign markets: agreements with overseas firms
● Relatively cheap: compared to the costs of a hostile takeover.
● Competitive advantages: less competition and together they are a stronger force against their rivals.
● Exploitation of local knowledge: via international JVs companies can take advantage of each other’s local
knowledge and reputation.
● High success rates: friendly and receptive. à Positive energy

Disadvantages of joint ventures

● Relies on goodwill and resources of partners.
● Dilution of the brand
● Organizational cultural crash.

2) Strategic alliances
A strategic alliance is similar to a joint venture, except that they share costs of product development, operation
and marketing. Forming a strategic alliance means that the businesses remain independent organizations.

There are four key stages to the formation of a strategic alliance:

1. Feasibility study: finding and making objectives of an strategic alliance
2. Partnership assessment: analyse the potential of different partners
3. Contract negotiation: negotiations take place to determine each member’s contributions and rewards
4. Implementations: operations with commitment both part
The purpose of forming a strategic alliance is the following: synergy from the strengths of the members and the
pooling of their resources, experience, and financial resources

There are also other advantages of strategic alliances

● Greater credibility and brand awareness
● Operating on a larger scale hence benefit from economies of scale.
● Customers get a wider channel of distribution

Franchising
Is from of business ownership whereby a person or business licence or trade using another firm's name. Logos
brands or trademarks. The purchaser pays fee to the owner. Plus a royalty payment

Advantages for the franchisor

● Rapid growth without huge risk
● National and international presence.
● Growth without running cost.
● Receives payments from the borrower
● Increased local knowledge

Benefits for the franchisee

● Less risk, already succeeded
● Lower start up costs because market research is done and the development is already there.
● The franchisor has the best interest in success for the franchisee and therefore they can benefit from
added services
● Large scale of advertising leads to reduced costs in marketing

Disadvantages for franchisor

● Difficult to control the activity, the franchisee might not meet qualities and standards
 ● Risk by letting other use their names, because it might end up harming the reputation of the company.
● It takes more time (not as quick as M&A’s)
Disadvantages for franchisee
● Expensive, money might never come back.
● Significant percentage of profit to the franchisor.
● No new ideas or inventions.

The role and impact of globalization

● Globalization is the globalization of the world’s economies in terms of economies, sociology and politics.
● For Bus: Firms produce and sell the same products in different countries
● Economics of scale: export to new countries and gain a bigger customer base.
● Growing presence of multinational corporations and the power of trading unions

The role and impact of globalization on business activity

● Globalization presents opportunities for growth and evolution of businesses as well as threats to their
operations. Examples include the following:
● Globalization considerably increases the level of competition.
● Meeting customer's expectations and needs become increasingly more demanding.
● Increased customer base
● Building a global presents can allow businesses to benefit from economies of scale.
● Greater choice of location
● External growth opportunities, globalization can allow businesses to expand by Mergers, acquisitions and
JV’s.
● Increased sources of finance
However the multinational companies still need to adapt their products and services to the countries they operate
in. Culture, language and unique characteristics.

The growth of multinational corporations

· A multinational company is an organization that operates in more than two countries. MNC has their head office
based in the home country.
· Transnational Corporation has regional head offices rather than a single international base.
· There are several reasons why companies strive to become multinational companies:
o Increased customer base: increase their sales turnover by expanding internationally.
o Economics of scale: by expanding internationally it's possible to benefit from economies of scale.
o Cheaper production costs: inexpensive labour.
o Avoid protectionist policies: by expanding internationally.
o Cheaper production costs: inexpensive labour.
o Spread risk: over several countries
o Globalization of markets: High-speed transport and we can trade even more efficiently.
● Potential problems of expanding overseas include : Lack of local knowledge, Storage, distribution and
transportation cost, External factors, Political and economic conditions and Infrastructure
The impacts of multinationals on the host countries
· A host country is any nation that allows a multinational corporation to set up in its country.
● Advantages of multinationals to the host countries
o Create jobs: the arrival of MNCs allows more local people to get jobs.
o Boost gross domestic products: value of country’s annual output
§ Creating consumption expenditure
§ Boosting export earnings
o Introducing new technology in production process Technology transfer
o Competition increases, hence an benefit for domestic customers
● Disadvantages of multinationals to the host countries
o Bad social responsibility in the poor countries
o The host country not able to control the MNC
o Unemployment in the host countries, because multinationals are a threat to domestic companies
o Fierce competition, MNC have very competitive prices so local businesses need to reduce price
Growth and evolution and the CUEGIS concept
· Growth is a strategic aim for many businesses. In an ever-globalized business world, the driving force behind
growth and evolution is not simply profit, but sustainable competitiveness.
· The concepts change, culture and globalization are central to any business strategy that involves growth in
overseas markets.
· Business practises has to be suitable for the local laws and regulations.
● Various business strategies to achieve growth (FUND)
o First – mover advantage
o Unique selling point
o Branding
o Economics of scale
o Diversification
· Growth strategies might not always be successful due to resistance to change and cultural clashes
· In these cases, a demerger might take place. This happens when a business sells off a significant part of its
business.
· Firms might strategically choose to demerge in order to:
o Sell unprofitable sections of the business
o Avoid diseconomies of scale
o Raise cash to sustainable operations in other parts of the business
o Have a clearer focus, by decreasing the range of business operations.
o Reductions in business size might happen on a cyclical basis.
· An alternative strategy to a complete merger or takeover of a target business is to buy of its brand. This is known
as brand acquisition.

BM 1.7 Notes - Organizational planning tools

Fishbone model
The fishbone model is a graphical representation of the most likely causes and effects of an important decision. It
helps us identify the root causes of a problem or issue, so that they can be targeted for improvement.
The problem is on the right side and the 4 M’s are the roots (on the left)
● Management: unsuitable management style and miscommunications
● Manpower: demonstrative employees
● Machinery: technological failures
● Materials: poor quality and delayed deliveries

A successful fishbone diagram follows these steps

● Clarity an agreed problem or issue
● Contributors must be concise and to the point
● Brainstorming on each bone to find the possible causes and place them
● Each branch, identify the root cause
● Consider combining branches that are empty or thin.
● Consider separate huge branches
● Discuss how each circled item affects the problem or issue
● When the root to the problem is found à fins strategies.

Advantages of the fishbone diagram : easy to understand, allows brainstorming in different ways, visual
understanding of the problem
Disadvantages of the fishbone diagram : simplistic for huge problems, it’s used in conjunction with other models.

Decision trees
A decision tree is a diagrammatic representation of the different options when making a decision. It allows
managers to calculate expected value of each option, to find the best
Expected value = multiplying the value of each outcome by it probability and then adding up the results.
Rules used to construct and interpret decision trees
● Left to right
● Decision nodes: squares, used when there is a decision to be made.
● Chance nodes: circles, the different possible outcomes of that decision. “Failure or success”
○ From the chance nodes…
○ To more routes, probability of the different outcomes
● The actual value of each outcome at the end of the branch
● Each unwanted branch is cut off. (by adding to parallel lines)

Advantages of decision trees

● Clear and logical manner
● All potential options can be viewed in one map
● Risks can be considered

Disadvantages of decision trees

● The probability is estimated and might contain errors.
● Only quantitative data is used
● The assigning of probabilities is rather subjective, so it depends on the management
● Time lags (in the information used)

Force field analysis

● Force field analysis evaluates the forces for and against a decision. The forces are weighted according to
the importance and size. Controlling the forces
● Driving forces push for changes
● Restraining forces act against change

There are several stages involved in a force field analysis:

● List the driving and restraining forces
● Allocate a weight to each force (1 to 5)
● Draw a FFA diagram, including the weights.
● Total the scores for the forces.

There are two main weaknesses of this organizational planning tool:

● Weights attached to the forces might be done subjectively rather than based on facts or evidence.
● Not all relevant forces might be considered.

Gantt charts
A Gantt chart is a visual representation of all the tasks in a particular project plotted against the timescale. It’s a
management tool used to plan a schedule business projects, allowing project managers to monitor progress.
The rules used to construct and interpret Gantt charts are:
● Its presented as a bar chart showing all the scheduled tasks over a given time scale.
● Timescale on horizontal axis.
● Each activity is shown by a separate horizontal rectangular bar, with the length representing the length of
the activity.
● Each horizontal bar shows the start and finish dates.
● Both critical and noncritical activities are shown.
● Predecessor – successor relationships are shown.
The ultimate purpose of producing a Gantt chart is to identity the minimum amount of time needed to complete a
project. This requires the various tasks of a project to be planned in a logical order so that the different processes
are completed with minimal delay and minimum efficiency.
The process involves:
 ● Identifying all the activities required to complete the project.
● Breaking down the project into separate and clearly identifiable tasks.
● Determining how long each of these tasks will take.
● Identifying activities that cannot start until the completion of other tasks.
● Determining which tasks can take place concurrently
● Placing all tasks in the right sequence on the Gantt chart.

BM 2.1 Notes - Functions and Evolution of HR

Human resource planning
Human resource management is the management function of using and developing people within a business to
meet its organizational objectives.
This entails roles such as:
● Human resource planning.
● The recruitment, selection and induction of new employees.
● Training and development of staff.
● Performance management and staff appraisals.
● Reviewing pay and remuneration packages.
● Disciplinary and grievance procedures.
● Looking after the welfare of employees.
People are important because they add value to the firm's outputs. This is achieved by increasing productivity,
improving quality, innovation and better customer service.
Human resource planning is referred to, as the management process of anticipating and meeting an
organization's current and future staffing needs.
Workforce planning is an ongoing process for most businesses:
● Short-term workforce planning deals with existing and upcoming demands of an organization.
● Long-term workforce planning looks at the human resources needs of the business in the foreseeable
future.
Workforce planning can be achieved by looking at:
● Historical data and trends - such as change in the size of the workforce over the past few years.
● Sales and income levels - higher levels of income and spending in the economy will lead to more jobs being
created.
● Labour turnover rates - measures the number of employees who leave a firm as a percentage of its
workforce per year.
● The flexibility and workload of staff - flexible skilled workforce vs. specialised.
● Demographic changes - change in age and gender are examples.
Workforce planning requires a lot of time and money.
Despite attempts to achieve effective workforce planning, external influences affect the accuracy of the forecast.
This is because businesses are constantly exposed to the forces of change.
Labour turnover
Labour turnover measures the percentage of the workforce that leaves the organization in a given time period,
usually for a year.

The main reasons why people leave their jobs can be summed up by the acronym CLAMPS:
 ● Challenge, Location, Advancement, Money, Pride, (job) Security.
A low labour turnover suggests that managers have recruited the right people for the job and that the existing
employees are content and motivated at work.
By contrast, a high labour turnover rates suggests that staff are incompetent or lack job satisfaction. Could also
accrue from better job opportunities and remuneration from other employers.
The opposite of labour turnover is staff retention.
The benefit of high staff retention is the opposite of the drawbacks of high staff turnover.
Firms with high staff retention tend to be those that regularly offer training for both personal and professional
development.
Internal and external factors that influence human resources planning
● Internal and external factors both influence human resource planning
Demographic change
● Demographic changes in the workforce affect the supply of HR in a country.
● Businesses need to understand these changes to that they can respond appropriately.
● Demographic changes can be caused by changes in various factors:
○ The net birth rate - countries with a high net birth rate will in the long term, have larger supply of HR.
○ The net migration rate - if the net migration figure is positive, the supply of HR will increase.
○ The retirement age - if retirement age is increased, increased the size of the workforce.
○ Women entering and returning the workforce - this boost the supply of HR.
○ Increased longevity, people on average are living longer, and a decreasing birth rate. This is an
ageing population. This has the following effect:
■ Increased dependent population - less people will be working in proportion to those who are
retiring.
○ Reduced labour mobility - labour immobility reduces the flexibility and international
competitiveness of a country's workforce.
○ Changes in consumption patterns - with more people going to university, the average age of
people entering the workforce that has also risen.
Change in labour mobility
● The mobility of labour is the extent to which labour can move to different locations (known as geographical
mobility) and the flexibility in changing to different jobs (known as occupational mobility).
● The more mobile workers are, the higher the supply of labour tends to be. Labour can be geographically
mobile, but there are limitations:
○ Friends and family ties tend to be the key constraints for most people's geographical mobility.
○ Relocation costs (moving expenses) such as remortgaging property and consideration of different
house prices.
○ Fear of the unknown means that people might prefer 'home comforts' (familiarity).
● The cost of living in a particular area such as the higher costs of housing and other expenses in cities can
deter people from relocation in these areas, thus reducing the potential supply of labour.
● Language and cultural differences tend to limit international mobility.

The limitations on occupational mobility include:

● Occupational mobility tend to be greater with acquired attributes of a worker such as education,
qualifications, skills, experience and training)
● Younger people tend to be more occupationally mobile as they often change careers.
● Some workers are immobile because they are highly specialised in their area of expertise.
● If employers discriminate against people's age, gender, religion or race then this will also hinder
occupational mobility of workers.
New communications technologies
Advances in communications technologies, such as email, e-commerce and video conferencing and threats to
human resource planning, By contrast, businesses that are capital-intensive might not require as many workers.
Information and Communications Technologies (ICT) in human resource planning can be used to support current
practices in workforce planning and/or to change workforce-planning processes. Examples include:
● Recruitment - Almost all firms use ICT in their recruitment practices.
● Meetings - Businesses with branches or facilities in different locations, including overseas, can reduce
costs of meetings by using video-conferencing technologies (Skype).
 ● Appraisals - Collaborative tools such as G Docs can be used by the line manager and appraises to set
targets and review progress.
● Flexitime and teleworking - Mobile technologies have enabled many more people to work away from the
offices and homes. This can help to cut costs for both the business and the employees. Effective use of
flexitime and teleworking also helps boost labour productivity.
● Online training courses - These courses tend to be cheaper than off-the-job training courses with a
specialist trainer.
Recruitment and selection
The recruitment and selection of employees is vital to the running of a business. Labour is an essential factor of
production needed for the provision of any good or service.
Hiring the right people helps to ensure that businesses can function effectively. As the recruitment and selection
process is likely to be time consuming and rather expensive, managers must ensure the steps in the process of
recruitment are effective.
Before a business recruits new workers, managers usually carry out a job analysis. This involves scrutinising the
different components of a job, such as the routine tasks and responsibilities of the post holders, to determine what
the job entails.
Managers might also want to verify:
● The skills and training required doing the job.
● The qualifications and personal qualities needed to carry out the job.
● The rewards needed to recruit and retain the post holder.
A job description is a document that outlines the details of a particular job. It refers specifically to what the job
entails rather than the type of person required for the job.
A person specification is a document that profiles the ideal candidate, such as the qualifications, skills and
experiences sought by employer. It's also a list of the personal attributes that a successful applicant should have.
HR-managers consider the five "TRAPS" in designing effective job advertisements:
● Truthful: the advertisements should not make exaggerated or misleading claims about the job, the pay or
the organization.
● Relevant: they need to be succulent in order to attract people's attention and interest.
● Accurate: to minimise the number of unsuitable applicants for a job, the person specifications and job
description must be precise.
● Positive: And encouraging and upbeat job advertisement helps to attract people to apply for the job.
● Short: given that advertising space in expensive, only appropriate and necessary information should go in
a job advertisement.
The application process
Applicants of a job usually apply using a combination of three methods:
● Application form: a standardised form produced by the business for selecting appropriate applicants for a
job.
● Curriculum letter: an introductory letter written by the applicant, stating which position is being applied for
and why the applicant should be considered for the job.
● Cover letter: an introductory letter written by the applicant, stating which position is being applied for and
why the applicant should be considered for the job.
Today candidates are more often asked to email their CV or apply using online application form.
The selection process
When the completed application forms and CV's have been received by the business. The HR manager checks
these to identify suitable candidates of the job (a process known as shortlisting).
Comparing the application form and the CV of a candidate against the job description and the personal
specification.
Interviews
Interviews are the most common method of selection. An interview is a two-way dialogue between the interviewer
and the interviewee.
To get the most out of the interview process all other prerequisites must have been carried out effectively.
Applicants get information and employer gets to know the person.
Interviews need to be well planned and conducted professionally.
Interviews can take various forms:
● Video conferencing: use ICT technology to save the cost and time of people having to physically meet.
● Telephone interviews: interviews over the telephone.
 ● Face-to-face: carried out at the business, allowing the manager to meet with the applicants.
● Group interviews: involve a number of candidates being interviewed simultaneously.
The most effective interviews tend to follow a structured approach, with the same core questions being asked of
each candidate.
If the same fundamental questions are asked to all candidates, interview bias can be reduced.
The purpose is to find and appoint the best candidate for the vacant job.
There are two categories of interview questions:
● Behaviour-based questions: are used to assess a candidate's behavioural pattern and initiative.
● Situational-based questions: are used to assess an applicant's judgemental ability.
One drawback of interviews is that they are very time-consuming. And a person's actual ability is not tested.
(Unreliable)

Testing
Although testing is time consuming, it increases the chances of hiring the best candidate for the job.
This reduces costs incurred in the long run if the wrong applicant is hired.
The main types of testing used in recruitment are:
● Psychometric tests: assesses a candidate's personality to gauge the attitude of potential recruits and their
level of motivation.
● Aptitude tests: examine the ability and skill of potential employees.
● Intelligence tests: calculate the mental ability of an applicant.
● Trade tests: are used to examine a candidate's skills in a specific profession.
References
References are written statements about an applicant from an independent source, such as previous employer.
These are used to assess the person's ability for the new job.
The contract of employment
Once a suitable candidate has been appointed (offered the job), the new recruit is entitled by law (in most
countries) to receive either a signed contract of employment or a written statement of the terms and conditions of
their employment.
Induction
The final stage in the recruitment process is to provide induction for new recruits to help them settle into their new
roles.
Recruitment can be categorized as internal or external.
● Internal recruitment involves hiring people who already work for the business to fill a vacant position.
Advantages of internal recruitment
● Cost effective: usually cheaper and quicker.
● Less down time: internal people are already familiar with the culture and how the business operates.
● Less risk: employing a new worker from outside the organization could be risky. (Skills and abilities
unknown)
● Motivational: internal recruitment for promotional posts can act as a form of motivation

Disadvantages of internal recruitment

● Fewer applicants: this limits the number of potential applicants. (External could be better and have higher
quality)
● "Dead wood": without external recruits, it might be difficult to get new ideas to the business.
● Time-consuming: redeploying, relocating or promoting an internal candidate usually leads to another
unfilled vacancy in the organization
● Internal politics: There could be resentment and conflict amongst fellow workers who were unsuccessful
for their internal post.
External recruitment is the process of hiring people from outside the business.
The various methods of external recruitment include:
● Newspaper advertising: a common method as it has a wide audience. Difficult to target right people.
● Specialist trade publications: used to better target the right audience.
● Internet advertising: more businesses are using the Internet to advertise their jobs.
● Commercial employment agencies: these agents advertise and interview suitable applicants for a job and
make recommendations for selection to the hiring firm.
● Job centres: non-profit organizations funded by the government to help people find employment.
 ● Headhunting: the poaching of a person is sought for their experience, expertise and knowledge.
● University visits: businesses go to specific universities to advertise their jobs.
● Employee referrals: personal recommendations made by a current employee who knows people with
specific skills and knowledge.
Advantages of external recruitment
● "New blood": people hired from outside the organization can bring in new ideas and ways of thinking.
● Wider range of experience: similarly, external recruits might be more qualified then the internal workforce.
● Larger pool of applicants: businesses will have a wider range and larger number of people applying for the
job.

Disadvantages of external recruitment

● Greater degree of uncertainty: When hiring external recruits, managers take risk, as they do not really
know the candidates or their ability to do the job effectively.
● Time-consuming: External recruitments take longer than internal recruitment.
● Expensive: external recruitment can be very expensive.

Training
Training is the process of providing opportunities for workers to acquire employment-related skills and knowledge.
The general objectives of training and development include:
● To enhance the efficiency and effectiveness of staff
● To improve the quality of work (including customer service) by the employees
● To facilitate career and personal development of employees.
● To develop a multi skilled and productive workforce
● To help staff adapt to change (such as technological, organizational, social and legal changes).
The general benefits of training include:
● A better skilled and more flexible workforce leads to organizational targets being met
● Improved competence leads to (having to do things again due to errors the first time round). Hence,
greater efficiency and better productivity help to reduce costs.
● Higher morale as workers progress within the organization. this may help to reduce absenteeism and to
reduce staff turnover, as staff feel valued by employers who have invested in them. Workers also have
improved chances of promotion as they become more skilled
By having a good reputation for training and developing staff, businesses might find it easier to attract good
quality workers.
As staff become more confident and competent in their roles, the quality of output and level of customer's service
are likely to increase.
Training helps employees adjust better to change. By updating their skills and being multi skilled, workers are
better able to cope with organizational change.
The largest drawback of providing training opportunities is the financial costs.
Another limitation is that effective training takes time to plan and this often consumes a large amount of a
manager's valuable time.
Furthermore, there is no guarantee that employees stay at the business after being unskilled.
Ultimately, the benefits of training mean that the workforce becomes more flexible, motivated and productive, if
the benefits of training are greater than the costs; it is deemed to be financially justified.
There are four broad types of training: on the job (including induction and mentoring), off the job, cognitive and
behavioural.
On-the-job Training
On the job training refers to training carried out whilst at the workplace.

Induction training is type of on-the-job training aimed at introducing new employees.

The purpose of induction training is to help new recruits to settle in quicker.
It can help to avoid costly mistakes being made by new employees who are not aware of the procedures or code
of behaviour required to carry out their duties.
It can also help new recruits to integrate into the corporate culture of the organization. Induction training might
require a new recruit to:
● Meet key personnel; such as the employee's line manager and members of the department.
● Tour the premises including the recruit's main areas of work.
 ● Learn about the new job role and other relevant duties and specific procedures.
● Look at company policies and practises e.g. rest breaks, health and safety policies, and fire or emergency
evacuation procedures.
Mentoring is another type of on-the-job training involving a partnership between two people - the mentor and the
mentee.
Advantages of On-the job Training
Can be relatively cheap as the firm uses in-house specialists to facilitate the training.
Relevant as the training is targeted at issues directly related to the firm's needs.
Fewer disruptions to daily operations as the trainee is still "at work" rather than being trained overseas, for
example.
Can help to establish relationships at work as team working is involved.
The location is convenient for workers and trainers, rather than them having to go off-site.

Disadvantages of On-the job Training

● Trainees may pick up bad working practises from the trainer.
● Internal trainers may lack the most up-to-date training experience and skills.
● Trainers will not be able to conduct their own work whilst facilitating the training; thus on the job training
can prove to be expensive.
● On the job training is often rather piecemeal and incomplete due to lack of resources.
● Productivity is initially low as workers undergo the process of learning new skills.
Advantages and disadvantages of induction training
● Establishes clear expectations and good working habits from the start.
● Helps new recruits to understand the corporate culture of the organization.
● By settling in more quickly, new recruits can contribute to the organization more promptly.
● Morale is boosted as a new staff feel welcome and are more coefficient and competent in their jobs.
Disadvantages and disadvantages of induction training
● Planning, delivering and overseeing an induction programme can be very time consuming.
● Key staff needs to be "freed" from their other duties, as they are involved in providing introduction.
● Information overload is counter-productive for new staffs that have to absorb new information.
● The program might run longer than is necessary for a certain staff member.
Advantages and disadvantages of mentoring training
● Synergy is created as the mentor shares personal experiences, hence expanding staff development.
● Mentoring can be informal, thus benefiting the organization indirectly.
● There is a qualitative difference between a mentor-mentee relationship and manager-subordinate
relationship.
● Effective mentoring creates a safe environment for mentees to reflect and discuss issues openly and
honestly.
Disadvantages and disadvantages of mentoring training
● Planning, delivering and overseeing and monitoring programme can be very time consuming.
● Mismatched pairing of mentor and mentee can cause major problems.
● Effective monitoring requires long-term commitment from both mentor and mentee. Negatively affect the
workload.
● Using internal employees as mentors might requires training, thus added to the cost of the business.
Off-the-job Training
● Off-the-job training refers to training carried out of sight.
● Training might require external specialist and equipment.
● It's common that key personnel are chosen to attend these training courses and pass the knowledge on.
Advantages and disadvantages of off-the-job training
● Experts, who might not exist or be available internally, are used to provide the training.
● A wider range of training can be provided.
● There are no distractions or disruptions from colleagues and customers as the training is conducted off-
site.
● Networking can take place, whereby employees get to meet other people who form the basis of business
contacts.
Disadvantages and disadvantages of off-the-job training
● There is potential loss of output whilst workers attend the off-site training course.
 ● Hiring specialist's trainers and the venue can be very expensive. There may also be need to reimburse staff
for transportation and accommodation costs.
● It is debatable whether all the skills and knowledge learnt are relevant and therefore transferable to the
business.
● Finding the time for staff to cascade the information and knowledge from the off-site training course can
be difficult.
Cognitive Training
Cognitive training is about training and developing mental skills to improve work performance.
It is based on the notion that the ability to learn is fundamental to success in the workplace. Hence, cognitive
training includes learning activities designed to help improve memory, attention, listening skills, logic and
reasoning, visual and auditory processing, self-control, time management and problem solving
Limitations to Cognitive training:
● Many cognitive training courses do not cater for the needs of trainees who have different needs or goals.
● Development relevant and applicable cognitive training can also be expensive
Behaviour Training
Behaviour training deals with identifying functional issues that could improve performance in the workplace by
developing behaviour change in the workforce.
Training is meaningless unless a desirable change in behaviour takes place. Behaviour training enables
participants to move towards this desired change.
Examples of behavioural training include:
● Team building: developing team cohesiveness to improve productivity.
● Ethical business practise: rising awareness of business ethics and codes of practise.
● Emotional intelligence: identifying, assessing and controlling the emotions of individuals.
● Motivation training: motivating individuals, teams and the workforce.
● Conflict resolution: managing conflict in the workforce.
● Stress management: identifying and handling stress anger.
● Anger management: understanding and controlling anger.
● Leadership skills: understanding and leading others in the organization.
● Business etiquette: organizational, regional, national and international cultural norms.

Human behaviour is however a product of innate human nature and of individual experience and environment.
Nevertheless, supports of behavioural training believe that such training provides people with the necessary skills.
Appraisal
An appraisal is the formal assessment of an employee's performance in fulfilling his/her job based on the tasks
and responsibilities set out in their job description.

The main reasons for appraisals are to:

● Assess and record an employee's performance in line with his/her job description and targets.
● Assist staff in reflecting on their performance at work.
● Provide an opportunity to praise staff for their good work.
● Identify any barriers hindering the performance of an employee.
● Identify appropriate training and development needs of the appraise.
● Set new targets and goals for continuous improvements.
● Aid professional development, helping employees to plan their careers.
● Aid management is assessing the suitability of individuals for a pay rise or promotion.

Advantages of appraisal
They are used to set targets, leading to changes for personal and professional development.
Appraisal allows managers to objectively praise staff on their strength and for their contributions in the workplace.
Appraisals can be a useful method of getting valuable feedback from the staff.
Managers often aggregate the findings of appraisals to identify common strengths and areas in need of
improvement. Thus training and development needs can be better planned.
Appraisals can be used as part of job evaluation to work out levels of pay. Looking at the different tasks,
responsibilities, skills, qualifications and challenges that a job entails can do this. The appraisal process can then
allow a business to objectively reward more demanding jobs with higher rates of pay.
Disadvantages of appraisal
Appraisals are time consuming and can be a costly exercise.
Confidential feedback must be given, and follow up action requires funding and monitoring; otherwise the process
is meaningless.
Comments from the appraiser, especially about areas or weakness, may offend staff.
Many appraisers lack the skills, experience and confidence to carry out appraisals effectively. This diminishes the
credibility of the process and the findings.
o Employees can experience unnecessary anxiety and stress if appraisals are linked to pay. It can also be a
daunting experience for both the employee and the appraiser, especially with upward appraisals (where a worker
appraises his or her line manager).
Types of Appraisal
Formative appraisal is a planned (formative) and ongoing process in which employees to inform them about what
to do to improve their work practices use appraisal evidence.
Goals of formative appraisal:
● Monitor the performance of employees' learning
● Help employees to identify their strengths and weaknesses (areas that need developing)
● Help managers to recognise areas where staff are struggling.
Summative appraisal is a written description of an employee's performance at work, summarising personal
performance and achievements during the year. The summative appraisal usually has recommendations for
improvement.
● 360-degree feedback involves collecting evidence about the appraiser's job performance from peers,
subordinates, line managers or other parties who have direct contact with the employee.
● Self-appraisal involves employees appraising themselves based on predetermined criteria. Appraises are
expected to be honest about their strengths and weaknesses. They also need to set realistic targets for
improvement.
Whichever type of appraisal is used, a performance appraisal usually includes the following steps:
● Staff records and reports are used to evaluate the performance of an employee over the past year.
● A formal and structured appraisal meeting is conducted to allow the appraisee to reflect on personal
performance.
● Appraiser completes a written report of the appraisal.
● Both appraiser and the appraisee sign the final written report
● At times, there might also be countersignature from a more senior manager.
If an appraisee has an overall rating that is below 'Moderate' then the following actions can be taken:
● Issue an advisory letter to the employee (warning letter)
● Counselling the appraisee and giving advice on shortcomings in the appraisee's job.
● Dialogue concerning the consequences if there is no improvement in job performance.
● Closely monitor the performance of the appraisee; perhaps by calling for quarterly reports or more
frequent updates.
● If no improvements are made within the agreed time period, action is taken to dismiss the employee.
Dismissal and Redundancies
Dismissal means the termination of a worker's employment due to incompetence or a breach of contract.
Dismissal can usually be seen as being fair in the following situations:
Incompetence: a lack of ability usefulness or effectiveness required to carry out the job.
Misconduct: unacceptable behaviour such as being constantly late for work.
Gross misconduct: major misdemeanours.
Legal requirements: if an employee does not have the necessary skills or requirements for their job.
In most countries, dismissing a worker is usually a three-step process:
● Initial verbal warning about misconduct or unacceptable
● Official written warning
● Dismissal
Evidence must be gathered and presented at all stages of the dismissal process.
However, not all cases of dismissal are justified. Unfair dismissal occurs when an employee is dismissed without a
valid or legal reason.
Two main reasons: discrimination and constructive dismissal.
Redundancies occur when a business can no longer afford to employ the worker or when the job ceases to exist.
When a business has to retrench workers, there are two main options:
 ● Voluntary redundancies: take place when the employer asks for volunteers to leave. They are offered a
redundancy package for leaving.
● Compulsory redundancies: occur when the employer has to choose which workers to make redundant.
There are two main methods to do this:
○ LIFO (last-in-first-out): newest recruits leave.
○ Retention by merit: the least productive workers have to leave.
An other option is to deploy staff. This means transferring employees from a department or branch that no longer
requires their services to their areas of the business.
Changing employment patterns and practises
In modern societies, there have been a number of observable changes in employment patterns and work
practises, such as the increase in the number of people working flexitime.
Employment sector
There are four employment sectors in an economy: Primary, secondary tertiary and quaternary.
In developed economies, the tertiary sector accounts for the largest proportion of employment
Aging population
The net birth rate in many developed economies has been falling. Hence the size of the future workforce
decreases. However people live longer, so the average working age will increase.
Shortage if workforce, this affect workforce planning, recruitment and training.
More flexibility, lower criteria.
Flexible work structures
Reducing the number of the core staff and employing more part-time workers also helps businesses to reduce
their labour costs.
Greater flexibility might mean that a larger number of people work from home.
Flexible working patterns have many implications for employers and employees, including:
● Organizational restructuring: there is less likely to be a traditional organizational structure as firms employ
various combinations of core, part-time and peripheral staff.
● Flexitime: consultants, contractors and part-time employees are more likely to be allowed to work the
hours that suit their individual needs.
● Changing recruitment practises: Firms shift to hiring more flexible workers, hence they are more likely to
employ more part-time and temporary staff.
● Retention of core staff: Key employees of an organization will need to be retained for their outstanding
skills and expertise.
● Training: Firms will be less likely to invest in training, except for their core staff. However there will be
pressure for staff to constantly update their skills.
Likewise, workers will have to be more flexible. There is no such thing as a "job for life" and people have to prepare
to move between occupations and industries to maintain employment.
Teleworking
Teleworking, a term coined by management consultant Jack Nilles in 1973, refers to working away from the office
by using electronic forms of communication.
The trend has been partly due to increasing problems commuting in central business districts by manly due to the
technological advances in ICT.
Teleworkers can be mobile, such as salespeople who spend most of their time commuting and visiting clients.
● Homeworking is a category of teleworking whereby people work from their own home.
·With advances in technology which allows employees to operate in almost any location.
Advantages and disadvantages of teleworking and homeworking
Advantages Disadvantages
Employee · Job opportunities · There is a huge dependents o
· Suitable for those who have n the use of ICT software and
to care for family. hardware.
· Flexible working hours. · Teleworkers often exceed
· Benefits of not having to working time directives.
commute · Possibly suffer from social
· Autonomy in decision- isolation (boredom)
making · Often less job security and
· Income tax allowances for less trade union representation
using personal property for for teleworkers.
conducting business activity. · Likely to face distractions
· Reduction in costs of ICT working at home.
system means more people · Tend to suffer from a lack of
can afford to work from training opportunities.
home.

Employers · Reduced office overheads, · Set up costs, ICT equipment

as less prime office location is can be very expensive.
needed. · Requires tight control in
· Flexible and extended recruitment, as not everyone
working hours can be offered has the right profile.
to customers. · Management, monitoring and
· Flexible working practises control are more difficult as
enable the firm to cater for staff are off-site.
peak and off-peak trades. · Technological breakdowns
· Continuity of service from can cause major disruptions to
those with young children or the business activity.
other dependents. · Teleworking is not always
· Lower absenteeism possible.
(research)
· Flexible to deal with working
time directives.

Portfolio working
A portfolio worker is a person employed in a number of different jobs, carried out simultaneously, usually on a part-
time or temporary basis.
The portfolio worker charges a fee for each unit of work carried out.
Portfolio working increases the flexibility and mobility of an organization's human resources.
An advantage for the portfolio worker is that the variety of experiences can contribute to a more fulfilling career.
The key drawback is the lack of job security.
Part -time employment
In many countries an increasing number of people work part time.
More females and students working part-time and there are benefits of labour flexibility.
Key advantage to a business hiring more part-time staff is that they are cheaper to employ.
● Part-timers are generally entitled to lower remuneration compared to full-timers.
● Part-timers are easier to hire and fire.
● It gives the business more flexibility, easier to adjust working hours.
However part-timers tend to feel less valued, and hence less loyal to the business.
This can have a negative effect on motivation, productivity and labour retention.
Furthermore a lot of resources will go into hiring and training new part-timer workers. (Very high labour turnover)
It may therefore be more cost effective for some firms to hire full-time workers.
Flexitime
Working from 9am to 5pm is no longer the system used by majority of businesses. Flexitime offers other solutions
for working hours:
Shift work with different groups of people working at different time allocations.
Flexitime is a system that requires employees to work for a core period, but the rest of the time is flexitime.
Workers determine when they will work.
Advantages
● Both shift work and flexitime can help businesses extend normal working hours for a business.
● They also help to reduce the need for paying staff to work overtime.
● Offering flexitime can improve a firm's image as it's seen to be providing equal opportunities to staff that
are unable to work standard hours.
● Beneficial to employees as it gives them a greater degree of freedom to balance their work.
● Flexible work structures have meant that the average number of hours worked has increased. This
happens despite the employment laws in some countries.
·This tends to provide opportunities for businesses to earn more money for each extra hour that they stay open for
trading.
Migration of workers
In a globalized world, ever more people are migrating for work purposes.
Migrant worker: a person who is engaged in a remunerated activity in a State of which she or he is not national"
Migrant workers contribute to the economic growth of the host country through their production, consumption
and payment of taxes.
Reasons for the migration of workers:
● Pay and remuneration: many multinationals attract migrant expatriate workers.
● Employment opportunities: unemployment and poverty may prompt many workers in low income
countries to seek work elsewhere.
● Seasonal factors: farm workers might migrate during off-season to find other employment.
● Domestic instability: political instability, lack of security and limited business opportunities.
● High standard of living: Migrant workers seek a better lifestyle so immigration provides such a possibility.
Outsourcing, offshoring and reshoring
Globalization has intensified competition in many industries.
One strategic way that businesses have strived to gain a cost advantage is by outsourcing - the practise of
transferring internal business activities to an external firm.
Subcontractors (the outsourced firm) are able to carry out the outsourced work for less then their clients.
Outsourcing tends to be used for three interrelated reasons:
● When activities are not core to the functions of the business.
● When the business lacks specific skills or expertise.
● To cut costs of production.
Advantages of outsourcing
● Specialists are hired to carry out the work to high quality standards.
● The subcontracted work is provided at competitive rates.
● It helps to reduce labour costs, as outsourced workers are not employees of the organization.
 ● Outsourcing allows the business to concentrate on its core activities.
● Outsourcing improves workforce flexibility.
Disadvantages of outsourcing
● In their aim to cut costs, subcontractors have been known to "cut corners" by hiring under-aged, illegal and
unqualified workers.
● Quality management can become more difficult.
● Subcontractors' needs to monitored to ensure that deadlines are met and quality standards are observed.
● Outsourcing can initially cause redundancies in the organization and this can affect staff morale and
motivation.
● Outsourcing and offshoring have often been associated with unethical practises, such as the exploration
of labour in less economically developed countries. @
Offshoring
Offshoring is an extension of outsourcing that involves relocating business activities and processes abroad.
· American and British firms dominate the practise of offshore outsourcing.
Offshore outsourcing of production activities and human resources can help a business to get around
protectionist measures used by foreign governments.
It also allows the firm to access the latest technologies and developments in manufacturing activities that it does
not have an expertise in.
However, critics of offshoring have complained about quality management issues.
The benefits of offshoring are also subject to changes in the external environment. (Exchange rate, inflation and
raise in minimum wages)
Reshoring
Re-shoring is the reversal of outsourcing. Transfer business back to country of origin.
Re-shoring has become more popular as the cost-effectiveness of offshoring has declined for many Europeans
and American countries.
Re-shoring from a human resource strategy include :
● Products recalls and mass media coverage of outsourced business practises that are unethical have
caused concerns for multinational companies.
● China losing its status as the "workshop of the world". Labour costs in China have risen sharply as the
country continues to experience phenomenal economic growth.
● Transportation cost continually rising means that is has become more cost-effective for businesses to be
located near their customers.
● The increased demand for customization for products has meant the need for businesses to be more
responsive to the customer demands and market changes.
● Domestic governments have also supported and encouraged reshoring in order to bring back jobs and
balance government budgets.

BM 2.2 Notes - Organizational structure

Organizational structure
● Businesses organize their human resources in various ways. In a small business, such as a sole
proprietorship, there may be an informal organizational structure; the owner has a range of functions
including marketing, operations and finance.
● Roles can be changed depending on the demands of the job at a particular point in time. The owner also
carries out more mundane tasks such as being a salesperson and a stock controller.
● However, in most businesses there is a need for a more formal and organized structure. This helps a
business to function more efficiently due to:
○ Accountability: shows who held responsible for each particular job.
○ Responsibility: shows whose is in charge of whom and in what role or capacity.
● As a business gets larger and more complex, it has to become more structured for tasks and roles to be
fulfilled in a manageable and coherent way.
● Although businesses differ in their formal structure, the typical configuration consists of different levels of
directors, managers and workers.
Delegation and span of control
Delegation
 ● As a business grows, managers need to relinquish some of their roles and responsibilities because they
are not able to effectively control all aspects of the organization.
● This passing on of control and authority to others is called delegation.
● It involves the line manager entrusting and empowering staff to complete a task or project but holding
them accountable for their actions.
● The responsibility still remains with the line manager although the authorised person does the actual work.
● Effective delegation has major benefits for both managers and employees:
○ The manager saves time by not having to tackle every single task, so can focus more on the
strategic issues facing the organization.
○ Delegation can motivate and develop employees who feel that they are trusted and that their
talents have been recognised.
● By contrast poor delegation causes confusion and a feeling of inadequacy. This leads to demotivated
staff, resulting in a failure to achieve the tasks set.
Span of control
● The span of control refers to the number of people who are directly accountable to a manager. Hence, the
higher up a person is in a hierarchy, the wider his or hers span of control tends to be.
● An advantage of a wide span of control is that few layers are needed in the hierarchy. This helps with cost
control, as there are less managerial positions in the firm. The flatter structure also means that
communication between the different levels of the hierarchy should be done more effective (in terms of
speed and accuracy).
● By contrast, a narrow span of control means that there are fewer subordinates who are accountable to a
manager. It is therefore easier to communicate with and control the team. Smaller teams might also be
more productive since there is likely to be better team spirit and cohesiveness. Larger teams tend to suffer
from communication problems, which may cause tension and conflict. However due to more levels of
management in the structure, this system tends to be more costly.
● As the business environment continues to evolve, many businesses have opted for wider spans of control.
In essence the decision is judgemental. The degree of control granted to a manager depends on several
factors, which can be remembered by the acronym “MOST”
○ Manager: the more skilled and experienced the manager is more likely to have a wider span of
control.
○ Organizational structure: narrower spans of control may be required in cultures that require
managers to closely monitors and control their subordinates.
○ Subordinates: highly skilled staff is more likely to work in smaller, dynamic teams with their line
manager.
○ Task: complex, urgent and important tasks tend to require a narrower span of control, as
communication will be more important.
Levels of hierarchy
● The hierarchy in a business refers to the organizational structure based on a ranking system. Those at the
top of the hierarchy include the CEO, Chairperson and the board of directors. Each hierarchical level refers
to a different rank with its associated degree of authority and responsibility.
● The person directly above an employee on the next hierarchical level is known as the line manager.
● Main advantages of Levels of hierarchy:
○ They show clear lines of communication within the organization.
○ Establish departments or teams to create a sense of belonging in the workplace so act as a form of
motivation.
● Main disadvantages of Levels of hierarchy:
○ Departmentalisation can mean workers are isolated to their official teams.
○ Rather inflexible.
Chain of command
● The chain of command refers to the formal line of authority through which orders are passed down in an
organization chart.
● This can be seen through an organization's chart.
Delayering
● Many large businesses have opted to delay their organizations. Delayering is the process of removing one
or more levels in the hierarchy to flatten the organizational structure. This reduces the number of layers
and widens the span of control in the hierarchy.
 ● Advantages of delayering
○ Reduces costs by removing levels of management - cost savings are made on the salaries and
benefits previously received by middle management.
○ Improves the speed of communication flows by flattening the hierarchical structures, i.e. chains of
command are reduced.
○ Encourages delegation and empowerment, as wider spans of control should provide more
opportunities for employees to take on wider responsibilities.

● Disadvantages of delayering
○ Creates anxiety and a sense of insecurity among workers who are worried about their jobs, e.g.
some are made redundant and others are demotivated. These issues harm morale and
productivity.
○ Overloads staff as their workload increases - This can have a counter -productive effect on the
quality of work and staff motivation.
○ Managers deal with larger teams, so decision-making can take longer. It can also create problems
of meeting deadlines.
Bureaucracy
● Bureaucracy is the execution of tasks that are governed by official administrative and formal rules of an
organization.
● Bureaucratic organizations are characterized by prescribed rules and policies, standardised procedures,
and formal hierarchical structures.
● Bureaucracy is often associated with excessive administration, paperwork and formalities. Within an
organization, this might include:
○ The frequent requirement to fill out unnecessary or tedious paperwork
○ Staff working in multiple departments and therefore having to report to several managers.
○ Too many committees set up to investigate issues of concern to the organization.
○ Long, official chains of command
○ Managers with duplicate or overlapping roles and responsibilities.
● Max Weber, a German economist and socialist, built on the work of Karl Marx, believing that bureaucracy
was the ideal organizational structure. He suggested that a bureaucratic organization is governed by
several principles, including:
○ Continuity: the establishment follows official rules and regulations rather then taking high risks that
could jeopardise its survival and continuity.
○ Rules and regulations: business activity is conducted in accordance with the official policies of the
organization.
○ Hierarchical structures: Authority and responsibilities are part of formal hierarchies structure with
line managers.
○ Accountability: business activity is conducted with written evidence of compliance with the firm’s
policies.
● However, the main drawbacks of bureaucracy can be summarised by Parkinson’s Law “Work expands so
as to fill the time available for its completion”.
● Today, most experts feel that bureaucracy hinders and/or prevents creativity and risk taking.
● They argue that, at best, bureaucracy simply slows down decision making.
● Bureaucratic organizations tend to be highly inflexible since formal decision-making becomes slow and
perhaps overly cautious.
Centralization and decentralization
● Decision-making power can be either kept in the hands of few people or it can be shared out among the
workforce.
● The extent to which authority is concentrated or diluted within an organization depends on the traits and
skills of managers and workers, the degree of trust and the corporate culture.
● In a centralized structure, decision-making is made by a very small number of people. These decision
makers, usually the senior management team, simply hold onto decision-making authority and
responsibility.
● The organizational alternative to use decentralized structure whereby decision-making authority and
responsibility is shared with others.
● Advantages of centralization
○ Rapid decision making: There is no need to consult staff on decisions and therefore quick decision-
making can take place.
○ Better control: Centralization allows managers to have a better overview and tighter control of what
is happening in their organization. This is particularly important in large firms where
communications can break down due to a lack of overall control and authority.
○ Better sense of direction: Decisions are made by senior managers, i.e. the people who are most
qualified to lead the organization. As there are fewer decision makers, consistency in approach is
also more likely to be achieved.
○ Efficiency: Centralized control means that tasks are less likely to be repeated by different people or
departments in the organization.
● Disadvantages of centralization
○ Added pressure/stress for senior staff: Decision makers do not delegate authority so could face
huge pressures from the extra workload.
○ Inflexibility: The organization becomes rather bureaucratic and inflexible, as workers have very
limited autonomy. They lack opportunities to be creative and simply follow the orders of decision -
makers. Hence, the skills and talents of employees are not exploited.
○ Possible delays in decision-making: Since a centralized group makes all the decisions, it is likely
that many decisions will eventually be delayed. This is simply due to the sheer number of decisions
that the group needs to make.
○ Demotivating: Employees lack opportunities to make a genuine contribution so motivation and
productivity suffer, as workers feel less valued.
● The decision ought to become more centralized or decentralized depends on several factors
○ The size of the organization: the larger the firm becomes the greater the need for decentralization.
○ The scale of importance of the decision: high cost implications or consequences will be centralized.
○ The level of risk: high-risk decisions will remain centralized.
○ The corporate culture: creative and innovative skills of employees tend to be decentralized.
● By contrast, factory operatives in low-skilled jobs producing mass-produced good are organized through
centralization.
● Management attitudes and competencies: Managers who have a positive outlook towards workers’
attitudes abilities are more likely to delegate authority and responsibility.
● The use of information communication technologies (ICT): firms that adopt up-to-date methods of ICT are
able to decentralize to a greater extent.
● Advantages of decentralization
○ Input from workforce: Firms can benefit from the skills and expertise of their employees, especially
their middle managers.
○ Speedier decision-making: Planning and execution are more efficient as there is delegation of
authority and responsibility.
○ Improved morals: Empowered staff is more likely to feel valued and motivated as they have some
input into decision-making. The autonomy also means that they can use their initiative and feel a
sense of ownership for their work, so productivity also improves.
○ Improved accountability: Staff is held directly accountable for their input, which can lead to
improvements in the quality of their work.
○ Teamwork: A feature of decentralization is collaborative work across teams and departments. The
sharing of ideas can foster harmonious relationships and generate innovative ideas.
● Disadvantages of decentralization
○ Costly: Empowerment and delegation often require financial incentives, e.g. better pay and
remuneration for middle managers.
○ Inefficiencies: In decentralized organizations, middle managers might carry out duplicate functions
as there is no overview of what everyone else is doing
○ Greater chances of mistakes: Decentralizing authority and responsibility only works if the
empowered are sufficiently competent. With more decision makers, it becomes more difficult to
track where mistakes were made or where things went wrong.
 ○ Loss of control: By decentralizing decision making, authority is diluted. Thus, senior managers have
less direct control over the operations of the business.
○ Communication issues: By decentralizing decision-making power, there is a greater need for
efficient communication. This might require additional time and resources, thereby adding to
overall production costs.
Organizational charts
● An organizational chart is a diagrammatic representation of a firm’s formal structure.
● Formal groups are setup to carry out specific functions, such as a team of finance specialists or a
department of marketers.
● An organization chart shows the five important features of a business:
○ The different functional departments within a business
○ The chain of command - This shows the various positions of authority in the organization. In
particular, it shows which people have direct line authority over others.
○ The span of control - This measures the number of staff directly accountable to a single line
manager.
○ The official channels of communications - This is the route that messages are communicated
within the organization.
○ The levels of hierarchy – the different levels are presented in the chart.
Flat and tall organizational charts
● Tall organizational charts (or vertical organizational charts) have many levels in the organizational
hierarchy. Therefore, managers tend to have a narrower span of control.
● By contrast, in flat organizational charts (or horizontal organizational charts) there are fewer levels. Thus,
each manager tends to have a wider span of control.

● Advantages of tall hierarchical structures

○ There tends to be quicker and more effective communication within smaller teams. By contrast, a
wide span of control means the manager has to communicate with many more people.
○ Smaller teams are generally easier to control and manage, with greater cohesiveness.
○ Greater specialization and division of labour can help to increase efficiency and productivity.
Hence, managers do not have to spend as much time monitoring the their teams.
○ There are greater opportunities for more people to be promoted as more levels exist in the
organizational hierarchy. This can motivate some employees to work harder, thus improving staff
retention and labour productivity.
● Advantages of flat hierarchical structures
○ Delegation becomes a relatively important part of managing the organization. Hence, there are
opportunities for subordinates to take on extra responsibilities and to develop their careers.
○ Communication should be improved overall since there are fewer layers in the hierarchy.
○ It is cheaper to operate because there are fewer managers to be hired due to fewer levels in the
hierarchy. Many of these managerial functions are either eliminated or delegated.
○ Flat structures can help to eliminate a ‘them and thus’ culture so workers do not feel alienated from
senior management, i.e. there is less of a psychological distance between senior managers and
those at the bottom of the hierarchy.
Hierarchical organizational charts
● A hierarchical structure is a traditional approach to organizing human resources in a business where
emphasis is placed on subordinates reporting to their line manager.
● The position of workers in the hierarchy indicates their rank, status and level of authority. Those at the top
of the hierarchy are the most vital to the organization and are remunerated with a larger salary and
benefits as they carry the most responsibility.
● Tall hierarchical structures are bureaucratic as there are many levels in the rigid hierarchy, with work
processes formally regulated by rules and procedures.
Organizational structure by product, function and region
● Organization by product: Most large businesses have a broad range of products. Hence they might choose
to structure their human resources according to the various types of products.
● Organization by Function: Most businesses are organized by function, i.e. the different operational roles
within a business such as marketing, production, finance and human resources. Some businesses will also
have functional departments in charge of administration, ICT and research and development (R&D).
 ● Organization by region: Multinational companies are often organized by geographical region. This allows
the business to be more aware of and responsive to local cultural differences and consumer needs. Such
organizational structures allow regional managers to have better overall control over staffing and training.
Project-based organization
● In a project-based organization, human resources are organized around particular projects.
● Allows businesses increased flexibility to adjust quickly to market changes and to adapt rapid innovations.
● Project-based structures might be used from a temporary period of time to execute specific projects, with
teams focusing on their assigned project rather than on their position in the firm itself.
Advantages of project-based organization
● Flexibility: projects continuously change, as they are completed and new once are started.
● Productivity: Projects are focused on solutions rather than functionality.
● Efficiency: as the project manager has direct control and authority over the project, tasks get done
quicker.
● Motivational: Project-based organization can be a source of motivation because individuals are able to
work on different project. (Variety)
Disadvantages of project-based organization
● A common form of project-based organization is the matrix structure. This is the flexible of employees from
different from different departments within an organization temporarily working together on a particular
project.
● Teams work better if the team members are highly skilled and experienced, so the project manager.
Handy’s Shamrock organization
● Charles Handy believes that people are the most important resource in any organization.
● Handy recommends that businesses place greater emphasis on meeting the needs of workers through
methods. (Job enrichment/flexible working hours)
● Handy believes this helps to improve the wellbeing and morale of workers.
● Handy also emphasised the dynamic nature of change within organizations and the external business
environment, thus requiring changes in organizational structures.
● Short-term contracts were more appropriate.
● Non-essential work should be contracted out to specialist who can do the work more productively and
cost effectively.
● Due to these structural changes, Handy coined the concept of the Shamrock organization. There are three
groups of workers within a Shamrock organization:
○ Core staff: Full-time professional workers who handle daily operation of the business. They are
crucial to the organization’s operations of the business.
○ Peripheral workers (contingent workforce): part-time, temporarily and portfolio workers who are
employed as and when they are needed. They are the flexible workforces and they help reduce the
labour cost.
○ Outsourced workers: individuals or businesses that are not employed by the organization, but are
paid to complete particular and specialized tasks. They are hired for their expertise.
● The three parts of the Shamrock organization have their own advantages and limitations for a business.
● Although Handy introduced the idea back in the 1990s, the time has shown that businesses are indeed
restructuring to become more flexible in their structures. This supports Handy’s foresight.
Impact of culture and ICT on communication in organizations
● Communication is the transfer of information from one party to another.
● Managers spend a significant part of their time communicating with both internal and external
stakeholders.
● The purposes and objectives of communication include to instruct, clarify, interpret, notify, warn, receive
feedback, review and above all, to inform.
● Effective communication is vital to the success of any business.
● However cultural differences have an impact on communication in an organization.
● Cultural ignorance can cause offense to others.
● One common way to deal with communication problems on an international scale is to recruit bilingual
employees.
● Innovation in communication technologies also has an impact on communication in organizations.
● However, strategic planners need to consider the communication problems that can still occur on an
international level where language and culture can present barriers to effective strategic implementation.
Electronic mail (email)
● Electronic mail is the process of using computer wide area networks as a mailing system.
● The widespread use of mobile devices such as smartphones and tablet computers has cemented the use
of email for communication in businesses.
● However, the set-up costs can be high, such as the purchase of computer equipment and the
maintenance of the system.
● Data transmission via email is not always secure as it can be hacked into.
Mobile devices
● Smartphones and tablets devices such as the iPad are becoming ever more popular for business use.
● Technological progress, such as Wi-Fi and digital camera technology, has also further popularised the use
of mobile devices as a form of information communication technology.
Video-conferencing
● Video-conferencing uses a combination of telephone, computer and video technology. It allows meetings
to take place when staff is in different locations, thereby cutting out travel time and costs.
● Video-conferencing has the advantage of being much quicker and cheaper than bringing people together
in one location.
● However a major disadvantage is that video-conferencing systems are expensive.

BM 2.3 Notes - Leadership and Management

Functions of management : refers to the role of managers. Planning, organising, commanding, coordinating and
controlling of business activities.

The following steps are the five functions of the management (Henri Fayol):
● Planning: Managers are responsible for setting the course of action to achieve organizational objectives.
● Commanding: Managers give instructions and orders to their teams and subordinates in order to achieve
business objectives.
● Controlling: Managers are responsible for the performance and health and safety of their teams.
● Coordinating: Managers have the responsibility for ensuring that all departments strive to archive the
goals of the organization.
● Organizing: managers organize resources in order to achieve corporate objectives.
An alternative perspective on the functions of management was proposed by Charles Handy...
Handy's three key roles of management:
1. Managers as general practitioners: if there are health problems in a business the managers must deal with
this.
2. Managers as confronters of dilemmas: Managers are relatively well paid because they have to deal with a
constant flow of dilemmas.
3. Managers as balancers of cultural mixes: it's the manager's' role to balance the cultural mix in an
organization to get the best out of each individual.
Handy suggested that effective management of the above roles require the helicopter factor, managers and
leaders need to rise above situations to see the big picture.
Drucker encouraged decentralization in the workplace.

According to Ducker managers have five basic functions (Peter F Drucker):

● Setting organizational objectives : setting and communicating organizational objectives.
● Organizing tasks and people : Managers establish systems to ensure the different functional areas of the
business to integrated to achieve its objectives.
● Communicating with and motivating people : Managers must build teams that are motivated to achieve
the organization's objectives.
● Measuring performance : Job performance should be measured by the extent to which employees meets
performance objectives.
● Developing people: Managers are responsible for bringing out the best in people.
Differences between management and leadership
A leader is someone who influences and inspires others to get things done. A leader fosters motivation, respect,
trust and loyalty from the workforce.
● Leadership is the skill of getting things done through other people by inspiring, influencing and invigorating
them.
● Leaders tend to focus on achieving broader goals or visions with no definite time frame in mind.
● Management is "the art of getting things done through people" (Mary Parker)
Management is essentially about problem solving and decision-making, so involves a process of planning,
organizing and coordinating human and capital to achieve organizational objectives.
● Managers tend to focus on achieving specific goals within a definite time frame.
There are significant differences between these two things and it is important to consider these when referring
specifically to either management or leadership.
● Time and devotion: Management is often described as a 9am to 5pm job, leadership however is about
being responsible 24h each day.
● Roles and responsibilities: Leaders are accountable for a much broader range of roles and responsibilities.
By contrast managers deal with routine how and when questions.
● Influence on others: instructions and orders from managers are listened to because they come from an
official position of authority. Leaders, however, inspire and motivate their followers through action.
● Risk taking: managers follow predetermined rules and policies set by the organization. Leaders are more
radical in their thinking. They risks by challenging the status quo to move the organization forward.
● Vision: leaders create a culture of hope, getting people to where they have not been before, whereas
managers abide by the procedures and culture of an organization.
Despite the difference both management and leadership are essential for a business to be successful. It's
possible for a manager to also be a leader.
Large businesses in particular rely on complementary roles of management and leadership to ensure the
effective running of their organization.
Leadership styles
● Leadership style refers to the way in which leaders tend to function, such as in an autocratic, paternalistic,
democratic, laissez-faire or situational manner.

There are five common styles of leadership:

● Autocratic refers to leaders who adopt an authoritarian approach by making all the decisions rather than
delegating any authority to their subordinates.
○ This style is suitable in situations that require quick decision-making or when critical decisions have
to be made.
○ One drawback is that communication is top-down, so any options or suggestions of the workers
are ignored. This can cause resentment among employees as they have little opportunity to make
a real contribution.
○ Also, demotivation and hence high level of absenteeism and labour turnover.
● Paternalistic leaders treat their employees as if they were family members, guiding them through a
consultation process and acting in the perceived best interest of their subordinates. The leader makes
decisions on behalf of the team, building trust and loyalty in the process.
○ There are two different types behaviour depending on the perceptions or beliefs of the leader:
■ A negative paternalistic style occurs when the leaders perceives the workers as less than
capable, so leads by guidance and control.
■ A positive paternalistic style occurs when the leader perceives the workers as highly
capable, so nurtures and develops the workers.
○ The paternalistic leaders act in a fatherly manner to guide and protect the workers. The workers
are expected to be loyal and obedient.
○ This style is inappropriate in organizations that have flatter, informal structures where creative
thinking is required.
● Democratic refers to leaders who take into account the views of others when making decisions. This
participative leadership style means that decision-making is decentralised.
○ The leader consults their staff before making a final decision.
○ Democratic leaders can bring about better morale and job satisfaction, as employees are more
able to express their views and have some input into decision-making.
 ○ This leadership style might work more effectively if the leader cannot always be present to ensure
that employees remain on task.
○ The main limitation of democratic approach is that it can delay decision making because more
people are involved in the process. Furthermore, such a style is not suitable when dealing a very
large workforce (since communication would be severely affected).
● Laissez-faire is based on having minimal direct input in the work of employees. Instead, they allow
subordinates to make their own decisions and to complete tasks in their own way.
○ The leader set the objectives but it's up to employees to decide how best to achieve these using the
resources available to them.
○ This can cause high level of motivation, as staff may feel trusted and highly valued by their
employer.
○ This style is suitable in businesses or a situation where creativity is important is important.
○ A key limitation is that coordination and decision-making can be time consuming since there is a
lack of direct supervision or support.
○ This style can be unsuitable for businesses or situations that require quick decision-making.
○ It also relies heavily on teamwork and the goodwill of employees to achieve the organization's
goals.
● Situational leadership refers to the belief that there is no single leadership style that suits all situations. The
'best' style depends on situational factors, such as the attitudes, behaviour and competencies of
managers and workers.
○ Situational leadership also suggest that managers and leaders must be able change and adapt
their style to different situations

Factors that affect situational leadership styles

CLOTS is a useful acronym for remembering the factors that affect situational leadership styles:
● Culture: what culture exists within the organization?
● Leader: How much trust do leaders have in their employees?
● Organizational structure: are hierarchical structures tall or flat?
● Task: To what extent are the tasks difficult, urgent and important?
● Subordinates: what are the levels of skills, motivation and unity of the employees?
Although leaders may have a natural or preferred style, it is unlikely that effective managers and leaders will use a
single style, as different situations require them to adapt. This will depend on several factors such as:
● The trails, personality and experiences of manager or leader
● The level of skills, experience, motivation and confidence of the employees.
● The time frame (how quickly a decision has to be made)
● The task (routine or crisis)
● The degree of importance of the decision (tactical or strategic decision-making)

BM 2.4 Notes - Motivation

Motivation
● Motivation refers to the desire, effort and passion to achieve something or the willingness to complete a
task or job with enthusiasm.
● Motivation helps businesses to get the most out of their human resources.
● Motivation theory looks at how managers seek to motivate their workforce to maximize job satisfaction,
staff morale and labor productivity.
● The nature of motivation itself can be seen to be subjective since what motivates one worker may not
motivate another.
Motivation theories – Taylor (1911)
● Taylor’s principles of scientific management assumed that employees are primarily motivated by money.
● Higher productivity could be accomplished by setting output and efficiency targets related to pay.
 ● Taylor promoted the use of 1) division of labour, improving efficiency through worker specialization. And 2)
Differentiated piecework whereby workers are paid a standard level of output and receive a higher rate if
they exceeded that level.
● A benefit of Taylor’s theory is that it is objective rather than subjective in rewarding workers.
● Taylor was Criticized for several things:
○ Ignoring the non-physical contributions of workers (contributions which didn't improve output
directly).
○ It is not easy to measure the output of workers
○ People are not only motivated by money, he he ignores the non-financial factors that motivate
employees. Workers appreciate opportunities to be innovative and independent thinkers.
○ Scientific management can lead to repetitive and monotonous tasks.
● However it was highly successful in the 1920s when the theory was introduced.
Motivation theories – Maslow (1943)
● Hierarchy of needs must be met in order to motivate employees.
1. Physiological needs
○ Basic needs
○ How much money a person earns can determine the extent to which workers are able to meet
basic needs (food, water, sleep)
2. Security needs
○ Also known as safety needs
○ It can includes predictability (Daily routine) and order (protection from harm)
○ Safety needs may include job security, sick pay, maternity leave and pensions.
3. Social needs
○ Also known as love and belonging
○ Includes opportunities for interaction and teamwork and recognition of trade union membership.
○ Anti-discrimination legislation can also help business to promote a sense of worth and belonging in
the business.
1. Esteem needs
○ Esteems can be internal--people feeling good about themselves, due to achievement
○ Esteems can be external--having status in the workplace or boosting worker morale
○ Job titles can help to boost internal and external ego of employees.
○ Sincere praise and positive reinforcements
○ Internal promotion of staff, rather than recruiting someone outside
○ Training and development opportunities
○ Giving workers input into decision-making process
1. Self-actualization
○ Allows people to become the best they can be.
○ Businesses can encourage this by providing opportunities for personal development and growth
Disadvantages of Maslow’s theory:
● Levels of needs are difficult to measure quantitatively
● Maslow assumed that everyone is motivated in the order of the model --with lower level needs needing to
be met before worker would respond to opportunities to have higher level needs met. However, home
workers and self-employed drivers do not get social interaction of working in an office, but this does not
mean that they cannot be highly motivated.
● There is no explanation of what motivates people once they have achieved self-actualization.
Motivation theories-Herzberg (1959)
● Focused on sociological and psychological aspects of work. His research suggested that there were two
main factors leading to job satisfaction and motivation:
1. Hygiene factors:
○ Also known as maintenance factors, are aspects of work that do not motivate but must be met to
prevent dissatisfaction.
○ Hygiene factors cause dissatisfaction if they fall below a level considered as being acceptable by
the workforce.
○ EG: Organizational rules, regulations, policies, supervision, working condition.
2. Motivators
 ○ Are factors that can lead to the psychological growth of workers and hence increase satisfaction
and performance at work.
○ Achievement, recognition, responsibility, advancement, personal growth
○ Managers could motivate workers through three key areas:
1. Job enlargement: Giving workers more variety in what they do, which should make the work
more interesting
2. Job enrichment: Giving workers more complex and challenging tasks, which could
contribute to workers feeling a sense of achievement as they are able to exploit their
potential.
● Job empowerment: Delegating decision-making power to workers over their areas of work, which should
help to boost their overall morale.
● Crucial difference between movement and motivation.
○ Movement occurs when people do something because it is part their job so they feel obligated to.
○ Motivation happens when people do something because they want to.
● This theory allowed managers to think in a different way then previously, money was no the main
motivation.
● Critics of the theory argue that his theory:
○ Does nor apply to many occupations (low skilled or paid jobs)
○ His methods when he conducted the research.
Motivation theories - Adam’s equity theory (1963)
● Adam suggested that workers would naturally compare their efforts or rewards to those of others in the
workplace.
● Each worker should receive remediation that reflects his or her efforts.
● The degree of equity in an organization is based on the ratio inputs to outcomes.
● It has to be fair in relation to the others in the workplace.
● He suggested that the degree of equity in the workplace has a direct impact on the level of motivation on
three levels:
○ Equity norms: Workers expect an equitable remuneration for their contributions in their jobs.
○ Social comparison: Workers determine what is fair based on comparisons of their inputs and
outcomes with those of their peers.
○ Cognitive distortion: Workers who feel under-compensated, become demotivated so might
withdraw any goodwill.
● If inequities are not dealt with absenteeism will increase and workers will become more disruptive to the
organization.
● Criticism of Adam’s equity theory argue:
○ The concept of fairness is highly subjective.
○ The theory ignores demographic, physiological and cultural variables that can affect perception of
fairness.
○ There is a limit to the scale of equity so it can be highly demotivating.
Motivation theories – Pink (2009)
● Pink challenges twentieth century thinking about the effectiveness of traditional rewards to motivate
people in the twenty-first century.
● Pink argues that such traditional rewards simply “dulls” and “blocks” the essential skill of creativity,
required from today’s workforce.
● His theory is based on three innate factors that drive people at work, school and their personal lives:
○ Autonomy: Self-sufficient to direct our own lives.
■ Tasks refer to what workers do. New initiatives and innovations are often generated when
workers have time to be creative, yet most organizations are far “too busy” to allow this to
happen.
■ Time refers to when workers do their tasks. Businesses of the 21st century are far more
flexible organizations, allowing employees to have greater flexibility.
■ Technique refers to how workers do their task pink argues that traditional command and
control techniques are no longer effective in modern society.
■ Team refers to whom employees work with to complete a task.
○ Masterly: Self-improvement to learn and create new things.
 ■ Masterly is important to motivate simply because people generally want to improve their
work as it makes them feel better.
■ Pink suggest four essential elements: autonomy, crystal clear goals, immediate feedback
and Goldilocks task.
○ Purpose: self-esteem and drive to do better by ourselves.
■ For Pink, purpose maximization is as important as profit maximization to inspire and guide
people.
■ Managers must clearly communicate the purpose to make sure employees who
understand how their individual role contributes to the purpose of their organization.
○ Pink distinguishes between Type X (extrinsic) and Type I (intrinsic) people.
■ Type X (extrinsic): motivated by money and other rewards.
■ Type I (intrinsic): people engage in an activity out of their own desire. It can also occur due to
altruistic reasons.
○ Pink has shown that type I outperform type X.
○ Pink acknowledges that without adequate “baseline rewards”, people cannot satisfy their basic
human needs.
○ Critics argue that they are not convinced that the theory applies professions, national borders and
cultures.
Financial Rewards
● Financial rewards are methods that businesses can use to motivate workers by using some form of
monetary payment.
● The main methods of financial reward systems are considered below:
Salary
● Salaries are set at a fixed annual rate but paid at the end of each month.
● Advantage: Help to improve a firm’s cash flow since workers are only paid once a month.
● Disadvantages: It is not easy to distinguish the efforts or output of different workers. There is little incentive
to work hard since people are pad the same amount for their time.
Wages (time and piece rates)
● Wages are usually expressed as the hourly rate of labor.
● Advantage: Straightforward method which is easily understood by workforce
● Disadvantage: Workers are not rewarded for their efforts but their time
● Piece rate: A payment system that can be used to get around the wages by rewarding workers who are
more productive. Workers are paid for the amount of work they actually do.
○ Advantage: Employees have an incentive to work hard in order to maximize their incomes.
○ Disadvantage: There may be a trade off between quantity and quality of output and tends to be a
need for supervision and quality control
Commission
● Businesses can use output-based payment system.
● Commission pays workers based on a proportion (percentage) of sales or output contributed by a worker
whereas piece rate is a fixed amount per unit sold or produced, similar to piece rate
● Advantage: Piece rate and commission are commonly found in jobs that pay a low basic wage or when
payment acts as an incentive to sell more.
● Disadvantages: There is added pressure on workers to sell more or to perform at a faster Tasks can be
monotonous, repetitive thereby causing boredom. Speed of production or aggressive selling techniques
do not necessarily correlate with high quality output. A commission depends on fluctuating sales outputs
levels. There could be a need for quality controllers.
Profit-related pay
● The amount paid will usually be linked to the employee’s salary and length of service, so those on higher
salaries and who have been with the firm the longest are rewarded the most.
● Advantage: Can strengthen employee loyalty and to foster team working. Profit sharing should boost labor
efficiency and limit the possibility of labor conflict
● Disadvantage: Share of profits given to employees is often seen as too small to provide an incentive to
work harder.
Performance related pay (PRP)
● Rewards those employees who meet certain performance goals.
● Goals may involve sales targets, competence in a job or signing a contract.
 Ways PRP can be paid:
○ Performance bonus: Paid to workers who have reached output or quality targets
○ Loyalty bonus: Paid to workers who have stayed with a firm for a certain length of time
○ Pay rise: An increment in a person’s pay due to meeting or exceeding their performance
○ Gratuity: Paid to staff that completes their employment contracts.
● Advantage: It creates incentives for people to work and perform better. Workers can also focus better if
targets for each individual are clearly set out.
● Disadvantage: Targets may be unrealistic or unachievable and this might cause resentment and hinder
job performance. Non-financial motivators are ignored.
Employee share ownership schemes
● Rewards workers, managers and directors by giving them shares in the company.
● Advantage: Staff will have a more direct interest in the well being of the organization by also being
shareholders of the company.
● Disadvantage: Majority of employees does not qualify for share ownership, and even if they did, the
amount distributed is hardly sufficient to sustain their level of motivation.
Fringe payments
● Payments and benefits to an employee in addition to his or her wages.
● Subsidized meals, private health insurance, housing allowance
● Advantage: It helps to encourage employee loyalty. Can also help to meet an employee’s safety needs
● Disadvantage: Potentially huge cost, large expenses.
Non-Financial Rewards
● Non-financial rewards are non-monetary factors that motivate people by offering psychological and
intangible benefits.
● Examples explained below
Job enrichment
● Giving workers more complex and challenging tasks, which could contribute to workers feeling a sense of
achievement, as they are able to exploit their potential.
● Advantage: Result in psychological growth for the worker and better execution of the work carried out.
● Disadvantage: The time and money needed to be spent training the worker to fulfill these extra aspects of
their job.
Job enlargement
● Giving workers more variety in what they do, which should make the work more interesting.
● Advantage: Workers might experience their day as less boring and more interesting, hence working more
efficiently.
● Disadvantage: the system might be inefficient because workers have to get training for the various tasks
instead of specializing on one task.
Job rotation
● Form of job enlargement that involves workers performing different tasks at the same level of complexity in
a systematic way.
● Advantage: possibly provide more variety to avoid the problems of overspecialization. It also makes it
easier for people to cover for absent colleagues as they become more familiar with a breadth of tasks
● Disadvantage: multitasking requires greater training costs and can be regarded by some employees as
simply adding to their workload without real career development opportunities.
Job empowerment
● Granting workers the authority to be in charge of their own jobs, to make decisions and to execute their
own ideas.
● Job empowerment can be achieved through methods such as:
○ Delegation: this occurs when managers pass on authority to their subordinates, allowing them to
take charge of a task and to get recognition for their accomplishments.
○ Worker participation: this occurs when workers have opportunities to participate in decision-
making so they feel empowerment.
○ Continuous participation development (CPD): Employers who provide opportunities for their staff to
undertake ongoing training tend to find that the costs of providing CPD are far less than the
benefits reaped from having a more loyal, empowerment and productive workforce.
● Advantage: Employees get to have a say in how things are done at work and they can feel a sense of
achievement when tasks are successfully accomplished
 ● Disadvantage: Managers are still held accountable for the tasks that they delegate to their subordinates.
Purpose (the opportunity to make a difference)
● Whilst some employees are driven by self-interest, others are motivated by using their work to help others
thereby making a difference to the world we live in.
● History has shown that during times of crisis people cooperate to help each other.
● Purpose is about the role of job itself rather than act of altruism such as donating money to an external
charity.
Teamwork:
● Team working is where staff have the opportunity to work alongside fellow employees:
○ Cellular manufacturing: Teamwork to complete part of a production process.
○ Quality circles: Team members meet regularly to discuss solutions to problems regarding quality
within the production process.
○ Departmental teams: Labor is divided by organizing people into functional departments.
● Advantage: it can reduce boredom and help to meet the social needs of employees. It can also built a
sense of knowing, this boosting productivity. Also greater flexibility and multitasking as workers learn from
other team members.
● Disadvantage: workers conflicts and inefficient work processes.

BM 2.5 Notes - Organizational culture

Organizational culture
● Culture can be defined as what is considered normal to an organization, such as the way that workers
behave within the business.
● Corporate culture is largely based on beliefs, values and attitudes of the management and employees. It
includes a range of things such as the approach towards punctuality, dress code or whether smoking is
acceptable in the workplace.
Elements of organizational culture
● The acronym NORMS can be used to remember the interrelated determinants of organizational culture:
○ Nature of the business: culture is shaped by the purpose culture is shaped by the purpose and
direction of the organization, derived from its mission, aims and objectives.
○ Organizational structure: Firms with tall structures tend to have lots of small teams that work well
independently.
○ Rewards: If employees are appropriately remunerated for their efforts, the organization is more
likely developed a strong and united culture.
○ Management styles: The culture is majorly affected by the management style chosen by the firm.
○ Sanctions: An organization with few sanctions can encourage staff to be slack. However, if an
organization is too rigid in its policies and extremely harsh in reprimanding workers, staff may feel
resentful of the management.
The importance of understanding organizational structure
● Cultural intelligence or cultural quotient (CQ) is the ability of an individual to blend into occupational,
corporate and national cultures.
● Within the context of business management, CQ is important as it measures the ability of people to
understand and adjust to unfamiliar situations such as hostile takeover or a crisis.
● The strengths of an organization’s culture depend on the unity among the staff.
● A strong culture exists when the staffs understands, believe and support the vision and mission of the
organization.
● Advantages to a business that has a strong corporate culture includes:
○ Creating a sense of belonging a security for staff because they feel part of an organization. This
helps to improve teamwork and to raise motivation.
○ Promoting cohesiveness so people do things as they feel that it is the right thing to do.
○ Reducing mistakes and misunderstandings as staff is familiar with the process at work.
○ Minimising problems associated with a culture gap so that conflict and misunderstandings
between different groups are curtailed.
Types of organizational culture
 ● Organizations are vastly different in the ways that they operate. Various theories have put forward models
of the types of organizational culture:
Edgar H. Schein
● He argues that there are three levels of corporate culture:
○ Artefacts: are superficial and behavioural aspects of an organization that can be easily seen but
not necessarily easy to understand.
○ Espoused values: are desired or expected corporate culture.
○ Shared basic assumptions: represents the deepest level of culture – the culture that is unseen and
not easily identified as it is so well integrated in the organization.
Charles Handy
● Handy argued that different cultures are needed for different business activities.
● Handy described four types of organizational structure:
○ Power cultures: exist when there is a dominant individual or group holding decision-making power.
○ Role-cultures: exist in highly structured organizations with formal rules and procedures. Role
cultures are often found in schools and colleges.
○ Task cultures: exist in organizations where the focus is on getting results from the work done.
○ Person cultures: exists in organizations when staff in similar positions with similar experience from
groups to share their knowledge and skills.
Deal and Kennedy
● They described corporate culture as the way things get done within an organization. Their research was
based on a two dimensional framework:
○ Feedback and reward: looks at the speed of the feedback and the level of rewards within an
organization. Deal and Kennedy argue that rapid feedback and reward are likely to lead to a
consistent corporate culture.
○ Risk: refers to the degree of uncertainty in an organization. Risk is something that either drives
workers or it demotivates them.

Feedback and reward

Rapid Slow

Risk High
Tough-guy macho Bet-the-company

Low
Work-hard, play-hard Process

● Deal and Kennedy suggested four types of organizational culture:

○ Tough-guy macho culture: occurs in organizations where feedback is rapid and risks are high. It
often applies to fast pace organizations. It can be highly stressful.
○ Work-hard, play-hard culture: exists where there is rapid feedback with low or few risks. Typical in
large organizations and in fast-paced customer-oriented businesses. Stress is more likely to come
from the scope and pace of work rather than risk or uncertainty.
○ Bet-the-company culture: occurs in firms that take high risks but without rapid feedback or
immediate rewards. Stress can come from the high uncertainty and risk.
○ Process culture: exist in organizations where there is slow, little or no feedback with low risks.
Kotter and Heskett
● They suggested that there are two types of corporate culture:
○ Adaptive cultures: are receptive to change and exist in organizations that adapt themselves to
change. Adaptive cultures are often found in innovative organization.
 ○ Inert cultures: are resistant to change and inward looking they exist in organizations that hold
negative values of any change to their culture.
Goffee and Jones
● They devised the double-S model of organizational culture, which looks at two dimensions of culture (they
argue that the ideal culture has both high sociability and high solidarity):
○ Sociability: refers to the extent to which people have concerns for their colleagues. High sociability
tends to focus on “people”.
○ Solidarity: refers to the degree of unity in an organization, such as whether people share the same
values and have common interests. Hence, high solidarity aids harmony and efficiency in the
workplace.
Geert Hofstede
● He studied the links between international cultures and organizational cultures.
● He found five types of cultures:
○ Power distance: this measures the extent to which subordinates expect and accept unequal
distribution of power within an organization.
○ Individualism versus collectivism: this measures the extent to which people feel they should care for
themselves or be cared for by the family network and society.
○ Masculinity versus femininity: this dimension focuses on the extent to which a culture conforms to
traditional gender values. Masculinity refers to values usually dominated by males. And femininity
refers to values traditionally associated with women.
○ Uncertainty avoidance: this measures the extent to which people in an organization or country
prefer structured routines or flexible structures.
○ Long-term versus short-term orientation: This final dimension of culture looks at the extent to which
a particular culture values making sacrifices today for the benefits to be reaped in the future.
● National cultures have a direct impact on organizational structure.
Cultural clashes within organization
● Cultural clashes exist when there is a conflict or incompatibility between two or more cultures within an
organization.
Reasons for cultural clashes
● Growth of firms: the internal growth of firm is likely to lead to a more formal and hierarchical organizational
structure. This can result in businesses becoming more bureaucratic and power orientated.
● Mergers and acquisitions: organizational cultures can clash and change when there is external growth.
● Change in leadership: Leadership style is a factor affecting corporate culture: a change in leadership can
easily result in a change in the organizational culture.
Consequences of organizational cultural clashes
● Misunderstandings and miscommunications: cultural clashes and cultural gaps often result in problems
due to employees not understanding the reasons for change.
● Unhappy staff: cultural clashes and the potential conflict that results will tend to make people unhappy in
the workplace.
● Resistance to change: this happens because staff is likely to recent change to the culture that they are
used to.
● High costs of training staff and implementing change
● National culture disputes: national cultures may also be so strong that any attempt to change the way
things are done can cause conflict and resentment
Individuals and organizational structure
● Individuals, usually leaders, can have a huge influence on organizational culture.
● An individual can shape a strong and effective culture.
● Within the workplace, the organizational culture depends on rules and policies, social interactions,
communications, collaboration, and informal friendship groups.
● The challenge for leaders is to influence people within the organization to follow or to shape a shared vision
and corporate culture. Strategies to achieve this include being a MOVER:
○ Mentor: leaders acts as mentors by sharing knowledge and expertise and supporting their people
to mould a healthy organizational culture.
○ Outreach: communicating the vision to all members of the organization.
○ Vision: Without knowing where the business wants be, it's impossible and pointless trying to guide
and motivate staff.
 ○ Engaging: the desired corporate culture must engage and excite the workers.
○ Role modelling: by being a role model to others In the organization, the leader can drive and
develop the desired culture.
● Organizational culture can have a direct impact on individuals.
● The organization’s culture also affects its approach to ethical considerations.

BM 2.6 Notes - Employer and Employee Relations

Employee and employer representatives
● Managers strive to ensure that there are good working relationships at work.
● Poor working relationships often lead to low morale and conflict.
● Possibly extreme actions from workforce if they are not pleased with working conditions.
● Employee and employer representatives deal with sources of disputes on behalf of their members and
conflict resolution.
● Agents, lawyers and trade union representatives are also used to act on the behalf of the employees
(individually).
● Collective bargaining: refers to the process by which pay and conditions of work are settled by negotiation
between employees and employees or their respective representatives.
● Negotiation: is a bargaining process whereby two or more parties attempt to achieve a mutually
acceptable result.
● Focus on terms and conditions of employment.
● Employees are represented by trade unions. More power, when more people.
● Types of labour unions
○ Craft unions: employees sharing a specific skill or craft
○ Industrial unions: member from the same union.
○ General unions: any industry or skill.
○ White collar unions: clerical, administrative and professional staff.
● Protect the interest of their members
● Examples of main issues that labour unions are occupied with include:
○ Negotiation on pay and benefits
○ Improving conditions of work for their members
○ Supporting with legal advice
○ Providing legal and financial advice to members who might have been unfairly dismissed.
○ Upholding rights of their members to have professional training and development.
○ Pressuring employees to ensure that equipment and machinery at work are safe to use.
● Employer representatives are individuals or organizations that represent the management team in
collective bargaining process.
● Often from the company's head office.
● Employer’s associations. These are organizations that represent the general views and interests of al
business within a certain industry by negotiating with unions and influencing government action.
● The outcome of the negotiation depends on the relative bargaining strength. These depend on several
factors:
○ The level of experience and skill of negotiation.
○ The number of members and the degree of unity within the union.
○ The state of economy
○ Demand of labour is derived from the demand for products that labour are used to supply.
○ The degree of substitution between labour and capital.
○ Public and media opinion.
○ Government involvement.
● Trade unions have decreased in popularity across all modern societies.
● Because of redundancies, government rules and regulations and more part times in the workforce.
● Consequence: organizations develop staff associations. (Only within the organizations)
Industrial/employee relations methods used by employees
● Workers have a mix of objectives that they wish to achieve:
 ○ Increased pay or the prevention of pay cuts
○ Improved remuneration
○ Better working terms and conditions
○ Training and development opportunities
○ Better quality staff facilities
● Trade unions use the following method to help achieve their objectives: collective bargaining, go-slows,
work-to-rule, overtime bans and strike actions.
● Collective bargaining
○ United workforce via trade union representation.
○ Increase in collective bringing power.
● Go-slow (slowdowns)
○ Minimum pace allowable in their employment contract.
○ Highly effective when firms face imminent deadlines or during periods of high seasonal demand.
● Work-to-rule
○ Absolute minimum required according to the rules set by the employer.
○ Goodwill from staff is withdrawn.
○ Less effective then strike actions.
● Overtime bans
○ A directive from labour union for members to disengage in any overtime activity.
○ Highly effective during peak seasons and implementing deadlines.
● Strike actions
○ Collective refusal of employees to work.
○ Result of major industrial unrest such as widespread pay disputes and serious grievances.
○ Official when it has backing from the majority of the trade union members.
○ A sign of protest and disapproval
○ Powerful tool used by unions.
○ A variation of the strike action is walkout. When employees leave their workplace.
Industrial/employee relations methods used by employers
● Employer objectives include: lower production costs, improved productivity levels and lower rates of
absenteeism and higher staff retention.
● The objectives are likely to conflict
● Represented by management teams and employers associations.
● Their function is to influence government action and offer advisory business related services.

● Different tactics when negotiating with trade unions:

● Collective bargaining
○ Do not require the involvement of third parties to establish a win-win situation.
○ Deadlines are a normal tactics. Short deadlines often give the opposition little time to prepare or
fight for its case.
● Threats of redundancies
○ Intimidation to pressure or threaten employees.
○ However laws protect the employees.
● Changes of contract
○ May be possible to legally change people’s contracts of employment.
○ They simply deny the employees to extend their contract.
● Closure
○ Managers decide to close the business
○ Used when other approaches have been exhausted
● Lockouts
○ Occurs when the employer temporarily stops employees from working during an industrial dispute.
○ Pressure people to want to return to work.
Conflict
● Conflict refers to a situation of friction or mutually exclusive goals between two or more parts.
● Caused by disagreements between these groups and result in lack of cooperation.
● Sources of conflict in the workplace include:
 ○ Needs and wants: when people’s wants and needs are ignored.
○ Perceptions: different people interpret things differently, misunderstandings.
○ Values: people hold incompatible beliefs, values or principles.
○ Power: people in a position of power try to make others do something against their will.
○ Feelings and emotions: ignore the feelings of others in the organization.
● Conflicts in the workplace becomes a problem if it is not managed properly, because it can:
○ Hinder productivity
○ Reduce the level of staff morale due to added stress and anxieties.
○ Cause inappropriate conduct, such as unethical behaviour.
○ Fuel the internal politics within an organization.
○ Hamper opportunities for collaborative teams.
● Some argue that conflicts might be needed in an organization
● Raise and address real problems that are bothering people.
● Foster better working relationships in the future.
● Conflicts itself is not the true problem; it is the way in which conflict arises and how it managed that can
become problems.
Conflicts resolution
● Conflicts resolution refers to the course of action taken to resolve conflict and differences in opinions.
● Successful if each party’s interests are addressed, resulting in a satisfactory outcome for all sides.
● There are several ways to approach conflict resolution, including:
● Conciliation and arbitration
○ Conciliation is a process whereby the parties involved in a dispute agree to use the services of an
independent mediator.
○ The person meets with the parties separately in an attempt to solve the issue.
○ Important for conciliators to be highly skilled negotiators and effective communicators.
Negotiation à Compromise à Win-Win solution
● Arbitration the process involves an independent arbitrator deciding on an appropriate outcome. (Rather
like a judge)
● The arbitrator’s final decision becomes legally binding.
● An extreme case of arbitration is pendulum arbitration, which requires the arbitrator to decide completely
in favour of one party or the other.
● The idea behind this approach is that both parties in the dispute are forced to make more realistic and/or
conservative demands.
● Employee participation and industrial democracy
○ Employee participation is an example of industrial democracy.
○ Employees are given responsibilities and authority to complete tasks and are involved in the
decision-making process.
○ Some argue that it increases productivity and motivation.
● No-strike agreements
○ In response to the trend (decreasing membership in trade unions) many unions have tried to
improve their image by having a non-strike agreement.
○ Has helped to increase the membership numbers in the unions.
● Single-union agreements
○ A single-union agreement occurs when an organization agrees to participate in the negotiation
process with a sole labour union that represents the workers.
○ It causes fewer disruptions to the employer as there is no need to spend as much management
time and resources dealing with a multitude of problems from various inter-union disputes.
○ The approach taken to deal with conflict largely depends on people’s concern for their own
outcomes and that of others. This means that there are five possible outcomes:
■ High concern for personal outcome leads people to compete for a win-only outcome.
■ High concern for others only means surrendering, which leads to a win situation for the
other outcome.
■ Low or no concern for either party’s outcomes simply means there is avoidance of the issue.
■ High concern for the outcome of both parties leads to collaboration to find a mutually
beneficial solution.
■ Moderate concern for the outcome of both parties leads of some sort of compromise.
 Concern for self

Low Moderate High

Concern High
for Surrender Collaborate
others

Moderat
e Compromise

Low
Avoidance Compete

Resistance to change
● On of the major barriers to effective change management in the resistance to change from the workforce.
● There are four main reasons why people are resistant to change in the workplace:
○ Self-interest often takes priority over organizational objectives.
○ Lower tolerance of change happens because people prefer familiarity to disruption and
uncertainties.
○ Misinformation causes misunderstandings because the purpose of change has not been
communicated properly.
○ Different assessment of the situation occurs when there are different interpretations of
circumstances.
● Professor Kotter proposed the six change approaches model to deal with resistance to change:
1. Education and communication: the approach aims to inform and educate staff about the change
beforehand.
2. Participation and involvement: this approach links with several motivation theorists such as Maslow and
Herzberg. By involving employees in the change process they are more likely to accept change.
3. Facilitation and support: This approach is paternalistic in style as managers become supportive of staff
during difficult times.
4. Negotiation and agreement: this is the “carrot” approach whereby managers use incentive to remove or
limit resistance to change.
5. Manipulation and co-option: This approach involves bringing a representative of those resisting change
into the change process.
6. Explicit and implicit coercion: this is the “stick” approach to dealing with resistance to change and is
typically used as a last resort. Managers use coercion to force staff into accepting change.

BM 3.1 Notes - Sources of finance

Organizations need money to finance Business activity. Sources could be loans or selling shares. What sources to
choose depend on a lot of aspects --including the business size, the type of Business, the time scale, and the
purpose of the finance.
That's what this chapter is about.
The role of finance for business
● Purpose in terms of capital or revenue expenditure.
● Capital expenditure: Keyword: fixed assets
○ The finance spent on fixed assets à determines the scale of the firm's operations.
○ Fixed assets not for resale (in short term), but generating money for the Bus.
○ Source of finance: medium and long term sources because high costs from financing fixed assets,
collateral for securing additional loan capital.
● Revenue expenditure
○ Payment of the daily running: raw material and wages. AND: indirect costs.
○ Need to control the cost, to generate revenue à make profit.
○ Different businesses, different access to an array of finance.
Internal finance (sources of finance)
● Personal funds
○ Main source for sole trader and partnership.
● Retained profits
○ The value of profits that Business keeps (after taxes and dividends).
○ They are often used for purchasing and/or upgrading fixed assets.
○ OR: kept in a contingency fund.
○ NB: not depend on borrowing à no interest charges.
● Sales of assets
○ Selling old machinery that has been replaced (computers).
○ If relocate, sell land and buildings.
● Family and friends
○ Borrowing from family and friends
○ Straightforward compared to the bank.
○ NB: sources are limited and often it provokes disputes.
● Working capital
○ Money available for the daily running of the B.
○ Sales from goods and services.
○ IMPORTANT: because it pays everyday costs like wages and suppliers
● Investing extra cash
○ Not need to be spent imminently can be placed an interest – bearing saving account.
○ Earns more interest for the B.
External finance (source of finance)
● Share capital
○ Main source for limited companies
○ Money raised from selling shares in the company
○ Advantage: provide huge amount of finance (no need to return the money?)
○ Issue on the stock market
○ Disadvantages: ownership and control diluted and a lot of legalities and administrative procedures.
● Preference shares
○ Preference shareholders earn a fixed dividend, before the other shareholders.
○ Shares can be cumulative which means that if the dividend can’t be paid, and then the preference
shareholders will be paid twice the next year.
○ Advantages: relatively safe income and low risk (compared to normal)
○ Disadvantages: non – voting, and ordinary shareholders earn more in high profitable periods.
● Ordinary shares
○ Most common type of shares
○ The level of dividend is unknown (based on the profit made)
○ Advantages: voting rights and possible bigger dividend then Preference shareholders.
○ Disadvantages: costs not fixed à more risk
● Loan capital
○ Medium to long term sources of finance
○ From lenders like the bank
○ Interest charges can be fixed and variable depending on the agreement
 ○ The amount borrowed is paid back in instalment over predetermined period
○ Business development loans à specific development needs (borrower), highly flexible loans.
○ Mortgage: see definitions
● Overdrafts
○ Facility allows the Business to temporarily overdraw on its accounts.
○ Take out more money that the Business has on its account in the bank
○ Used when they have minor cash flow problem
○ More effective than bank loans, because
○
○ Disadvantages: repayable on demand. Without prior notice from the lender.
● Trade credit
○ Buy now and pay later
○ The cash from the sale is received at a later date.
● Credit cards
○ The creditor is a financial institution like American Express
○ Allows the holder to buy goods and services based on the promise to pay at a later date.
○ Cash advantage for the card holder
○ Source of finance for sole traders and partnerships
● Government grants
○ G offers aid to support business activities, like for small Bus
○ Stimulate activity in specific industries that has problems
○ For most businesses they are very hard to obtain
● Government subsidies
○ G has the purpose to reduce the cost of production
○ Subsidies: to benefit the society, famers, health and education
○ If obtained: very good for the B, do not cut into profit margins
○ Cut in price leads to increase the demand of their products
● Donations
○ Financial gift from individuals or organisations
○ No benefit for the donor (*feels good)
○ The donor might have terms and conditions (acknowledgement of donors name in recognition of
their gift.
○ For schools and hospitals, not for the private sector.
● Sponsorship
○ Organisation gives financial support à cash, products and services
○ In return for prominently displaying the sponsor’s brand or logo
○ Sponsorship is a form of promotion
● Debt factoring
○ The concept of debtors: people or organizations that owe the business money.
○ Possibly facing bad debt: debtors that are unable to repay the money owned.
○ More unemployment à more bad debt
○ Debt factoring. Financial service that allows the B to raise funds based on the value owned by its
debtors (customers that has bought on credit).
○ Offer between 80 to 85% of the outstanding payments from the debtors within 24 hours once
application has been approved.
○ Benefit: Get the money fast, immediate source of finance.
○ Benefit: Non – recourse debt factoring of the provision of bad debt. Not responsible, so they have to
absorb these are loses.
○
○ Disadvantages: the high fees from charges by the debt factoring providers. Additional charges,
higher value of debtors à higher charges (more risk involved) Not all businesses are eligible
● Leasing
○ Hiring whereby a contract between a leasing company (lessor) and the customer (lessee).
○ The lessee pays rental income to hire assets from the lessor (owner of the assets).
○ Cheaper to lend machinery, vehicles and buildings, in short or medium term
○ Suitable for B that do not have the initial capital to buy assets.
 ○ Releases cash for other purposes within the B
○ Added services: Maintenance and upgrading provided by the leasing company
○ Leasing = business expensive, hence tax bill reduced
○ Disadvantage: In the long term it’s more expensive then buying the assets.
● Hire purchase
○ Allows the B to pay their creditors in instalments, perhaps over 12-24 months
○ Legally the property of the HP firm, until all payments have been made
○ Deposit:
○ If not paid back: the HP can repossess the assets
○ HP: buying on credit. Interest charged by the lender on the amount borrowed
○ The buyer eventually owns the assets on the last payment.
● Debentures
○ Long term loans
○ Debenture holder could be members of the public, G or other Bus
○ Debenture holders do not have voting rights or ownerships like shareholders
○ They receive interest (fixed or variable depending on the type of debenture) before the
shareholders. NB: even if they make a loss
○ Not all debentures pay interest they offer other things (like VIP). Secured debenture. à The
debenture has legal interest in the asset.
○ A mortgage with collateral
○ Long term source of finance, without losing control (no voting rights)
○ Disadvantage: increases the firm’s gearing à more borrowing as a percentage of its capital
employed. Therefore interest repayments to the lender à more risk, because of the change in the
interest rate.
● Venture capital
○ High risk capital
○ In the form of loans or shares invested by venture capital firms or individuals
○ Venture capitalist: invest in small bus to sell their shares for higher prices when the Bus has grown.
○ Bus that want this source of finance will need to have a convincing B plan with supporting data to
convince the capitalist that it's worth the risk.
○ Venture capitalist and B angles look at criteria before committing their capital
■ Return on investment: demand return on their investments. Must have good potential to be
highly profitable
■ The business plan: should outline the long – term aim and purpose of the business venture.
Direction and identity of the B. Investors must feel confident that the B understands the
market. Innovative and original
■ People: the success is depended on the people. Management is important.
■ Track record: The historical track record of a B and its management before investing any
capital. Ability to pay back to previous lenders and success record of the entrepreneurs.
○ Business angels
■ Extremely wealthy individuals who choose to invest their own money in B that offers high
growth potential.
■ High risk à high return business ventures
■ Proactive role in the setting up or running of the B venture
■ The owner loses some control to the B angle
■ Disadvantage: Might have to buy out the B angle
■ Major advantage for survival and success of a new B

Sole trader Partnership Private limited Public limited Non – profit

company company organisations
Business angels X X X

Donations X

Factoring X X X X

Grants X X X X X

Leasing & HP X X X X X

Loans X X X X X

Mortgage X X X X X

Overdraft X X X X X

Personal funds X X

Retained profit X X X X X

Shares X X

Trade credit X X X X

Venture capital X X X

Short-, medium- and long – term finance

● Effective manager pay close attention to the cash flow situation of their B
● Balance out and in
● Different forms of finance to deal with short-, medium- and long – term changes.
● Different sources of finance in different situations
● Same purpose à fund B activity
● Short term: refers to the current tax year. External sources: anything that has to be repaid to the creditors
within the next twelve months.
● Medium term: time period more than twelve months but less then five years. Sources: commercial loans or
HP purchase agreements in excess of a year.
● Long term: Any period longer then five years. Longer time à harder to plan effectively. Sources: mortgages
and debentures
● The definitions vary between B and industries.
● How do this definitions link to the overall aims and objectives of a B.
● Table categories in a crude way

Short term Medium term Long term

Internal sources

Cash at bank X

Retained profit X X

Sale of fixed assets X

Selling dormant assets X

Working capital X

External sources

Business angel X X X

Debentures X

Debt factoring X

Donations X

G subsidies and grants X X X

HP X X X

Leasing X X

Loan capital X X

Overdraft X

Share capital X

Sponsorship X X

Trade credit X

Venture capitalist X X

Sources of finance for public sector organisations

● Directly charge their services, funding from the government helps to keep the cost low and Donations and
campaigns
BM 3.2 Notes - Costs and revenues
Types of costs
● Difference between costs and price. What the customer spends on a product is the price and the cost
refers to the expenditure in producing the shirt.
Fixed costs
● Costs of production that the business has to pay regardless of how much it produces or sells.
● Example – rent on leased premises.
● Paid even if there is no output.
● TFC – total fixed costs
● Can change but it happens independently from the level of output.
Variable cost
● Costs of production that changes in proportion to the level of output or sales.
● As output increases – the total variable cost increases (TVC)
● Total costs include fixed plus variable costs.
● TC = TFC + TVC
● Linear function y – intercept in TFC and the same gradient as TVC
Semi – variable costs
● Contain element of both fixed and variable costs
● They tend to change when production or sales exceed a certain level of output
● Example – telephone bill. Fixed up until a point then variable after how much you use.
● A lot of cost can be classified as semi – variable.
Direct cost
● Specifically related to an individual project or the output of a particular product. Without which the costs
would not be incurred.
● Can include variable costs à but not necessary related to the level of output (can be fixed)
● Direct cost can be traced back to the output of and/or to a specific cost centre.
● Variable costs are different in different businesses.
Indirect costs (overheads)
● Cannot directly be traced to the production or sale of any single product.
● Example lights and rent.
● Advertising, legal expenses, administrative staff salaries, insurance and security.
● Indirect cost can be fixed costs since they do not directly relate the to level of output. à But they are not as
easy to identify.
Costs formulae
● Total cost (TC) = TFC + TVC
● Total variable costs (TVC) = AVC*Q
● Total fixed costs (TFC) = AFC*Q
○ AVC represents average variable costs.
○ AFC represents average fixed costs.
○ Q represents quantity or level of output
Revenue
● Refers to money coming into a business usually from the sale of goods or services (sales revenue).
● Sales revenue = Price*Quantity sold
● The Business earns profit there is a positive profit between its revenues and costs.
Revenue formulae
● Total revenue (TR) = P*Q
● Average revenue (AR) = TR/Q
○ Since P = TR/Q à then AR = P
Revenue streams
● Not only from sales à can come from other sources à revenue streams
● Depending on type of firm and its activities
Advertising revenue
● Google, twitter and facebook uses offering of advertising and a revenue stream.
Transactions fees
● Alternative revenue stream à airplanes charging for use of credit card, reservation of seat and luggage.
Franchise costs and royalties
● Revenue from selling brand name, logo and trademarks. Burger king
Sponsorship revenue
● Below the line promotion à money from representing another brand or company, like Arsenal represents
emirates airlines.
Subscription fees
● Customer who use or access good/ service based on a formal agreement. Like fitness centres charge
membership fees.
Merchandise
● Services provided in the entertainment industry. Rely on selling merchandise like popcorn, beverage and
souvenirs
Dividends
● Being a shareholder of other company à dividend, like Volkswagen holds shares in Porsche.
Donations
● Financial gift from individuals or organizations. For charities they depend on donations for revenue stream.
Interest earnings
● Earn interest on the cash deposits at the bank. Important to highly cash – rich businesses because of a lot
of return, when you put a lot of money in the bank.
Subventions
● Offered to some businesses to reduce the cost of production. Benefit for the society.

BM 3.3 Notes - Break–Even Analysis

Contribution
● Refers to the sum of money that remains after all direct and variable costs have been taken away from the
sales revenue. à Money available to pay fixed costs.
● Contribution per unit = P – AVC (P = price, AVC = Average variable costs)
● Total contribution = (P – AVC)*Q (Q = quantity of sales)
● Profit = Total contribution – TFC (TFC = total fixed costs)
● Profit can be increased in the following cases
○ Increasing sales of product (increase in gross profit)
○ Reducing variable costs
○ Reducing fixed costs and overheads
● Contribution helps to identify products that are relatively profitable and the once that might need more
attention.
● Profitable à contributes positively towards the fixed costs.
● Important to know the units sold before deciding how profitable the business is.
● Contribution analysis helps the business at several areas
○ Pricing strategy: set the price for the product to insure it will be able to pay the costs
○ Product portfolio management: which product should be given the investment priority.
○ Allocation of overheads to cost and profit centres: done in fair manner.
○ Make – or – buy decisions: should produce? Or purchase them? The difference between the unit
contribution of making or buying is likely to decide the decision.
○ Special order decisions: customer places an order at a price that differs from the normal price
charged by the business. à Take it or not?
○ Break – even analysis: TC = TR.
Break – even analysis
● The difference between revenue and costs. à Survival
● The level of sales that must be made to break – even
● Break – even analysis is a management tool.
● A business can be I one of the following situation any point in time.
○ Loss: when cost of production exceeds the revenue of the business.
○ Break – even: revenue is equal to cost of production
○ Profit: when revenue exceeds costs of production.
● A break – even analysis can inform managers of two things
 ○ Is it financially worthwhile to produce or launch a particular good or service?
○ The expected level of profit if things go as planned.
● Three ways that we can determine the break – even point
○ Using TR = TC
By comparing total sales revenues with total costs. Px Q=TFC+TVC
● Using the contribution per unit rule
Break – even = fixed costs/contribution per unit
● Interpretation from a break – even chart

● Break even formulae

○ Unit contribution: P – AVC
○ Break – even: TC = TR or
○ Profit (or loss) TR – TC
Total contribution – total fixed costs
=
The margin of safety
● MOS measures the difference between a firm’s sales volume and the quantity needed to break even.
● Extent to which demand exceeds the BEQ
● A positive MOS means that the firm makes a profit, whereas a negative safety margin means the firm
makes a loss.
● Greater positive the more safe the firm will be in terms of earning profit.
● Margin of safety = level of demand – BEQ
● Less safe à more vulnerable a business becomes to change in the market.
● Therefore the MOS can reveal the degree of risk involved in a decision.
Constructing a break – even chart
● To construct an accurate break – even chart, use the following rules
○ Conventional to draw and label the total fixed cost line
○ The total cost line is drawn and labelled. Same starting point as TFC
○ Total revenue is drawn. No output à sales revenue is zero. TR starts in origin.
○ The x – axis labelled as “output” and include units
○ The y – axis labelled as “costs and revenues”, terms of currency.
○ A title put into the context of the business.
● Target profit = TR – TC
Changes in break – even
● The model is static, only a small amount of time in the chart.
● Factors that can affect the profit or loss
○ The difference between short-term and long-term profits: might be necessary to reduce prices in
order to attract customers.
○ Level of demand in subject to change: like changes in fashion.
○ Profit depends on the level of risk involved: low risk product lead to quicker BEQ, value likely to be
low.
○ Innovation and the introduction of new technology: generate more sales if they are popular à apple
iPad
○ Luck: to succeed à external factors can have direct impact on profit.
Break – even analysis and the CUEGIS – concepts
● Contribution is crucial to the understanding of break – even analysis.
● Three broad strategies for improving profits
○ Increasing sales revenues à market and/or growth strategies
○ Reducing variable costs à seeking more cost efficient production
○ Reducing fixed costs à cheaper rents
● BEA is a useful scientific management planning tool for presenting cost and revenue data to aid strategic
decisions, such as:
○ Product portfolio management: BEA helps to assess the expected BEQ.
○ Risk assessment: calculating the margin of safety
○ Make – or buy decisions
 ○ Special order decisions: accept or not?
● Consider the quantitative tools
● Consider the context of the business culture, and strategy
● BEA should be used with caution, bearing in mind that assumption of the model.
● Alongside with other tools

Benefits and limitations of break – even analysis

Strengths:
● Useful decision-making tool for managers. “What if”.
● It’s a quick visual representation of the data.
● Can be used to make realistic predictions rather then relying on simple guesswork.
● Extra beneficial for (produce or sell a standardised product, operate in single market, output is sold)
Weaknesses
● Assumptions that are hardly ever meet.
○ All cost are linear (unlikely because of economies of scale)
○ Sales revenue is linear (unlikely because of discounts of large orders, reduced prices and price
discrimination)
○ That the business will sell all of its outputs. Stock costs money.
● A static model, ignores changes at short notice, only be valid for one point in time.
● Garbage in garbage out.
● Quantitative and qualitative factors that can alter the cost, revenues and outputs of the business are
ignored.
● Only suitable for single product firms that sell all their output.

BM 3.4 Notes - Final accounts

● Proper accounting lets managers have better financial control and planning, but it's also a legal
requirement.
● Financial reporting is a way to account the money of the business, whether it belongs to the owners,
investors or lenders.
● The financial accounts consist of two statements
○ The profit and loss account – trading position of a business at the end of a specific accounting
period.
○ The balance sheet – the assets and liabilities of a business at a particular point of time.
● Most countries have a legal requirement to have their final accounts audited by independent accountants
● Incorporated businesses legally obligated to produce final accounts.
● Internal stakeholders can use financial accounts to manage the business and aid strategic decision –
making.
● External stakeholders can use financial accounts to make judgements.
● The purpose of financial accounts for the different stakeholders
○ Shareholder – the owners are interested in seeing where the money was spent + return. (Hold, sell
or buy)
○ Employees – to assess the likelihood of pay increment and degree of job security.
○ Managers – judge operational efficiency of the org. financial analysis à setting strategic planning.
○ Competitors – compare the financial performance.
○ Government – The tax authority à right amount of tax
○ Financiers – lenders (B angles) to approve funding.
○ Suppliers – decide the extent to which trade credit should be given.
○ Potential investors – is it worth it?
The principles and ethics of accounting practice
● Professionals must be abiding by the principles and ethics of accounting practice established by a
regulator body. à Positive reputation
● The Association of Chartered Certified Accountants (ACCA) is a global regulatory body of professional
accountants.
● 5 guiding principles for accounting practice
 ○ Integrity: straightforward and honest
○ Objectively: free from bias and any conflict of interest.
○ Professional competence and due care: professional knowledge and skills.
○ Confidentiality: respect the confidentiality of the information and duties. Not to use for personal
gain.
○ Professional behaviour: relevant laws and regulations.
The profit and loss account
● Financial statement of the firm's trading activities over a period of time (1 year).
● Private sectors à profit
● Purpose à to show the profit or loss of a business during a particular trading period.
● Revenue: income from trading activities: cash and credit sales, charges and fees.
● Costs: outflow from operating, wages, rents and the purchase of stock.
● Tree stages to an income statement

● Trading account (example page 254)

○ The difference between the sales revenue and the cost of producing or purchasing those products
to sell. à Gross profit
○ Gross profit = sales revenue – Cost of goods sold
○ Cost of goods sold (COGS) term of the direct cost of the goods that are actually sold.
○ COGS = opening stock (the cost value) + purchases – closing stock
○ Improve gross profit by reducing costs and raising revenue.
■ Using cheaper suppliers à conflict with quality.
■ Increase selling price à fall in volume of sales
■ Enhanced marketing strategies à raise expenses
○ Profit and loss account
■ Net profit at the end of a trading period
■ Net profit is surplus from sales after all expenses are accounted for. à Net profit is actual
profit.
■ Net Profit = Gross profit – Expenses
■ Indirect and fixed cost of production: administration, management salaries, insurance, rent
of land and property.
■ Improve net profit by reducing expenses
■ Rent charges negotiated or moved to cheaper premises. à Industrial inertia
■ Heating and lighting could reduce à better image
■ Administration costs might be reduced by combining jobs.
■ Interest charges and taxes are shown separate items in the P&L accounts. They change
over time. Beyond the control of the business. Allow firms to compare the financial
performance.
○ Appropriation account
■ How is net profit is distributed
■ Dividends – amount of net profit after interest and tax that is distributed to the
owners (shareholders) of the company. The figures are transferred to the balance
sheet and shown under current liabilities.
■ Retained profit – kept by the business for own use, reinvesting it in the company or
to expand the business. Transferred to “financed by” in the balance sheet.
■ Combined into one account (Trading account + Profit and loss account + appropriation
account)
■ Important to show the profit after all cost is taken away.
■ Limitations of the P&L account
■ Historical performance: not linked to future success.
■ Window dressing: legal manipulation to make them more attractive
■ No international standard: hard to compare different companies.
The balance sheet
● Annual financial statements that all companies are legally required to produce for auditing purposes.
● Value of an organization’s assets, liabilities and the capital invested by the owners.
● ONE DAY ONLY à snapshot
 ● The firm’s sources of finance (equity), where the money has been used (net assets) à were does it come
from, and what was it spent on.
● Helps to ensure that all monies within the organization are properly accounted for,
● Three essential parts
● Assets: items of monetary value that are owned by a business; Cash, Stock and buildings.
○ Fixed assets: any assets used for business operations and likely to last for more then 12 months
(Balance Sheet date).
○ Current assets: refers to cash or any other liquid assets that are likely to be turned into cash within
12 months of the balance sheet date. (Cash, debentures and stocks)
● Liabilities: legal obligations of a business to pay its lenders or suppliers at a later date, what does the
business owe.
○ Long – term liabilities: debts that are due to be repaid after 12 months. Long-term borrowing.
○ Current liabilities: debts that must be settled within one year of the balance sheet date. Overdrafts,
dividends to shareholders and taxes.
● Net assets = Fixed assets + working capital – long – term liabilities
● Net assets = Total assets – total liabilities
● Equity (capital and reserves): the value of the business belonging to the owners. Shareholder’s equity
(limited liabilities companies) or owner’s equity (other then limited liability companies)
○ Two main sections to this part of the balance sheet.
○ Share Capital: amount of money raised when the shares were first sold, rather then current market
value.
○ Retained profit: Amount of net profit after interest, tax and dividends.
○ From the balance sheet we can see that Total assets – total liabilities = net assets = owner’s equity
○ Owners own the value of the assets after all the deductions are made.
● Legal requirement to report balance sheets for two consecutive years. To be able to compare.
● Sole traders and partnerships differ
○ Sources of finance will differ.
○ Shareholder’s funds replaced with owner equity.
○ Dividend will not appear for sole traders and partnerships.
● Limitations of balance sheet
○ Static document, the financial situation might differ a lot.
○ The figures are, at best only accurate estimates of the value of assets and liabilities. Market values
not the same as book value. Only known when sold.
○ No specific format required for preceding a balance sheet, different businesses would produce
different balance sheets à difficult to compare the different companies.
○ Not all assets are included à intangible and human capital. Financial situation not accurate in the
balance sheet.
Intangible assets
● Non – physical fixed assets that have the ability to earn revenue for the business.
● Legally protected by intellectual property rights
● Can account for a large proportion of the firm’s assets value.
● The main intangible fixed assets that can appear on the balance sheet include.
○ Brand: helps to drive global sales.
○ Patents: provide legal protection from inverters copying their creation for a fixed number of years.
Stimulate innovation.
○ Copyrights: legal protection for the original artistic work of the creator.
○ Goodwill: value of the organization's image and reputation, can also include value of customer
base and business connections. The sum of staff and customer loyalty and can provide a major
competitive edge for any business.
○ Registered trademark: are distinctive signs that uniquely identify a broad, product of business.
Trademark can be sold so that ownership can be transferred for appropriate fees and is reflected
in the firm’s balance sheet.
● Not always in a balance sheet because they are hard to measure
● The subjective nature of valuing intangible assets renders its unnecessary or even impossible to include in
a balance sheet.
● Seen as a form of window dressing the balance sheet
Deprecation
● The increase of value of fixed assets is known as appreciation.
● Deprecation is the fall in value of fixed assets over time. Due to
○ Wear and tear: used rapidly over time leads to decrease in value
○ Obsolescence: a newer and better product arrives, demand and value of the fixed asset
decreases.
● Deprecation spreads the historic cost of fixed assets over their useful lifespan.
● The change in value of fixed assets is shown by reassessing their value on a balance sheet.
● Deprecation needs to be recorded in order to:
○ Calculate the value of the business more accurately. Better reflect the true value.
○ Realistically assess the value of fixed assets over time.
○ Plan for replacement of assets in the future. Recorded on the P&L.
● Two main methods of calculating depreciation: The meaningful and historical comparing decides which
method.
● Straight line method:
○ Simplest and most commonly used method.
○ Annual depreciation is calculated from the life expectancy of the asset, the residual value and the
purchase cost.
○ Annual deprecation = (purchase cost)/(lifespan)
○ The residual value is an estimate of the scarp or disposal value at the end of its useful life. à Many
companies use 0 residual value because the estimate is inaccurate.
○ With minimum return price the formula becomes
○ Annual deprecation = (Purchase cost - residential value)/(lifespan)
○ Advantage: simple to calculate and to understand.
○ Disadvantage: not realistic with equal amount each year.
● Reducing balance method:
○ Deprecates the value of an asset by predetermined percentage for the duration of its useful life.
○ Net Book value = (Historical cost – accumulated depreciation)
○ This method is more realistic in the representing of the falling value of the fixed asset over time.
○ Not straightforward to calculate and deciding on the annual rate of deprecation. Subjective.
○ Also unnecessary in the risk is to simply spread the value over its full useful life span.
○ Amortisation: used to reduce the value of non – physical fixed assets. On a balance sheet.
Limitations of final accounts
● One-year accounts in isolation do not say much about the financial performance.
● HR are ignored – skills, loyalty and motivation overlooked.
● Nothing about non – financial matters, organizational culture, qualitative factors.
● Needs access to the other firm’s accounts to see the financial performance.
● Not the whole truth.
● Past performance does not necessary mean future performance.

BM 3.5 Notes - Profitability and ratio analysis

● A ratio is a number expressed in terms of another
● Ratio analysis is a quantitative management tool for analysing and judging financial performance of a
business.
● Calculating the financial ratios from the firm’s final accounts.
● To see improvement à comparing to history or rivals
The purpose of ratio analysis
● Examine the financial position (short and long – term liquidity position)
● Assess a firm’s financial performance
● Compare actual values with budget
● Aid decision – making, risk or not.
● Ratios are compared in two ways:
○ Historical comparisons à part with present
○ Inter-firm comparisons à comparing from same industry. Relevant.
 ● Firms use both, but can only compare like with like.
Profitability and efficiency ratios
● Profitability ratios
○ Profit in relation to other figures (like sales)
○ Relevant for profit seeking businesses
○ Managers, employees and potential investors are interested in these.
○ Main is the GPM and the NPM
● Efficiency ratios
○ How well a firm’s resources have been used (like amount of profit generated from the available
capital used by the business)
● Profit is an aim and a measure of success
● Profit: the surplus earnings of a firm once all cost have been deducted.
● The absolute amount of profit in the P&L tells little about the financial performance.
● Depends on size.
● Key limitation: only apply to profitable businesses
● Gross Profit Margin (GPM)
○ The gross profit as a percentage of sales revenue
○ The formula
○ For every 100$ of sales the (GPM)$ is gross profit
○ Two main ways of improving the GPM
○ Raising revenue by
■ Reducing the selling price for products, which there is many substitute products.
Competitive advantage.
■ Rising the price of products, which there are few, if any, substitutes. Strong brand.
■ Marketing strategies to raise sales revenue. Promotion and product extension.
■ Alternative revenue streams to boost sales revenue.
○ Reducing direct costs by
■ Cutting material costs, cheaper suppliers. (Negative effects)
■ Cutting direct labour costs. Cutting number of staff or getting them to do more. (Negative
effects)
○ Net Profit Margin (NPM)
■ Percentage of sales turnover that is turned into profit
■ For every 100$ of sales the (NPM)$ is gross profit
■ The formula
■ Better because it includes direct AND indirect costs
■ Difference between the GPM and NPM represents the expenses and the greater difference
à bigger expenses à more difficult to control overheads.
■ Higher NPM à better for the business.
■ Common for high volume products like confectionary and fast food to have low margins à
but high amount of sales. Opposite for aircrafts
■ NPM can be improved by financial and non – financial strategies. (Like those in GPM).
■ Negotiate preferential payment terms with creditors and suppliers.
■ Negotiate preferential cheaper rents
■ Reduce indirect cost
■ Net profit before interest and tax is common to use. Allows comparing since both tax and
interest are not in control of the business.
○ Calculate the financial ratios are necessary to use the P&L and the balance sheet.
○ Efficiency ratios
■ ()
■ Return on capital employed (ROCE) à measures the financial performance of a firm
compared with the amount of capital invested. Also indicates the profitability. Both
profitability and efficiency ratios.
■ The formula
■ Capital employed = shareholders fund’s + retained profits + long-term liabilities (loan capital)
■ ROCE shoes profit as a percentage of the capital used to generate it.
■ Higher ROCE, the better it is for the business.
 ■ Targets need to be put into context à what industry.
■ Rule: the ROCE should exceed the interest rate offered at banks (if not, it would be better to
deposit the capital in an interest – bearing bank account) à to gain investors.
■ Calculated by using net profit before interest and tax.
■ Allows better historical comparison.
■ Most important à key ratio.
■ ROCE can be improved like the NPM
Liquidity ratios
● Look at the ability of a firm to pay its short-term liabilities. Like comparing working capital to short – term
debt.
● Creditors are interested to see the likelihood of being paid back. Also the potential investors.
● Liquid assets: quickly turned into cash. (Cash, stock, debtors)
● Current ratio
○ Liquid assets and short-term liabilities (working capital)
○ Reveals whether a firm is able to use its liquid assets to cover short-term debt.
○ The formula
○ Accepted ratios between 1.5 – 2.0
○ A safety margin if the assets are not as liquid as we think
○ Below 1 there is not enough working capital à not survive
○ To high à could have been invested.
○ Ratios into context.
○ Can be improved by a combination of raising the value of current assets. And reducing the value of
current liabilities.
● Acid test ratio (quick ratio)
○ Ignores the stock when measuring the short-term liquidity of a business.
○ The formula
○ More meaningful because stock are not always easy to convert into cash.
○ The quick ratio should be 1:1 (if not, liquid crisis)
○ Can suggest that the firm is holding to much cash rather then using it efficient.
○ Put into context
○ Potential investors and short-term lenders are likely to be interested.
● Uses and limitations of ratio analysis
● Stakeholders use financial ratios to aid decision – making by assessing the relative financial strengths and
weaknesses of a business. For example
○ Employee and trade unions use financial ratios to assess the likelihood of pay rises and the level of
job security.
○ Managers and directors can assess the likelihood of getting management bonuses. Plus areas that
needs improvement.
○ Trade creditors look at short-term liquidity ratios to ensure that the customer will pay back.
○ Shareholders use ratio to assess the return of their investment compared with other investments.
○ Financiers use ratio to ensure that the business has sufficient working capital to repay any loans.
○ The local community use ratio to gauge job opportunities for local residents. Secure sponsorship
for local events.
● Ratios has limitations
○ Historical account of a firm’s performance. They do not indicate the current or future. Changes in
the external environment. The ratios can changes without change in performance.
○ Totally ignored qualitative factors.
○ Organizational objectives differ between businesses à could be meaningless to compare.
● Other quantitative and qualitative factors can help assess a business financial performance.
○ Historical performance: The same ratio should be compared years on years to identify any trends.
Determine improvements.
○ Inter – firm comparison: benchmarked with close rivals
○ The nature of the business and its aims and objectives: Different objectives give different ratios.
○ The state of economy: might change the impression of the business performance.
○ Social factors: air pollution, ethical and job losses.
● Important to compare with other factors
BM 3.6 Notes - Efficiency ratio analysis
Stock turnover
● Inventory turnover ratio
● Measures the number of times a firm sells its stock within a time period. (1 year)
● The speed at which a firm sells and replenishes all its stock
● Two alternative ways to calculate stock turnover:

● COGS used instead of sales turnover as stock are valued at cost value of the inventory rather then selling
price.
● Using this calculation, the higher the ratio the better it is for the firm because more stock is sold and
therefore the more efficient it is generating profit.
● High stock turnover: perishable stock does not expire or stock does not become outdated.
● Ways a firm’s stock level can be reduced to improve its stock turnover ratio:
○ Holding lower stock levels requires inventories to be replenished more regularly
○ Divestment (disposal) of stock à those that are slow to sell.
○ Reduce range of products
● Comparing ratios. Like – with – like
● Different businesses have different benchmark figures for stock turnover.
● A low stock turnover might not be a bad sign à needs to be put into context.
Debtor days
● Ratio measures the number of days it takes a firm, on average, to collect money from debtors. à Debt
collection period.
● The formula
● Shorter time to get the money, better for the business. Two reasons
○ Improve cash flow
○ The opportunity cost of holding onto the money
● A ratio that is too high or too low can also be problematic.
○ Credit period can be too long, the business might experience liquidity problems.
○ Too low the customers are might seeking other suppliers. à Better credit terms.
● Credit control: the firm’s ability to collect debts in a suitable timeframe.
○ Good credit control: Within 30 – 60 days
● Ways to improve the debt collection period
○ Impose surcharges on late payers
○ Give debtor's incentive to pay earlier à discount to pay earlier. Encourage using direct debit or auto
pay.
○ Refuse any further business with clients who have not paid their bills.
○ Threaten legal action.
● Depends on the business and industry how much you can rely on the debt collection period
Creditor days
● The number of days it takes on average, for a business to pay its trade creditors.
● The formula
● Creditor range in the same as debtor days = 30 – 60 days
● High creditor days ratio means that repayments are prolonged. Help to free up cash in the business to use
somewhere else.
● High ratio may also mean that they take to long to pay their creditors.

● Improving any of the efficiency ratios can enhance the efficiency position of a firm. (Increasing stock
turnover, reducing debtor days and increasing creditor days) Strategies to achieve this include.
 ○ Developing closer relationship with customers, suppliers and creditors. Thereby reduce debt
collection time and extend the credit period.
○ Introduce a system for a just – in – time production. To eliminate the need of holding large amount
of stock and improve stock control.
○ Improve credit control. Managing risk regarding the amount of credit given to debtors.
Gearing ratio
● To assess the firm’s long – term liquidity position.
● By examining the capital employed that is financed by long – term debt.
● Gearing enables managers to gauge the level of efficiency in the use of a firm’s capital structure.
● The formulas

● The higher gearing ratio, the larger the firm’s dependence on long – term sources of borrowing. à The firm
incurs higher costs due to debt financing. Can limit the net profit of a firm.
● Creditors and investors are interested in the level of gearing.
● Highly geared when the gearing ratio is 50% or above.
○ More vulnerable to increase in interest rate.
● Shareholders and potential investors are also interested in the gearing ratio.
○ Assess the level of risk
○ High interest rate – less for the shareholders
○ (Also the profitability and potential return counts)
● Need external sources when expanding. “You need money to make money”
● The problem facing finance managers is how much debt the firm can handle before the benefits of growth
overweigh the costs of high gearing and financial risk.
● The level of gearing that is acceptable depends on factors like
○ Size and status: positive correlation between size and ability to pay.
○ The level of interest: low à less vulnerable.
○ Potential profitability: good profit quality à high gearing (less of an issue)

BM 3.7 Notes - Cash Flow

The difference between cash and profit
● Cash is the lifeblood of a Business, because needed to function
● Cash is used to pay the daily costs, if not the company will go bankrupt.
● Cash is a current asset
● Two other current assets are stocks and debentures
● Current assets = Cash + stock + debentures
● Liquidity à assets turned into cash
● Insufficient working capital is more dangerous then lack of profitability
● Insufficient working capital à insolvency à closure (creditors take legal action)
● Various methods that can prevent or deal with working capital problems
The working capital cycle
● Working capital à money available for the daily running of the B
● Running costs
● Working capital = current assets – current liabilities
● Currents assets (liquid assets) are resources that belong to a B that are intended to be used within the next
12 months.
● Three main types of currents assets
○ Cash: money held in the bank
○ Debtors: people or organizations that owes money to a B
○ Stocks: unsold suppliers of raw material, semi and finished good à inventories
● Current liabilities the money that the B own to others and that needs to be repaid within the next 12
months.
● Common examples
○ Overdrafts, creditors and tax
● Delay between getting money from selling products and paying costs
 ○ Because the production process takes time
○ This is know as the working capital cycle
○ Delay means careful management of Working capital
● Important to have enough Working capital, opportunity cost in holding to many current assets. Used more
productively
● Measure liquidity by the current ratio: (current assets/current liabilities)
● Value lower than 1 the B has liquidity problem
Difference between cash and profit
● Profit: revenue – cost
● Credit may cause cash flow problems à need to survive
● Firm does not receive the cash because of credit
● Difference between sales revenues and cash inflows
○ Sales revenue from a single source à costumers
○ Cash inflow: sales revenues, not limited to trading bank loan, donations etc.
● Possible to be profitable but cash deficient
● Poor credit control, expand to quickly, seasonal variations,
● Need cash to pay employees and suppliers
● No cash à
● High cash flow, but not profitable

Cash flow forecast

● Financial document that shows the expected movement of cash in and out of the B, per time period
● Based to three key concepts
○ Cash inflows (receipts): sales forecast, and from debentures, loans from banks, interest from
deposits.
○ Cash outflows: cash that leaves the firm, bills that needs to be paid. Detailed budget including all
expenses
○ Net cash flow: difference between out and in, per period of time. Needs to be positive
● Reasons for cash flow forecasts
○ Banks and lenders need it to see the financial health of the B
○ Managers to identify possible problem periods à plan
○ Its positive for the B planning à aims and objectives
● Constructing cash flow forecast
○ In addition to cash inflow and outflow and net cash flow there are two other elements
○ Opening balance: the amount of cash in the beginning of a trading period. Same as the previous
month closing balance.
○ Closing balance: amount of cash in the end of a trading period. Closing balance = opening balance
+ net cash flow
Causes of cash flow problems
● Overtrading: expand too quickly, without enough resources to do so. Take more orders than they can
handle, reducing the working capital
● Over borrowing: larger proportion of capital raise by external sources à higher cash outflows on payment.
Putting pressure on the working capital
● Overstocking: Firm holds to much stock as a result of an inefficient stock control system. Wasted money
● Poor credit control: to long credit period, without cash inflow. Increases the bad debt, they fail to pay
● Unforeseen change: unexpected change in demand can cause serious cash flow problems, breakdown,
seasonal problems etc.
Investment, profit and cash flow
● Cash is not the same as profit
● Examples of how investment, profit and cash flow are interlinked
○ When a business sells an investment, it experiences an increase in its cash flow position. The
opposite happens when a business buys an investment.
○ When a firm obtains finance for investments, the cash inflows improve the liquidity position.
○ Note: the use for cash for investments are not directly linked to a firm’s trading activities.
● Investment requires the use of cash, so net cash flow might be negative in the short – term.
 ● Remember: Investment does not guarantee profit.
● The importance of how investments are financed also affects the cash flow position of a business.
● Cash flow is vital for investment opportunities. Poor = not able to invest.
● Effective cash flow management and product portfolio in necessary before a business can turn
investment into profit.
(Improving cash flow) Seeking alternative sources of finance
● Overdrafts: Immediate access to cash during times of negative cash flows.
● Selling fixed assets: generate much needed cash
● Debt factoring: external firm takes the debt. Saves administration costs.
● Government assistance: the government helps out.
● Note: Cash flow statements do not show profitability.
Cash flow and the CUEGIS concepts
● Firms use combinations of cash boosting and reducing strategies
● Pareto (80-20)
● Firms have ICE funds.
● Working capital is essential for many aspects of the business strategy
○ HR: needed to pay staff on time. Pay key motivator.
○ Marketing: needs a lot of cash
○ Production: need huge amount of cash to finish their products.
● Cash flow forecast calculations are static and can easily contain mistakes.
● Only one point in time. à Handled with some caution.
● Also updated regularly to be more correct at any time.
● The desire of cash and the desire of profit.
● Cash is regarded as being more important then profit in the short run.
Management of working capital
● Improvements require effective working capital management
● Successfully manage its currents assets and liabilities
● Several ways of dealing with working capital problems
● Seeking alternative source of finance
○ Boost liquidity position if it can use other sources of finance, like overdrafts. Firms facing liquidity
crisis might find it difficult to obtain overdrafts
■ Sale and leaseback: selling fixed assets and directly leasing them again.
■ Selling of fixed assets: sale of dormant assets (Unused).
■ Debt factoring: external firm taking the debt.
■ Government assistance: low interest rate from the government, helps cash flow
■ Growth strategies: increase the size of the B SA, JV etc.
○ Improving cash inflows
■ Tighter credit control: limit trade credit to their customers or reduce the credit period.
Receive cash sooner.
■ Cash payments only: removing credits delays. Drawbacks the customers might choose a
competitor that offers credit.
■ Change pricing policy: cutting prices à stock into cash
■ Improving product portfolio: wide and varied product portfolio, more likely to generate sales
revenue. Drawback: risk and no guarantee
■ Improving marketing planning: effective planning can help a B to better meet the needs and
wants of customers.
○ Reducing cash outflows
■ Seek preferential credit terms: negotiate on credit terms. Time. Seek other creditors with
better offers. Drawback: administrative cost.
■ Seek alternative suppliers: more competitive prices à reduce cash flow problems.
Drawback: might lower the quality.
■ Better stock control: just-in-time system, works for mass production: drawback for service
B, with low stock
■ Reduce expenses: identify costs that can be reduces, without affecting quality.
○ In reality firms are likely to use combination and reducing and boosting to improve Working capital.
○ The Pareto Principle (80/20 rule): 80% boosting, 20% reducing
 ○ Also likely to have a contingency fund, ICE
○ To take measures from the outset to minimise the risk and impact of cash flow problem, these
measures include
■ Spreading risk by having a wider customer base à more sources of cash inflow and avoid
the reliance of few large customers.
■ Making demands for partial payments at certain key dates. For large projects.
■ Establishing systems to pay large bills in regular instalments can help to prevent huge cash
outflow during certain times.
■ Ensuring that quality management systems are in place prevent customer complaints.
Limitations of cash flow forecasting
● Predict the future based on certain assumptions. Inaccuracies can come from
○ Marketing: poor market research, incorrect sales forecast. Offend customers, this can harm the
cash flow position
○ HR: demoralised workforce becomes less productive, and poor customer service. Conflicts affect
CF position
○ Operations management: machine failure can cause production delays to the detriment of a firm’s
cash flow.
○ Competitors: directly affects a firm's’ success.
○ Change in fashion and taste: change in demand, more positive then forecasted, vice versa. Boost
income or increasing problems with outflow.
○ Economic changes: opportunities or threats, overtime it should boost growth and evolution and
therefore the sales revenue.
○ External shocks: war; oil crisis etc. cash flow less accurate.
● There are always uncertainties in the assumptions and they are constantly updated to present the most
accurate forecasted cash flow.

BM 3.8 Notes - Investment Appraisal

● Investment: The purchase of assets with the potential to yield future financial benefits. Example: Upgrade
or purchase of computer equipment or building.
● Resources are risked in a venture that might or might not be an advantage.
● Different methods used by managers to access the risk involved in investment
● Investment Appraisal Payback period, accounting rate of return, net percent value and discounted cash
flow
Payback Period (PBP)
● Refers to the amount of time needed for an investment project to earn enough profits to repay the initial
cost of the investment.
● The formula:

● Most investment projects would only be considered if they have a relatively short PBP.
● *Unlikely that the income will be the same every year.
● Advantages
○ Simplest and quickest method, most commonly used.
○ Useful, when B has cash flow problems. Because: identify how long for the cash to “get back”.
○ Allows seeing whether or not it will break even on the purchase of the assets. Before it needs to be
replaced. (Today: fast-paced tech – environment)
○ Compare different investment projects
○ Helps assess projects, which will yield a quick return for shareholders.
○ Assesses short term, less forecast errors.
● Disadvantages
 ○ Short-termism approach to investment. Only focus on short – term benefits.
○ Not suitable for big investment projects
○ Contribution per month is unlikely to be constant.
○ Focuses on time not profit.
Accounting rate of return (ARR)
● Calculates the average profit on an investment project as a percentage of the amount invested.
● Formula:

● Percentage to allow managers to control the rates of return on their investment projects.
● Compared to the base interest rate to assess the reward for the risk involved in an investment.
● What is acceptable real rate of return depends on the size and control in the Business
● Advantages
○ Easy comparisons of estimated returns à in percentage terms.
○ Aiding business decision-making.
● Disadvantages
○ It ignores the timing of cash inflows
○ Forecasting problems, seasonal factors
○ The lifespan might be a pure guess, and is needed for the calculations.
○ The longer time period the more forecast errors.
Discounted cash flow (DCF)
● Based on the opportunity costs of money and future cash flows.
● No or over a longer time period.
● Money received in the future will have lost some of its value.
● Discounting cash flow is the reverse of calculating compound interest.
● A discount factors is used to convert the future net CF to present value
● Discount factor can represent: inflation and/or interest rate.
● Useful decision – making tool, even small changes can lead to large changes in future values.
● Software that calculates it for the managers
Net present value (NPV)
● It takes discounted cash flows further
● Future money worth less then today’s money à longer time, lower percent
● The formula

● Original amount invested is often referred to as the principal.

● NPV will be greater than the principal (positive) if the discounted (future) cash flows are enough to justify
the initial investment. Negative = not worth it.
● *Need to include the fact that the values might reduce if the interest rate were to go up during the next 5
years.
● Disadvantage
○ Complex
○ Only comparable if the initial investment cost is the same.
Qualitative investment appraisal
● All the techniques above are quantitative techniques of investment appraisal.
● Numerical data do not necessary show us the full picture so it is important to consider other factors.
● Qualitative investment appraisal methods do not focus on numbers.
● Qualitative factors, that affect the investment decision – making (PORSCHE)
○ Predictions: Gut feeling, the intuition of changes in the future. Like change in interest rates or
income levels
○ Objectives: Profit or not. It is dependent of your objectives, which technique you will be using.
○ Risk profile: How much risk is your firm willing to take?
 ○ State of economy: high confidence à higher risk projects.
○ Corporate image: investment project might affect the business public relations. Like pressure
groups.
○ Human relations: will automation cause mass redundancies? Staff moral?
○ Exogenous shocks: Hurricanes, oil crises and other natural disasters. May have to be considered.

BM 3.9 Notes - Budgets

The importance of budgets
● A budget is a financial plan of expected revenue and expenditure of a given time period.
● They can also be targets à planned sales revenue, cost, cash flow or profits
● Essential part of managing.
● Budgets are needed when a business grows beyond a size that prevents the owner or controller from
making all expenditure.
● Should be set in line with the aims
● Prepared in advance, monthly annually and quarterly.
● All budgets aim to help managers plan, monitor and control activity.
● Budgets are produced for the four reasons
○ Planning and guidance, coordination, control and motivation.
Planning and guidance
● Plan for the future and to anticipate financial problems before they occur
● Better prepared to overcome problems
● The following questions might be asked
○ How much should they spend on marketing this year?
○ How many workers and what will they cost?
○ How much money should be set aside for ICE funds?
● Questions help allocate budgets and in decision – making
Coordination
● Control the firm’s money
● Effective = match with the aim of the business
● Budgets help the entire workforce to focus on common goals
● Budgetary control
● Coordinated and controlled budgeting leads to consistent and coordinated decision-making.
Control
● Control business expenditure
● Overspending is a big problem
● With a budget you know what you can spend money on and not. You can see your limitations.
● It can prevent going into debt
Motivational
● Recognition, responsibility and employee participation can motivate.
● Control to budget holders à boost moral, feel trusted
● Involving people in the process à teamwork
● Higher productivity and less people are absent from work.
Setting budgets – the considerations
● The available finance – greater finance, greater budget
● Historical data – based on past trends
● Organizational objectives – what is the plan? Built budget after that
● Benchmarking – budget from nearest competitors
● Negotiations – discussion between budget holder and management
Potential limitations of budgeting
● Unforeseen changes that can make the whole budget wrong
● Natural tendency of managers to overestimate their budgets – because then it’s easier to accomplish
their goals.
● Budgets are not permitted to be carried forward to the following tax year.
● Budget can be set by managers that do not have anything to do with that department.
 ● Most useful for those companies with stable sales and costs.
● Rigid and poorly allocated budgets can harm quality.
● Making budgets are time consuming.
● One departments win is another's loss à conflict in the workforce
● Ignore the qualitative factors.
● The budgeting process is rather inflexible in today’s fast past and constantly changing business
environment.
Cost and profit centres
● Divided up to cost or profit centres
● Where managers are responsible for the cost/revenue for that centre/department.
● A cost centre is a department of the business that incurs costs, but is not involved in making any profits.
● Example: salaries, lighting, components and capital expenditure.
● Making sections help managers to have better cost control.
● Can see which centre is costing the most money.
● A profit centre incurs both cost and profits
● Used by large businesses that have broad product mix
● Producing an independent P&L and contributing to the overall profits of the business
Advantages of cost/profit centres
● Managers forced to be more accountable
● Identify areas of weakness – which part is making a loss
● Smaller teams work better then big teams
● No need to consider what type of cost it is – all cost counted
● Benchmarking with the better departments can help overall
● Delegating power to those of profit and loss centres can help motivate.
● Performance can be used to encourage or reward teams.
Disadvantages of cost/profit centres
● Allocating indirect cost is a subjective task
● The profits of a department can change simply because of the apportionment of fixed cost.
● Performance can change because of external factors beyond control
● Data collection is required for all accounting. Expensive and time consuming.
● Managing cost a profit centres can add to the pressure and stress of staff.
● Less likely to consider social and ethical objectives.
● Internal competition – tension between the sections
Variance analysis
● A variance exists if there is a difference between actual outcome and budgeted figure.
● The formula
○ Variance = actual outcome – budgeted outcome
● Two types of variance
○ Favourable variance – positive figures. More then expected.
○ Adverse variance – negative numbers. Not ideal for the business.
● Budget holders needs to investigate the causes of any variance.
● Why over or under the budget?
● Helps monitors and control budgets
● The review and revision of annual budgets.
● Do not have to be expressed in monetary terms à some use percentage
● Needs to investigate the causes

BM 4.1 Notes - The role of Marketing

Definition and nature of marketing
● Marketing exist to address people's needs and wants.
● Reasons behind people’s decisions, like price and features
● Four main generic objectives
○ Ensure that the right products are supplied to fulfil needs and wants of customers.
○ Set the correct price
 ○ Distribute the product
○ Ensure that there is effective promotion to convince customers
● Marketing differs between the organizations
● “The management process involved in identifying, anticipating and satisfying customer requirements
profitability.”
● The various roles of marketing
○ Requires that people take responsibility for decision – making
○ Involves identifying the needs and wants of customers.
○ Predicting what the customer wants in the future.
○ Price, availability and quality are essential to get loyal customers
○ About earning profit. Price must cover cost.
● The relationship with other functions should be considered
○ Operations Management: the production Dep. Uses sales forecast to prepare their production.
Work together to develop and launch products to meet the customer.
■ Possible conflict: marketing – fast launch, production – more time for development and
production.
○ Finance: To set budgets, some marketing is linked to finance directly.
■ Possible conflict: marketing want more money to promotion.
○ Human resources: the need of workforce for the different product that they launch. HR needs to
communicate with marketing, for what they need.
Marketing goods and services (differences in marketing)
● Intangibility: need to communicate the benefits of services à based on trust
● Inseparability: not possible to separate the production and the consumption
● Heterogeneity: different for different customers
● Perishability: cannot store services like you can with goods.
● Product strategy: need to decide if the offering is standardised or customized
● Price strategy: right prices for services so that they appeal to the customers.
● Promotional strategy: physical environment to promote their services. Visualise.
● Place strategy: the location is very important when you offer a service.
Market and product orientation
● Market orientation: is a marketing approach adopted by businesses that are onwards looking by focusing
on making products that they can sell, rather than selling products that they can make.
● Focuses on the customer à needed to stay competitive
● The two main advantages of being market orientated
○ Greater flexibility: respond quickly to changes in the market.
○ Lower risk: more confident that their products will succeed.
● Main disadvantage: market research can be very expensive
● The factors that decide if you are market or product orientated
○ The market: depends on the size if the market. Bigger more market orientated
○ Organizational culture: customers key stakeholder = more market orientated.
● Product orientation: is marketing approach used by businesses that are inward looking as they focus on
selling products that they can make, rather than making products that they can sell.
● Creative and innovative products will create their own markets.
● Often hit and miss
● Concentrate on producing high quality products à higher price
● Main advantage: quality can be assured and the firm has more control over their own operations.
● Main disadvantage: high risk, because the market is ignored.
Commercial marketing and social marketing
● Commercial marketing is the use of marketing strategies to meet the needs and wants of customers in a
profitable way.
● Largely value free à low focus on ethics
● Giving the customer what it wants, where it wants it and when. With the right price.
● Social marketing refers to any activity that seeks to influence social behaviour to benefit the target
audience.
● Benefit from a different stance.
● Awareness, anti – smoking, anti drink – driving and unwanted teenage pregnancies.
 ● The challenge is to get people to change their customary behaviour
● Tend to be Non – profit organizations, but firms that believe in CSR also use social marketing such as
sponsoring events in the local community.
● Market research is important role in social marketing – need to know the people to make them change
their habits.
● Process is also important part of social marketing. Like making it easier to contribute to the case.
● Pricing decisions tend to refer to net benefits – the difference between the cost and taking action.
● The main differences between social and commercial marketing
○ Purpose: commercial wants to sell products to make profit, social aims to change social behaviour
or attitudes.
○ Benefit: commercial the individuals and the business it self, social the benefit of the general public
○ Main users: commercial the private sector (profit seeking) and the social NPO’s
The market
● A market is a place or process whereby customers and suppliers trade. A market exists where there is
demand for a particular product and where there is a willingness from businesses to apply these products.
● Markets catering for private individuals: consumer Markets
● Markets catering for organizations: industrial or producer market.
● There is likely to be competitors in all markets
● Characteristics of the market
● Market size: refers to the magnitude of an industry, usually measured in terms of the value of sales revenue
from all the businesses in a particular market, per time period. Some market is big and global others are
small and local.
● Customer base: total potential number of customers in a particular market.
● Barriers to entry: obstacles that determine the number of suppliers in the market. Set up costs and
dominating the market.
● Competition: rivalry within a particular market.
● Geographical characteristics: markets focuses on particular areas.
● Demographic characteristics: differences in gender, age and religion.
● Market growth rate: increase in the size of a market per period time.
● Seasonal and cyclical characteristics: Some markets are concentrated by seasonal factors
Market share
● Market share measures the value of a firm’s sales revenues as a percentage of the total sales revenue in
the industry.
● The formula
● Positive relationship between market share and profit
● Also benefit from status as being the largest firm à economics of scale
● Market leaders, better price setting ability and are less threatened by competition.
● Increase market share by
○ Promotion of the brand Unit 4.5
○ Product improvement, development and innovation Unit 5.6
○ Motivation and training of the workforce Unit 2.4 2.1
○ Use trademark, copyright and patents Unit 3.4
● Market concentration: Measures the degree of competition that exists within a market by calculating the
market share of the largest firms in the industry.
● The sum of the shares – concentration ratio
● Most industries are dominated by a few large businesses that have huge market share.
Marketing objectives
● Market objectives are the specific marketing goals of an organization. The marketing objectives of for –
profit organizations including:
○ Increased sales revenue – greater customer base or more from existing customers increase in the
profit.
○ Market leadership – the benefit of having the greatest market share
○ Greater market share – more competitive – might give higher revenues
○ Product and brand awareness – promote the product to get customer loyalty
○ Developing new products – innovation can give a competitive advantage
○ Enhanced brand perception – customers have positive perception about the business.
 ● The objectives of social marketing (NPO’s)
○ To build membership and connect with new donors
○ To generate awareness
○ To improve brand recognition
○ Create positive attention to the operations
○ To demonstrate the value of the NPO to the local community in general.
● Marketing is important both for social and commercial, but for different reasons.
Marketing strategies and change in customer preferences
● The successful businesses evolve their organization to suit changes in the customer preferences.
● The market can change without warning
● To have insight is still important to remain competitive over time.
● Reasons why marketing strategies evolve include:
○ Changing customer tastes – that the customers might change, and they need to evolve to remain
competitive.
○ Shorter product life cycle – if success the sales are strong during the introduction and growth
stages. Extension stages can be used to prevent the sales from falling.
○ Internet and mobile technologies – the e – commerce gives people a lot more choice then they
have ever had.
○ Competitive rivalry – the intensity of competition in many markets has forced marketers to evolve
their strategies.
○ Globalization – businesses more interdependent with customer tastes more integrated. Marketers
need to act globally. Cultural and local norms.

BM 4.2 Notes - Marketing Planning

Elements of a marketing plan
● A marketing plan: refers to the document outlining a firm’s marketing objectives and strategies for a
specified time period.
● Usually preceded by a marketing audit – a review of the current position of a firm's marketing mix.
○ SWOT
○ Intensity of competition in the market
○ Product portfolio
○ Effectiveness of the marketing
● A marketing plan can include the following
○ SMART marketing objectives
○ Methods of market research to be used to identify target markets
○ SW of the competitors
○ Outline the marketing mix
○ Details of the marketing budget
○ Strategies to deal with the issues
○ PEST analysis
● Marketing planning is the systematic process of devising marketing objectives and appropriate marketing
strategies to achieve these goals. It requires the collection and analysis of information about a particular
market.
○ Marketing audit – current position
○ Marketing objectives – are the targets that the marketing departments wish to achieve. Derive
from the overall objectives.
○ Marketing strategies – the plan
○ Monitor and review – checking and monitoring that targets are being meet.
○ Evaluation – success or not.
● Main advantage: improves a firm's chance of success
○ Identify and deal with problems
● Main disadvantage: no time, money or expertise to do the work. Inflexible plans that can be outdated.
The 4 Ps of the marketing mix
 ● Marketing mix is the combination of various elements needed to successfully market a product. It’s used to
review and develop marketing strategies and it is the heart of marketing planning. Traditionally, it consists
of the 4 P's: Product, price, promotion and place.
○ Price - refers to the amount that customers pay for a particular good or service.
○ Product - is a physical good or an intangible service, such as a computer or haircut. Businesses sell
products to fulfil the needs and wants of their consumers.
○ Promotion - refers to the strategies used to attract customers to buy the firm’s products.
○ Place: describes the methods for distributing products to customers.
● Need all four elements to create a marketing plan that is efficient
Product
● The marketing strategies used by a business will depend on the type of product in question:
○ Producer products: are industrial products sold to other businesses to further production process.
○ Consumer products: are sold to end-user. Private individuals
● Some products are sold to both industry and private persons
● Businesses tend to sell a range of related products.
Price
● Difficult balance between more profit and overpricing
● Price need to reflect value of money and business
● Depends on a “drastic” number of factors
○ Demand – the greater the ability and willingness of consumers to pay, the higher price they can
take
○ Rivalry – higher competition – more price competition
○ Aims – depends on objectives
○ Supply – lower supply – higher price
○ Time – the time of replacement changes the price
○ Image – corporate images
○ Cost of production – the higher cost of production – higher price
Place
● The distribution starts at the factory of the manufacturer
● Wholesalers sell to retailers
● Retailer to consumer
Promotion
● Above the line – ATL (mass marketing) or below the line – BTL (other marketing)
● Promotional activities include
○ Advertising – expensive form of promotion
○ Sales promotion – price reduction, free gifts etc.
○ Sponsorship
○ Publicity – good press coverage.
The marketing mix and marketing objectives
● Marketing objectives: are the targets that the marketing departments wish to achieve. Derive from the
overall objectives.
● They should also be SMART
● Setting marketing objectives is important because
○ Sense of purpose, direction and motivation
○ Monitor and measure
○ Help planning and development
● Marketing objectives include the following
○ Market share – increase the profit
○ Market leadership – greatest market share
○ Product positioning – improve corporate image
○ Consumer satisfaction
○ High market standing – the presents in the market place
 ● Strategies to meet objectives
○ Market development – selling products in new markets
○ Product development – new products in existing markets
○ Diversification – new products in new markets
○ Product innovation – original or new product onto the market
● Ps for marketing services
○ People – refers to the personnel used in the provision of services
○ Physical environment – refers to the tangible aspects of a service
○ Process - is part of the extended marketing mix, which refers to the method and procedures used
to give clients the best possible experience.
● Internal and external constraints
○ Finance – size of marketing budget
○ Cost of production – determine the price/quality
○ The size and status of the firm – unknown = hard to market
○ Social issues – the people decide what they want
○ Time lags – delay between actions and consumer reactions
○ Actions and reactions of competitors – likely to respond to competitors
○ The state of economy – hard during recessions
○ The political and legal environment – regulations can limit
Target market and market segments
● A market for a particular good or service consist of different types of consumers
● Subdivided into market segments
● A Market segment refers to a distinct group of consumers with similar characteristics, wants and needs.
● What segment to target
● Targeting refers to each distinctive market segment having its own specific marketing mix. Different
markets can be targeted depending on whether firms operate in niche or mass markets
● Consumer profiles are the demographic and psychographic characteristics of consumers in different
markets. (Age, gender etc.)
● Helps identify the needs and wants of consumers
Targeting, segmentation and consumer profiles
● Organizations segment their market in order to create distinct consumer profiles in several ways based on
demographic and/or physiological factors
● Businesses segment for several reasons
○ Better understanding of consumers – better understand needs and wants
○ Higher sales – being able to cater for a wider range of consumers can help a business sell more
product
○ Growth opportunities – identify new opportunities
○ Support of the product differentiation – differentiate its products and spread its risk.
Segmentation by demographics
● Age – similar wants and needs
● Gender – male and female have different wants and spending habits
● Race and ethnicity – different races of peoples have different cultures that affects demand.
 ● Marital status – the change in the culture, opportunities and threats
● Religion – different food, different markets
● Language – businesses may cater for different consumers based on their mother – tongue languages
● Income and socio – economic class – wealthy vs. poor. Spending habits and wants/needs
* In reality: combinations are used for marketing purposes
Segmentation by geographic factors
● Location – different places have different wants and needs, cultures and attitudes.
● Climate – the typical weather affect the wants and the needs in the specific area.
Segmentation by physiographic factors
● Hobbies and interest – provides a lot of marketing opportunities
● Values – ethical responsible businesses appeal to people with specific values
● Religion – opportunities for marketing
● Status – social and economical status
● Culture – and buying habits of different ethnic groups
Marketers can use DAMAS as a set of criteria for assessing successful market segmentation
● Differential – segments must be unique
● Actionable – able to provide suitable products to cater for each market segment.
● Measurable – size and purchase power must be quantifiable
● Accessible – reach consumers in a cost – effective way.
● Substantial – large enough to generate profits.
● After segmentation the targeting is the next stage for the marketing planning.
● Targeting refers to each distinctive market segment having its own specific marketing mix. Different
markets can be targeted depending on whether firms operate in niche or mass markets
Niche markets
● Niche marketing targets a specific and well-defined market segment.
● Interested in exclusive luxury goods or small group of consumers
Advantages of niche marketing
● Better marketing focus, because a specific market segment is targeted
● Less competition, smaller market. Charge higher prices – higher margins
● Specialised in meeting needs and wants à possible loyalty.
Disadvantages of niche marketing
● Small à limits the number of potential consumers in the market.
● Few opportunities to exploit economies of scale.
● If successful, new competition will arrive, threat to survival
Mass Markets
● Mass Marketing refers to differentiated marketing. This is a strategy that ignores targeting individual
market segments.
● Maximize sales volume
● Government use this to do social marketing.
Advantages of mass markets
● No need to modify the marketing strategies – single marketing campaign
● Establish greater economies of scale – more profit.
Disadvantages of mass marketing
● Not suitable for all businesses as there are high entry barriers for mass production
● High competition. Need to convince consumers with a lot of choices.
● Lack of focus can give waste of marketing.
Position (perception) maps
● Position map is a visual aid that shows customers perception of a product or brand in relation to others in
the market.
 ● Position maps allow businesses to identify any gaps in their product portfolio
● Refine their marketing strategies
● Advantage: its simplicity in presenting potential complex market research
○ Inform about market opportunities and threats
● Three stages in positioning
○ Identify the competitive advantage of the product in question
○ Decide on which aspects on these strengths should be marketed
○ Implement the desired positioning by using appropriate marketing mix.
● Three basic competitive strategies to achieve positioning success
○ Cost leadership – low cost suppliers of economic products
○ Differentiation – produce a distinct product
○ Focus – paying close attention to a particular market segment
Unique selling point
● Many possible ways to improve the corporate image
● Seek to market their unique selling point.
● Unique selling point refers to any aspects of a product that makes it stand out from those offered by rival
businesses.
● The USP explains why consumers buy the product over rival once.
● Major source of competitive advantage
● Other more genetic examples of USP include
○ Being the only firm in a local area to supply a certain good or service
○ Being the first to supply a new product (first mover advantage)
○ Having a reputation of being the best in the market
○ Having the reputation of being the lowest cost provider
○ Having a highly popular business slogan
● Can be very difficult to find a USP
● When you find one, competitors will arrive.
Differentiation
● Differentiation is the act of distinguishing a business or its products from rivals in the industry. It tires to
create the perception among customers that the firm’s products is different compared with substitute
products from rival businesses.
● Involves making a product stand out from others
● Common methods of differentiation (8 P’s in the marketing mix)
○ Product – features of product in design, function, build or performance. The quality by using better
raw material
○ Price – different strategies enables businesses to sell a range of products.
○ Promotion – through various promotional method, logos or slogans
○ Place – retailers can reach a greater customer base.
○ People – quality of their customer service. High degree of support.
○ Processes – the way things are done can differentiated
○ Physical environment – the observable places can be a differentiator.
○ Packaging – as a way to be different from competitors
Advantages of differentiation
● Price advantages – differentiation can add value to the good/service
● Brand recognition and loyalty – high brand awareness creates more opportunities for products to be sold.
● Distribution advantages – differentiation improves the placement
Disadvantages of differentiation
● Can be very expensive – cost of being different
● Economics of scale – cannot be fully exploited compared with mass production of a single standard
product.
● Excessive differentiation – can drain a firm’s resources and confuse customers.

BM 4.3 Notes - Sales Forecasting

Sales, trends and forecasting
● Sales forecasting is a quantitative management technique used to predict a firm’s level of sales over a
given time period.
● Sales forecasting is important because it helps identifying problems and opportunities in advance. NB:
difficult to predict the future.
● To make realistic and accurate forecasts managers use several sales forecasting techniques:
○ Extrapolation – which is a forecasting technique used to identify the trend by using past data and
extending this trend to predict future sales. à Works well if there is a clear correlation between two
sets of numbers.
○ Market Research – identifying and forecasting the buying habits of consumers can be vital to a
firm’s survival.
○ Time series analysis – which is sales forecasting technique that attempts to predict sales levels by
identifying the underlying trend from a sequence of actual sales figures. Three main elements:
■ Seasonal variations are periodic fluctuations is sales revenues over a specific time period,
such as certain months or quarters of the year.
■ Random variations are unpredictable fluctuations in sales revenue caused by erratic and
irregular factors that cannot be practically anticipated.
■ Cyclical variations are recurrent fluctuations in sales linked to the economic cycle of booms
and slumps. Unlike seasonal variations can last longer then a year.
○ In reality businesses are likely to use a combination. The choice depends on several factors:
■ How accurate the forecast needs to be – the more certainty needed, the more thorough the
method of sales forecasting needed.
■ How far ahead forecasts need to be – to predict far into the future is a lot more
complicated. Extrapolation is only useful in the near future.
■ The availability and cost of data and information collection – if there is widespread access
to a wealth of information at no or very little cost, then forecasting will be more accurate.
■ The stage in a product’s life cycle – market research rather then time series analysis will be
used during both R&D and launch of the product.
Statistical techniques in sales forecasting
● There are several statistical techniques that can be used to analyse sales forecasting data.
○ Mean – The arithmetic mean is the sum of all items divided by the number of items in a data set.
○ Median – When all numbers are ranked in numerical order, the median is the middle number in the
data set.
○ Mode – This is the number that occurs more frequently than any other value in the data set.
○ Range – This is the numerical difference between the highest and the lowest numbers in a data set.
○ Standard deviation – The measures the difference (or digression) of a variable from the mean value
in a data set.
Moving averages
● The most frequently used method to calculating averages is the arithmetic mean, however moving
averages are a more accurate method of identifying trends à so more useful tool for sales forecasting.
● Moving averages are used to find underlying trends by smoothing out variations in a data set caused by
seasonal, cyclical and random variations. It is common to use up to four part moving averages.
● More time consuming then the arithmetic mean.
 ● The moving averages show the underlying trend for the given time period.
● To calculate a four – point moving averages, the same technique is used. Although “centring” is used to
average to moving averages.
Benefits of sales forecasting
● Improved working capital and cash flow – sales forecasting can help a business identify fluctuations in
demand and hence the liquidity position. Clear idea about costs and revenues à more likely to have better
cash flow position.
● Improved stock control – accurate sales forecasts can help to ensure that the correct levels of stock are
available for use in production at different times. Optimize purchasing plans.
● Improved productive efficiency – the ability to plan for the correct level of production means a better use of
a firm’s resources. Devote time to strategic planning to develop the business, rather then to deal with
operational problems caused by lack of production planning.
● Helps to secure external sources of finance – accurate and realistic sales forecasting can help a business
to obtain external financing from investors and lenders. NB: new businesses à business plan
● Improved budgeting – accurate sales forecasting helps managers to anticipate changes in the economy
and therefore to adjust budgets accordingly.
● Conclusion: sales forecasting should help managers to have better control by giving then an informed idea
of what to expect in the near future, thereby optimizing the marketing plans. More efficient and profitable.
Limitations of sales forecasting
● Limited information – sales forecasting is a prediction based on past data and trends, without any
consideration of qualitative factors. Only as good as the data.
● Inaccuracy of predictions – critics argue that sales forecasting is part fact and guesswork. Elements of
bias or subjectively is a real issue.
● Garbage in garbage out – if the data and information used to predict are outdated, irrelevant or bias, then
forecasts are unrealistic.
● External influences – the external business environment causes change that may not be predictable, such
factors can significantly distort sales forecasts.

BM 4.4 Notes - Market research

● Market research refers to marketing activities designed to discover the opinions, beliefs and preferences
of potential and existing customers in order to identify and anticipate their wants and needs.
● Ad hoc research: takes place on an ‘as and when necessary’ basis. The focus of the research is on specific
marketing problems or issues and tends to be on a one-off basis.
● Continuous research: takes place on a regular and ongoing basis. For example, governments usually
calculate the cost of living based on the price data of a representative sample of products ought by the
average household. market research firms report annual league tables containing information such as the
most popular brands in certain country, region of the world
The role of market research several purposes
● Gives businesses up-to-date information. This is particularly important for fast paced industries that are
always changing. E.g. the fashion and consumer electronics industries.
● Enables businesses to improve their marketing strategies by using a distinct marketing mix for each
customer target market.
● Assesses customer reaction to a new product by testing it on a small group of customers.
● Gives businesses an understanding of activities and strategies used by their rivals
● Helps businesses to predict what is likely to happen in the future. Understanding the likely trends will
enable firms to react accordingly in order to maximise future opportunities.
● *Effective market research helps to reduce the risk of failure by investigating the needs and wants of
customers. If the research findings show that customers react negatively to the product, then the business
can either make necessary adjustments or scrap the project altogether (without having spent huge
amount of money on a national launch). Market research can therefore be used to answer questions such
as:
○ Are customers likely to buy the product?
○ Which market segments are interested in the product?
○ How much are customers willing to pay?
 ○ How often are they likely to purchase the product?
○ Which brand do customer see as being rivals to the marketed product?
○ What are the preferred (most effective) methods of promotion?
○ Where and how should the products be sold?
● *Ultimately; as a strategic planning tool, market research helps to reduce risks. Being able to accurately
forecast future market trends gives businesses a greater chance of success, despite the limitations of
market research.
● Market research can be conducted in two broad ways: Primary and Secondary research.
Primary research
● Primary research is market research that involves gathering new data first – hand for a specific purpose.
Methods of primary research include: surveys, interviews, focus groups and observation.
● A survey is a document that contains a series of questions used to collect data from a specific purpose. It
is most common method of primary research. There are several types of surveys such as:
○ Self-completed survey - are completed by a sample of people e.g. many hotels and restaurants use
these questionnaires to gather views from their customers. The information help to identify
problems, trends and suggestions for improvement.
○ Personal surveys - are conducted face-to-face rather like an interview. The interviewer can
address any questions that might arise from questionnaire (such as clarifying what certain
questions mean). It is also quicker for the interviewer to complete the survey due to familiarity with
the questions.
○ Telephone surveys - are similar to personal surveys but use telecommunications technology. The
benefit of this is that a larger number of people in a wider geographical spread can be covered. The
main drawbacks are the higher costs and the low response rate.
○ Online surveys - are an increasingly popular way of gathering primary data. They are much
cheaper than other forms of primary research such as paper-based surveys or telephone surveys.
○ Postal surveys - are sent to people’s home or office address for them to complete in their home.
● Due to potential benefits of using survey and the potentially high costs, effective survey of design is of real
importance. Therefore, surveys should:
○ Avoid bias in order to collect meaningful and useful data. The wording of questions should not
distort answers from respondents.
○ Avoiding jargon (technical language) so that respondents understand the questions.
○ Include both closed and open-ended questions. Closed questions (such as ‘yes or no’ questions or
multiple choice options) make it easier and quicker to complete a survey.
○ Be tried and tested. Before using a survey for market research, it is common for it to be trialled
(tested) with a small group of people. This can help identify errors in the survey.
○ Allow the objectives of the survey to be met by gathering only relevant data.
● *A major benefit of surveys is the ability to generate qualitative and quantitative answers specific to the
needs of the researcher.
Advantages of primary research
● Relevance - Primary research is carried out for a specific purpose so directly addresses the questions that
need to be answered.
● Up to date - Secondary market research data tends to be more dated and therefore less reliable than
primary research data
● Confidential and unique - Since the research is done firsthand no one else (including rivals) has access to
the information.
Disadvantages of primary research
● Time consuming - It can be very tedious and lengthy task to collect primary data that is accurate and
representative.
● Costly - Collecting primary data is often costly, due to the time involved to collect quality data or because
the data is difficult to collect.
● Validity - Faults in market research (e.g. poor questionnaire) will lead to misleading or biased results
Interviews
● Interviews are a type of primary research that involve discussion between an interviewer and interviewees
to investigate their personal circumstances and opinions. Beliefs, attitude and feelings can be examined in
detail.
 ● Interviews often provide a range of non-quantifiable information that might prove to be difficult to analyse
or to make any extrapolations from.
● They also tend to be time consuming.
● There is also a huge scope for interviewer bias which can have an impact on the way in which respondents
answer.
Focus groups
● Focus groups involve forming small discussion groups to gain insight into attitudes and behaviour of
respondents. The group is typically made up for participants who share a similar customer's profile, such
as teenage boys who like to play online computer games.
● One drawback of focus groups is that only extroverts tend to take part; those who shy from group
discussion and debates are unlikely to participate and therefore their views are unregistered.
● A variation of focus groups is the use of consumer panels - small groups of consumers within a business’s
target market who are used for regular market research.
Observation
● Observations are a method of primary research that involves watching how people behave or respond in
different situations. It can be done under controlled conditions or as real life situations.
● A benefit of using observations is that they record people's actual behaviour rather than what people say
they would do.
● However observations do not necessarily reveal why a person behaves or responds in the way they do.
Secondary research
● Secondary research involves the collection of second – hand information that already exists, previously
gathered by others.
● Secondary research can be collected from internal and external sources.
Market analysis
● A market analysis reveals the characteristics and the outlook for a particular product or industry. Market
size, market share and market growth rate.
● Market analysis data and information can be found in commercial sources and public information sources,
such as:
○ Market research firms - Specialist market research firms supply a huge range of market analyses,
usually only accessible to subscribing clients.
○ Competitors - Company annual reports and websites of competitors are easily accessible and
could contain a wealth of data and information.
○ Trade publications - These are specialist magazines targeted at a specific industry.
Academic Journals
● Academic journals are periodical publications from educational and research institutions that publish data
and information relating to a particular academic discipline.
Government publications
● Governments publish a broad range of data, such as: population census, social trends, labour market
developments, trade statistics unemployment figures, inflation rates and so on.
Media Articles
● The general media can contain valuable data and information as part of secondary market research,
Media articles are widely available online, making them a useful source of secondary market research.
● Examples include: Newspapers, Business-related journals, Television documentaries, Books and The
World Wide Web
Advantages of secondary research
● Data or information that is already available is generally cheaper and faster to collect and analyse rather
than primary research that has to be collected.
● Secondary research often provides an insight to changes or trends in an industry, such as whether
customers are spending more money on household goods, jewellery and tourism. This allows a business to
develop strategies in response to these market changes.
● There is a huge range of sources that market researchers can use, especially with online sources, making
secondary data more accessible than primary data.
● Findings are often based on large sample sizes, so the results are statistically valid.
Disadvantages of secondary research
● Unlike primary research, secondary data and information is widely available to competitors
● Secondary research might only provide partial information as it was produced for a different purpose.
 ● The data or information might be in an inappropriate format for the market researcher as it has been
collected for another purpose.
● Secondary data is second-hand data, so the results might be outdated or can become obsolete quite
quickly.
The Internet
● All of the above methods of secondary research can be conducted via the Internet.
● The Internet can provide a range of invaluable information, if not a good starting point to find other sources
of secondary market research data and information.
● It is common for market researchers to use both primary and secondary data and information. This is
because neither method is necessarily better than the other as it depends on what data or information a
firm needs to collect.
● Secondary research is quicker and cheaper to gather but might be out of date or insufficient but Primary
research could contain bias or errors, on the other hand can provide information not available through
secondary data sources.
Ethical considerations of market research
● Marketers need to consider the ethical issues of conducting market research, such as not to access
confidential data for personal gain.
● Businesses may need to face criticism if this market research practices are perceived to be unethical.
● Market research needs to be systematic, consistent and unbiased. These form the guiding principles to
avoid when carrying out market research.
○ Damage - Market research must protect the people in their samples by ensuring the information
collected is never used in such as way to harm them.
○ Deceitful - Market researchers need to be trustworthy in their attempt to obtain usable data for
marketing purposes. Acting ethically in the research process is a key way to encourage trust, e.g.
being open and transparent.
○ Deceptive - Deceptive practices and misleading methods to access and gather data about
customers is ethical problem.
○ Disclosure - A major ethical issue involved in market research is the potential invasion of privacy
and the breach of confidentiality.
○ Detachment - Market researchers need to be detached from personal biases and be objective in
their work.
Qualitative and quantitative Market research
● In addition to classifying market research as primary or secondary methods, qualitative or quantitative
market research can also be used.
● Qualitative market research involves getting non – numerical answers and opinions from respondents. The
main purpose is to understand the behaviour, attitudes and perceptions of customers, employees or other
respondents.
● Quantitative market research is about collecting and using factual and measurable information rather
then opinions.
Advantages of Qualitative market research
● It’s better than quantitative research for exploring motivators and non - motivators concerning the
behaviours and attitudes of respondents.
● Information gathered from qualitative research can be very rich.
● It can be inexpensive yet provide detailed information
● Respondents are not under pressure of conforming to the views and opinions of the majority.
Disadvantages of Qualitative market research
● Due to small sample size typically used in qualitative research, the findings might not be representative of
the whole population.
● It can be very time consuming unlike quantitative research.
● A high level of interviewing expertise is required to engage and encourage respondents.
● Interviewer bias might be introduced to serve the researcher’s own purpose.
Sampling methods
● Sampling is the practice of selecting a small group of the population for a particular market for primary
research purposes.
● Quota sampling is the most common sampling method. Involving a certain number of people from different
market segments being used for research.
 ○ An advantage of using quota sampling is that a relatively representative sample can be obtained
quickly.
○ The disadvantage of quota sampling is that the number of people interviewed in each segment
and how randomly they are chosen for interview, are not always representative of the population.
● Random sampling involves giving everyone in the population an equal chance of being selected for the
sample. Random sampling is useful when all members of a population have the same or very similar
characteristics.
○ An advantage if random sampling is that it is quite easy to get a sample. Also, everyone has the
chance of being selected so this might help to minimise bias or unrepresentative samples being
judgmentally selected.
● Stratified sampling is similar to quota sampling in that it involves segmentation.
○ This method benefits from using samples that are more representative of particular market
segment as it involves only using those with key characteristics required for the sample.
○ One disadvantage of stratified sampling is that it can be difficult to select relevant strata, especially
if the subgroups of a population are largely homogeneous.
● Cluster sampling is used when getting feedback from respondents involves too much time, travelling or
money.
○ The main advantages of using cluster sampling are that it is quicker, easier and cheaper than other
methods of sampling if the population is widely dispersed over different geographical areas.
○ The main potential drawbacks of using cluster sampling are bias and sampling error, By selecting
and using just a few locations, the results might be biased as people living in the same area are
likely to share similar views or characteristics, such as lifestyle and social status.
● Snowballing refers to market research carried out with individuals who then suggest other friends, family
members or colleagues to increase the sample size. Businesses use snowballing when they are unable to
get hold of appropriate respondents, as the population is not clear.
○ The main advantage of snowballing is that it can be cheap and quick to get hold of relevant
contacts for enlarging the sample.
● Convenience sampling uses subjects that are easy to reach.
○ The main advantage of convenience sampling is the ease of data collection.
○ However, the main disadvantages of convenience sampling is that market researchers
inadvertently exclude a large proportion of the population, thus the findings are often highly
skewed and unrepresentative of the population.
Results from data collection
● Market research is not perfect science so the results form data might not be absolutely reliable. There are
two types of potential errors in the results from data collection.
● Nonsampling errors are caused by human error or human behaviour. They arise from the researcher’s
mistakes in recording, processing and analysis data, or because of respondents do not always give
truthful and honest answers.
● Sampling errors are caused by mistakes made in the sample design, such as unrepresentative sample
being used for the sample size being too small. Examples could be:
○ The sample size is too small to get statistically valid answers within desired confidence levels
(margins of error).
○ The sample selected is not representative of the population, perhaps due to poor sample design.
○ An inappropriate sampling method is used. Random sampling will, in theory, have little bias since
everyone has an equal chance of being selected, but snowballing is less likely to generate such
results.
○ There is bias in the research.
● The results from data collection can be presented in several different ways, depending on the purpose, for
example:
○ Bar charts, Pie charts, Line graphs, Histograms
● The results from market research should be treated with some caution due to the limitations, which include
following:
○ The concept of garbage-in-garbage-out (GIGO) applies, whereby unreliable or inaccurate input
data generates poor quality output of information.
○ Data and information can also be inaccurate or unreliable due to bias.
○ The cost of good market research is often very high.
BM 4.5 - The Four Ps (Product, Price, Place, Promotion)
Product in the marketing mix
● Product is any goods or services that serves to satisfy the needs and wants of customers. Products can be
tangible or intangible.
● Products can be classified as consumer or producer goods.
○ Consumer products are those purchased by private individuals for their own personal use.
○ Producer products are goods purchased for commercial use rather than private use.
● Classification of products
○ Fast – moving consumer goods: are everyday convenience products sold in retail outlets such as
supermarkets.
○ Consumer perishables: are products that do not last very long à fresh food
○ Consumer durables: product that last for a relatively long time. à Cars
○ Speciality products: are exclusive and highly expensive products that take up a significant
proportion of the average costumers’ income.
Product life cycle
● The product life cycle shows different stages that a product is likely to go through from its initial design and
launch to its decline.
● Its life cycle is measured over time in terms of sales revenue.
● The use of product life cycle allows managers to identify any necessary changes and to take appropriate
action as part of an improved marketing strategy.
● For most products, there are generally 5 stages to their life cycle:
○ Research and development, launch, growth, maturity, and decline.
○ Each stage is likely to have different marketing mix and affect cash flows and profits in different
ways.

1. Research and Develo­ ­ pment

○ The research and development (R&D) stage of a product’s life cycle involves designing and testing
the product. This tends to be a time-consuming task.
○ A prototype is often produced along with detailed market research to assess the potential success
of the product.
○ Test marketing will usually take place. This involves trialling new product with a sample of
customers, perhaps in a limited geographical area, to determine the reactions of customers and to
gather valuable feedback.
2. Launch (introduction) stage
○ The launch stage of the PLC requires careful marketing planning.
○ Sales will be relatively low as customers are not fully aware of the product’s existence.
○ However, the costs are very high due to the expenses involved in the launch (such as costs of
publicity, promotion and distribution).
○ Hence, the product is unprofitable at this stage of its PLC and the firm may face cash flow issues.
3. Growth stage
 ○ The growth stage of a product’s life cycle sees sales revenue increasing. Growth is partly due to the
businesses using wider channels of distribution to get the product to different customers in
numerous locations.
○ Brand awareness and the influx of customers at this stage of the PLC, known as early adopters,
also help to boost sales and cash flow.
○ Profits may materialise due to sales revenue rising and the possibility of lower unit costs from
economies of scale in production.
○ Businesses strive to prolong this stage as far as possible. However, profits will attract rivals to the
industry. Hence, to remain competitive, the marketing mix of the firm may need to be reviewed.
4. Maturity stage
○ During the maturity stage of a product’s life cycle, sales revenues continue to rise but at a much
slower rate.
○ The firm may have obtained significant market share as sales revenues are at their peak. Cash flow
and profits will be favourable.
○ Economies of scale will give the firm a competitive advantage, although there are likely to be many
rivals in the market at this stage.
○ Saturation occurs when there are too many competitors in the market and sales have peaked or
have started to fall.
○ The marketing mix will therefore focus on promotional activities to remind customers, rather than
persuade them, in an attempt to emphasise brand loyalty and repeat purchases.
○ Managers might also look to exploit new market segments for the product.
5. Decline stage
○ Decline is the final stage of the PLC (before its withdrawal or ‘death’ happens).
○ During decline, sales and profits of the product fall and cash flow is less favourable.
○ This could be due to lower customer demand, caused by changing fashion and tastes or new
replacement models being available on the market, thus making the existing product obsolete.
○ Investment in the product, including promotional expenditure on the product, is cut and the price
plummets.
● The life cycle of a product will therefore have varying effects on a firm’s level of investment, profit and cash
flow.
● The PLC and its relationship with investment, profit and cash flow

Extensions strategies and the product life cycle

● For products that reach saturation in their life cycle, various extension strategies can be implemented to
prolong their sales revenue. Extension strategies are any means of lengthening the product’s life cycle and
delaying its decline.
● Common extension strategies include:
 ○ Price reduction to increase demand for a product. Businesses also use price cuts to get rid of
excess stocks before they become obsolete.
○ Redesigning involves introducing special features or ‘limited editions’ to a current product. This
adds value to the product to entice more customers to buy it.
○ Repackaging involves changing the packaging of a product to help revive demand, perhaps by
using more attractive colours or materials. The appearance of a product, including its packaging,
can have a large effect on demand.
○ New markets for a current product can also extend its life cycle. E.g. Trying to sell the product in
new retail outlets, different regions or overseas.
○ Brand extensions refers to the use of an existing and successful brand name to launch a new or
modified version of the product, thus prolonging its life cycle.
○ Product differentiation can also help to prolong a product’s life cycle. This is any marketing strategy
that involves making a product stand out from others offered by rival firms. By having unique or
distinctive element to the products offered by a firm, it could help the businesses to withstand
competition. Successful product differentiation requires marketing support such as sales
promotion.

Boston Consulting Group (BCG) matrix

● The BCG matrix is a marketing planning tool that helps managers to plan for a balanced product portfolio.
● The Boston matrix looks at 2 dimensions: market share and market growth in order to assess new and
existing products in terms of market potential.
● Product portfolio analysis allows a business to decide which products should receive less or more
investment.
● The analysis allows businesses to develop growth strategies by adding new products to an existing or new
product range.
● A business would place each individual product or brand in its product portfolio onto one of the quadrants
based on the product’s relative market share and the product’s relative market share and the product’s
market growth in the industry
● There are 4 possible outcomes:
○ Question marks (or problem children) are products that operate in a high market growth sector, but
have low market share.
○ Stars are products that operate in high growth markets and have high market share.
■ Therefore, stars are successful products that tend to generate high amounts of cash for a
business.
 ■ Therefore, businesses tend to invest money to develop and promote their stars. The cash
generated from stars can be used in an attempt to turn some of the question marks into
stars. It is hoped that stars will eventually turn into cash cows.
○ Cash cows are products with high market share operating in a low-growth market. Such markets
tend to be mature and the products are very well established, thereby generating superb net cash
flow. Cash cows generate large amount of profits.
○ Dogs are products with low market share operating in a low growth market. Dogs do not generate
much cash for the business, as the market tends to be stagnant or declining. Firms that have too
many dogs may face liquidity problems.
Branding
● Branding is a form of differentiating a firm’s products from those of its competitors. A brand refers to a
name that is identifiable with a product of a particular business.
● It is important for marketers and managers to realise the importance of branding:
○ Branding is a legal instrument. Brand names create a legal identity for a product by giving it a
unique and recognisable name and image to differentiate it from other products.
○ Branding is a risk reducer. Brands can give new products a better chance of survival. They can
create a sense of value for money and encourage brand awareness.
○ Branding is an image enhancer. Successful brands allow a business to charge premium price
because customers are often willing to pay a substantially higher price for a ‘good’ brand.
○ Branding is a revenue earner. Branding can encourage brand loyalty. This means that customers
have a preference over other brands. Customers might also perceive the brand as superior to
others so will not tend to buy substitutes.
● Advocates of branding as a marketing strategy go as far as to argue that a brand is more important than
the product itself, because they differ in several ways:
○ Intangibility - Brands represent the intangible value that customers place on the actual physical
product. Marketers argue that it is the brand that sells a product not the other way round.
○ Uniqueness - Brands are unique, whereas a product is quite easily copied.
○ Timeless - Successful brands are timeless, whereas products can become obsolete.
● There are several advantages of successful branding:
○ Price advantages - Businesses that sell homogeneous products, such as bananas from a fruit
market, can only charge low prices as there are plenty of substitutes. By contrast, branding can
add value to products, so allows a firm to charge higher prices.
○ Recognition and loyalty - Brand recognition can be a source of competitive advantage as there is a
greater chance of the products being sold. This could be due to brand loyalty or simply because
customers feel more comfortable buying a brand that they are familiar with.
○ Distribution advantages - Retail space is limited so vendors only stock the best-selling brands.
Hence, successful branding improves placement of a firm’s products.
Aspects of branding
● Brand Awareness
○ Brand awareness measures the extent to which potential customers or the general public
recognise a particular brand.
○ Creating brand awareness is a key part of promoting a product or business.
○ Brand awareness plays a major part in the buying decision of consumers.
○ In general, the higher the level of brand awareness, the higher the sales revenue are likely to be, In
addition, brand awareness gives the firm a competitive edge over its rivals, resulting in greater
market share.
○ It can also encourage repeat purchases if customers like and trust the brand.
○ Raising brand awareness is also of particular importance during the launch stage of a product’s life
cycle.
● Brand development
○ Brand awareness is a prerequisite of brand development.
○ This refers to the marketing process of improving and enlarging the brand name in order to boost
sales revenue and market share.
○ Both brand awareness and brand development help a brand to stand out from the others in the
market.
 ○ Whilst brand awareness can occur quite quickly, especially with an effective marketing strategy, it
takes a lot longer to develop a brand and the desired image.
● Brand loyalty
○ Brand loyalty occurs when customers buy the same brand of a product time and time again,
○ They are devoted to the brand since they have a brand preference over other brand names. Brand
loyalty is important to businesses for several reasons:
○ It helps businesses to maintain or improve their market share.
○ It allows businesses with brand loyalty to charge premium prices for their products, which improves
their profit margins.
○ It acts as a barrier to entry in highly competitive markets such as the fashion and clothing industry.
This is because brand loyalty reduces the likelihood of brand switching.
○ It plays a major role in the future success of a business, helping to prolong the product and brand’s
life cycles.
○ NB: The opposite of brand loyalty is brand switching. To prevent brand switching, businesses often
use customer loyalty schemes. These are a form of sales promotion used to entice customers to
stick to the brand by rewarding devoted customers.
● Brand value
○ Brand value refers to the premium that customers are willing to pay for a brand name over and
above the value of the product itself.
○ This means that customers are willing to pay more for a reputable brand than for the product itself.
○ This is because consumers believe that a well-known brand has better value for money than
products that are less well known.
○ There are numerous advantages for businesses that try to boost their brand value:
■ Higher market share - Market share is an indicator of the level of brand development and
brand loyalty. There is a strong and positive relationship between a firm’s market share and
its brand value.
■ Premium prices - Having brand value allows a business to charge higher prices for its
products because customers feel that they are paying for the added value that the brand
carries.
■ Higher barriers to entry - Brand value makes it more difficult for new firms to enter the
market because customers are loyal to the existing brand.
Packaging
● Packaging refers to the ways in which a product is presented to the customer. Packaging can be very
important in the marketing mix due to its varied functions:
○ Packaging has a profound impact on customer perceptions of a product or brand.
○ It acts as a form of product differentiation.
○ Packaging protects a product against damage during transportation and distribution of the
product.
○ Labelling can be used to provide information. This might be legal obligations or for promotional
purposes.
○ Packaging makes the distribution of products easier.
○ Packaging can be used to encourage impulse buying.
○ Packaging is used to promote the brand or the business.
○ *One drawback of packaging is its cost.
Price
● Refers to as the amount paid by a customer to purchase a good or service.
● The dilemma facing businesses is to set a price that’s competitive yet also profitable.
● Price can affect corporate image of a business.
● Price directly affects the level of sales revenue.

Cost – plus (mark up) pricing

● Involves adding a percentage or predetermined amount of profit to the cost per unit of output to determine
the selling price.
● The percentage or predetermined amount is known as the markup or profit margin.
● Main advantage: it's simplistic and ease of calculation.
 ● Main disadvantage: often relies too much on intuitive decision-making rather than on the needs of
customers.
Penetration pricing
● Penetration pricing sets a relatively low price to help establish a new product in the industry. To gain brand
recognition and market share.
● This strategy is suitable for mass-market products sold in large enough quantities to sustain low profit
margins. à Fast moving consumer goods.
● Main disadvantage: customers might see the product as a low quality product because of the low price.
Price skimming
● Price skimming is used for technologically advanced and innovative products.
● Since the cost of NPD can be very high, a high price is needed to recoup the costs of the R&D.
● A high initial price can create maximum profits and a unique image of the product.
● Due to the large potential profits a lot of firms will enter the industry à the price will be skimmed (gradually
decrease).
● Price skimming can only be successful if it’s supported by other elements of the marketing mix.
Psychological pricing
● Psychological pricing involves rounding down number such as $9.99 to make the price seem lower. à
Customers feel like they're getting a bargain for the product.
● It does not fit for every industry, like taxi where it’s more convenient with whole numbers.
Loss leader
● Loss leader pricing involves selling a product below its cost value. Retailers such as supermarkets often
use this strategy by heavily marketing the loss leader in the hope of attracting customers.
● Loss leader can be used to encourage brand switching. (Long – term).
Price discrimination
● Price discrimination occurs when the same product, usually a service is sold as different prices to different
customers.
● Three conditions to be met for successful Price discrimination
○ The business must have some degree of market power to set prices.
○ Customers must have different degrees of willingness to pay otherwise the business cannot set
different prices different segments of the market.
○ Markets must be kept separate to prevent resale.
● Firms are likely to raise prices during peak periods.
● Price discriminations is also about setting the right price for the right time.
Price leadership
● Price leadership is a strategy often used for the best – selling products or brands in a particular market.
● Customers perceive there to be few subtitles for such products, so the dominant firm can set its own
prices.
● The leader affects the rest of the industry.
Predatory pricing
● Predatory pricing involves temporarily reducing price in an attempt to force rivals out of the industry, as
they cannot compete profitability.
● Destroying pricing
● The strategy stems from price wars, where there are series of intensive price cuts.
● Illegal in many part of the world.

In addition there are several factors that can affect pricing strategy
● The nature of the business – Profit maximising firms with significant market share are likely to use pricing
strategies with high profit margins.
● Nature of barriers to entry – This refers to the degree of competition within the industry.
● Business image – Firms with a reputable and prestigious corporate image can change higher prices.
● Business costs – whatever strategy is chosen, a business must cover its costs of production in the long run.
● The state of economy – like any good business strategy, flexibility allows pricing strategies to change in the
line with the state of economy.
Promotion
● Promotion refers to methods of communicating messages to the market, usually with the intention of
selling a firm’s products.
 ● Although promotional activities are important, especially during the early stages of a product's life cycle,
they can also be extremely expensive.
● Determining promotional budget and possible return is not an easy task.
● Effective promotion can improve the financial health and sustainability of a business.
● There are three key objectives to any promotional strategy:
○ Inform – Informative promotion aims to alert the market about a firm’s products, especially new or
updated products. Information like features and price. The aim is to give customers sufficient
information to influence their purchasing decisions.
○ Persuade – Persuasive promotion aims to encourage customers to make a purchase, to switch
from rival products and to create brand loyalty. Successful persuasion can also generate impulsive
buying à urge to buy product.
○ Remind – reminder promotional techniques are used to retain customer's awareness of, and
interest in, an established product.
● Vast majority of promotions are of the persuasive kind. However, most promotional campaigns contain an
element of both persuasion and information.
Above the line promotion
● Above the line promotion (ATL) is any form paid – for promotional method through independent mass
media resources to promote a business, its brand or its products.
● The main methods of ATL includes the following:
Television advertising
● The fact that expenditure on TV advertising is such big business, and that it exceeds spending on all other
forms of promotion, suggest it has huge advantages.
● Combining sound and moving images to convey a powerful message to the viewers.
● Main disadvantage: the high costs of TV advertisements.
Radio advertising
● Radio time slots are sold to businesses, with peak listening times in morning and afternoon. (Rush time)
● Commercial radio stations are monitored by a government agency, therefore is has to be legal, decent,
honest and truthful.
● Able to reach a large audience, and it's also way cheaper then TV commercials.
● The audience can be moving around and still get the information.
● Main disadvantage: radio advertising is that it can only communicate audio messages, no visual impact.
Cinema
● More people go to watch movies at the cinema therefore it has attracted more marketers from around the
world to use that for advertising.
● Key advantage: Audience can be directly targeted. Specific market segments. Size of screen and sound
can make more impact and the viewers cannot turn of the advertisements.
● Main disadvantage: Limited amount of audience.
Newspaper advertising
● Newspaper advertising has the advantage of potentially reaching a wide audience yet is much cheaper
then using TV. Can include important information since it can be referred to later. Newspapers can target
audience in a better way then TV
● Main disadvantage: the high cost for small businesses in particular. People will not read yesterday's news
again and therefore they might never see or remember the advertisement.
Magazines
● Promotion in magazines has the advantage of being able to use high photo-quality colour images to
attract the attention of the readers.
● Targeting specific market segments by choosing the type of magazine to promote the product.
● Main disadvantage: it’s a static method. Hence, it’s quite unusual for a business to place several different
advertisements in the same magazine. Also readers are experience advertising cutter à therefore ignore a
lot of the promotions. Long lead-time between submitting an advertisement and the actual publication.
Outdoor advertising
● Outdoor advertising refers to the use of commercial billboards, banners and posters to promote a
business, its brad or its products. (Sporting events)
● With technology the billboards have become electronic and they can now rotate. Increasing the number of
advertisements per billboard. à Dynamic dimension and a high exposure (can be located many places)
● Main disadvantage: outdoors promotion is difficult to monitor the effectiveness.
 ○ Traditional banners can be harmed by bad weather and vandalism.
○ High levels of competition in terms of advertising cutter.
● In summary: the main advantage of ATL promotion is that it reaches a potential large number of
customers. Research has shown that people take more notice of the ATL promotions. However ATL can be
very expensive and might not appal to the audience.
Below the line promotion
● Below the line promotion (BTL) refers to the use of non – mass media promotional activities, allowing the
business to have direct control.
● Unlike ATL promotion, this means that no commission has been paid to external media agencies.
Relatively cheap compared to ATL methods.
● Main methods of BTL:
Branding
● A huge amount of money each year is spent on promoting brands.
● Successful brands are instantly recognizable
● Companies also use brand extension strategies to launch and promote new products under the company
brand name.
Slogans
● Slogans are memorable catchphrases used to gain and retain the attention of customers.
● A slogan is a concise message designed to present the essence of a business or its products in a
memorable set of words.
● Effective slogans can help to give a business a competitive advantage over its rivals.
● In order to judge the effectiveness of a slogan marketers may look at the following MAIN criteria:
○ Simplicity so that the slogan is memorable, perhaps through the use of mnemonics, music and
catchy tunes.
○ Outlines or hits to the advantage of the product or brand.
○ Creates an upbeat image for the business or its products.
○ Creates a sense of desire or need for the product.
Logos
● Logos are essentially a form of branding that uses a visual symbol to represent a business, its brand or its
products.
● Logos can create a monetary value for businesses.
Packaging
● Packaging can be a powerful component of the marketing mix. Almost every manufacturer and retailer
uses protective packaging for their product displaying the name of the brand.
● Customers how reuses bags are helping promoting the brand.
World – of – mouth promotion
● World – of – mouth promotion refers to the spread of information from one person to another through oral
communication.
● Ordinary persons can spread information faster then marketers.
● Negative aspect is if the product quality is not like the customers could expect it to be.
Direct marketing
● Direct marketing refers to promotional activities that aim to sell a product straight to a customer rather
then using an intermediary.
● Making telephone calls, sending e – mail advertisements and direct mail to customers.
● Advantage of direct marketing: the business keeps larger shares of any profits because they do not have
to pay intermediaries. They can also control the marketing them self, no external firm.
● Disadvantage of direct marketing: the cost of producing and distributing promotional material. Most
people ignore this type of advertisements.
Direct mail
● Direct mail is a type of marketing that involves mailing promotional material to customers in an attempt to
persuade them to buy the firm’s products.
● Main disadvantage: Due to large volume of direct mail people tend to ignore the promotional material.
○ It does not always target the right audience, hence waste of resources.
Sales promotions
● Sales promotions are temporary ways to boost the sales and attract new buyers, such as:
○ BOGOF (buy one get one for free)
 ○ Money of coupons.
○ Free sample of products
○ Competition that give buyers the chance to win a prize.
○ “Free” gifts to customers making a purchase.
○ Customer loyalty schemes, where repeated purchases are rewarded.
● Advantage: can boost sales in the short run, and they can take customers away from rival brands. It also
requires action, compared to just informing and reminding.
● Disadvantage: All the promotions are added to the marketing cost and can be very expensive. It can
reduce profit margins.
○ Sales promotion is only short term and might not be sustainable in the long term.
Point of sales promotion
● The term point of sales refers to promotion of a product at the place or location where the customers buy
the products.
● Supermarkets add products by the counter to sell more.
Publicity
● Publicity is the process of promoting a business and its products by getting media coverage without
directly paying for it.
● Giving away product to celebrities to make them wear the product can be a lot cheaper then promoting it
otherwise.
Sponsorship
● Sponsorship involves a business providing financial funds and resources to support an event or another
organization in return for publicity and prime advertising space.

Promotional mix
● The promotional mix is the set of tools that a business can use to communicate effectively the benefits of
its products or service to its customers.
● In deciding on a promotional mix, marketers often consider the marketing acronym AIDA:
○ Attention – the promotional mix should raise the awareness of the product by getting the attention
of existing and potential customers.
○ Interest – the promotional mix should stimulate and keep customers interested.
○ Desire – the mix should generate a desire or feeling of need for the product.
○ Action – it is vital that the promotional mix encourages customers to take action.
● Alternative approach to AIDA is the use of abbreviation FAB (Features, Advantages and Benefits)
● In devising a promotional mix marketers consider a combination of factors including:
○ Cost – TV is by far more expensive then the Internet. Businesses often consider the cost per head
when selecting the most appropriate method of promotion.
○ Product – certain products are suited to particular types of promotion.
○ Product life cycle – the promotion mix used is dependent on the product's position in its life cycle.
 ○ Legislation – rules and regulations can prevent certain products from being advertised in certain
media.
● Combination of ATL and BTL methods is used as a part of the promotional mix.
● Using promotional technique in isolation is unlikely to be efficient.
● Different methods are used to deliver a slightly different but reinforcing message about the product.

1. Advertising
● Advertising is referred to as the science of arresting the human intelligence long enough to get money
from it.
● Used to shape and develop awareness, perceptions, knowledge and attitudes.
● Advertising is a form of promotion that communicates marketing messages in a persuasive and/or
informative way.
● A successful advertising campaign must therefore be distinctive.
● In marketing what is said and how it's said are of equal importance when trying to stand out from
competition.
● The advantage of using an external firm is that they are experts in their field.

1. Personal selling
● Personal selling refers to promotional technique that rely on sales representatives directly helping and
persuading customers to buy. Examples include sales presentation, face – to –face meetings with clients
and door – to door sales.
● Advantage: can be tailored to the individual needs of the customer. Can also help build a relationship
between the customer and the company.
● Disadvantage: sales agents can be very expensive to hire.
1. Public relations (PR)
● Public relations refer to business activities aimed to establishing and protecting the desire image of an
organization. Good media coverage.
● Long term and ongoing process.
1. Sales promotion
● Sales promotion provides short-term incentives designed to stimulate demand for a product.
● Gain short-term competitive edge.
● To get rid of exceeded stock.
● Encourage customers’ loyalty.
● Disadvantage: All the promotions are added to the marketing cost and can be very expensive. It can
reduce profit margins.
Technology and promotion
● The impact of new technologies including internet technologies have significantly broadened the
opportunities available to businesses to extend their promotional strategies.
● The main trends include viral marketing, social marketing and social networking.
● Viral marketing is similar to word-of-mouth marketing except P2P relies on the electronic transfer and
spread of promotional messages. Done through Internet via e – mail and social networking.
Social media marketing
● Social media marketing refers to the practice of gaining Internet traffic through social media websites
such as Facebook and Twitter.
● The strategy focuses on creating marketing content that attracts attention and encourage people to
share this using their own electronic method.
● Social marketing spreads from person to person.
● Built trust through giving the message from a trusted third – party source rather then from a commercial
marketer.
● Relevantly inexpensive promotional strategy.
● Low control and hackers are threats to businesses using social media marketing.
Social networking
● Social networking refers to any platform used mainly by individuals to build social relationships between
people.
● Social media can be individual – centred or group – centred. (LinkedIn)
 ● Sell advertising spaces on their websites to make profit.
● The use of web banner for promotion. (Like links that you can click.)
● Pay per click (PPC)
Guerrilla marketing
● Guerrilla marketing is referred to as achieving conventional goals, such as profit and joy, with
unconventional methods, such as investing in energy instead of money.
● As a promotional strategy, it is highly suitable for businesses that operate on a tight budget.
● Create and original way of promoting.
● It aims to ambush or catch the attention of customers through unusual and/or shocking techniques.
● Advantages
○ The Pareto principle (80:20 rule)
○ It can lead to viral marketing, spread of the marketing message.
○ Guerrilla marketing can be very inexpensive and is often free.
○ In ever – competitive markets guerrilla marketing can promote creativity and healthy competition.
○ Guerrilla tactics can help businesses to better understand the needs of its customers by coming up
with creative ways to communicate its products.
● Disadvantages
○ Guerrilla marketing does not always reach the right target market.
○ Guerrilla marketing techniques can be rather intrusive.
○ Controversial and unethical methods are sometimes used.
○ There can be large opportunity costs in terms of the time and resources spent in devising an
original campaign.
○ Guerrilla marketing does not always work.
● The most effective guerrilla marketing strategies are simple, flexible, and inexpensive and target specific
market segments.
● Successful promotion relies on the creativity of the marketers.
● Guerrilla marketing is based on psychology rather then guesswork.

Place

Place (distribution)
● Place refers to the distribution of the products
● Getting the right products to the right customers at the right price and in the right place at the right time.
● The distribution decision requires management skills in persuading the retailers to stock the firm’s
products.
Channels of distribution
● The channel of distribution refers to the means used to get a product to the consumer.
● Intermediation is the process used to facilitate this.
● Intermediaries are agents or businesses that act as a middle person in the channel of distribution between
the manufacturer and consumers of a product.
● Long channel of distribution tends to raise the prices for the customer.
● Long channel of distribution tends to increase the distribution time.
● The distributional channel levels:
○ A zero level channel does not have any intermediaries. Producer directly to customer.
○ A one level channel has one intermediary. Like agents.
○ A two level channel has two intermediaries such as the use of wholesalers and retailers to get
product to consumers.
Wholesalers
● Wholesalers are businesses that purchase large quantities of products from a manufacturer and then
separate the bulk purchases into smaller units for resale, mainly to retailers.
● Intermediary between producers and retailers.
● Benefits for retailers and wholesalers
○ Wholesalers bear the cost of storage.
○ By breaking bulk, they sell smaller batches and therefore eliminating the need to purchase huge
quantities.
○ There are lower transaction costs for the producer as wholesalers are consumers.
 ○ Time is freed up for manufactures to focus on production as wholesalers deal with distribution
issues.
● Key limitation: the producers take risk in passing on the responsibility of marketing products. Loss of
control.
Distributors and agents
● Distributors are independent and specialist businesses that trade the products of only a few
manufactures.
● Agents are negotiators who act on behalf of buyers and vendors of a product. They are not usually
employed by the producer but are used intermediately to help sell the vendor products.
● Agents usually offer a range of products to the customers, perhaps from several different suppliers.
Retailers
● Retailers are the sellers of products to the final costumer. They are often referred to as “shops” in everyday
language. Retailers play an important role in the distribution of the products.
● There are several types of retailers:
○ Independent retailers – are small local vendors often owned by a sole proprietor.
○ Multiple retailers – are retailers that have numerous outlets.
○ Supermarkets – are retailers that mainly sell foodstuffs.
○ Hypermarkets – are huge outlets that stock a broad range of product.
○ Department stores – are retail outlets that sell a large range of products.
● More retailers rely on stocking well – known brands to attract customers they base this decision on sales
per square metre.
● Must businesses use multi – channel distribution strategy.

BM 4.6 - The Extended Marketing Mix

The marketing of services
● A service is an intangible product supplied by a business such as a bus ride.
● Buyer of services does not take anything away with them when paying.
● The product is perishable and services are heterogeneous.
● Services can also be provided to other businesses.
● Product differentiation is important when marketing services.
● The marketing includes three extra P's (people, products and physical evidence.)
People
● The provision of services relies on the goodwill of all employees.
● It is important for service – orientated businesses to built a good relationship and trust with their
customers.
● Measuring the effectiveness of people in marketing or delivering a service
○ Appearance and language – uniforms and formal clothing, to appear as more professional.
○ Aptitudes and attitudes – managers will ask their employees a range of questions concerning the
capability and behaviour of their staff. Sufficient product knowledge, being proactive etc.
○ Feedback – comments by various stakeholder groups can also provide useful information
regarding the effectiveness of people in delivering services.
○ Efficiency – staff that do not keep customers waiting and who do not make careless mistakes will
help the business to gain better reputation and corporate image.
● People are not consistent and their motivation depends on a range of factors.
● In addition culture also affects how people interact with customers.
Process
● Processes are the ways in which a service is provided or delivered, including payment systems, queuing
times, customer services, after – sales care and delivery services.
● Processes in the marketing of services
○ Payment methods – businesses may offer the convenience of different payment methods.
Therefore the process of paying can be more convenient to the customer.
○ Waiting time – waiting time for costumers can be a negative consequence for the business. Like
poorer corporate image, customer complaint and disgruntled customers.
○ Customer services – the degree of attentiveness, care and politeness of staff towards customers.
 ○ After – sales care – can gain competitive advantage if it provides after – sales services.
○ Delivery process – enhance the buying process of services by providing various delivery options.
Can give competitive edge.
● Processes are important as they can determine whether customers will make repeat purchases. Can give
advantages like vital mouth promotion and vital marketing
Physical evidence
● Physical evidence refers to the tangible aspects of a service, like location.
● Like hotel rooms and airplanes
● Physical evidence is important for services in most industries.
● Many businesses use peripheral products in delivering their services.

BM 4.8 Notes - E-Commerce

Features of E-Commerce
● E-Commerce (or electronic commerce) is the trading of goods and services via the Internet, electronic
systems and computer networks.
● The Internet has become an increasingly important method of business activity as e-commerce allows
businesses to operate 24 hours a day, with an international reach.
● The growth in the use of mobile devices has presented further opportunities for online trading.
Examples of e-markets include:
● Financial services - online banking, foreign exchange and share trading
● Gaming - the internet has intensified competition in the sale of online gaming
● Retailing - groceries, books, clothing, toys can all be traded online
Common features of e-commerce include:
● Global reach - unlike traditional retailers, e-commerce breaks geographical barriers, allowing businesses
to sell their products to consumers residing in almost anywhere
● 24/7 accessibility - whilst most retailers have ‘opening hours’, e-commerce is accessible at all times,
allowing customers to buy products from the comfort of their home, whilst mobile or at the office, this adds
convenience.
● Access to information - businesses use the internet to provide detailed and accurate product information,
whilst ultimately helps customers to make more informed buying decisions, this also helps in information
about billing and payment.
● Consumer reviews - customer shave been empowered by e-commerce, which allows them to post online
consumer reviews, which can have a direct impact on the buying decisions of other customers. Share
buttons also allow the sharing of information.
● Impersonal interaction - B2C firms are totally reliant on e-commerce technologies to reach their
customers. Unlike retailers, the nature of the interaction with consumers under a system of e-commerce is
impersonal.
● Barrier to entry - technology has helped e-commerce businesses break traditional entry barriers as set-up
costs for an e-tailer are usually far less than the costs for a physical retailed. However, cultural differences
still exist, such as trust issues.
E-Commerce and the marketing mix
1. Price
● The Internet increases price transparency to the advantage of the customer who is able to gain a better
knowledge of price comparisons in an instant. For example, they can use price comparison websites to
compare the prices of books and clothes. This forces businesses to be even more competitive in terms of
pricing strategies in order to maintain their market share.
● The Internet also allows businesses to cut out intermediaries such as wholesalers and retailers. Instead,
they can sell directly to the customer. Thus, price may be reduced, as there are lower costs; with each
intermediary there is a percentage markup for profit.
● E-Commerce firms will usually add postage and shipping costs, which make their prices less competitive.
International trading standards and regulations may also add to the costs e.g. customs declarations and
import taxes.
1. Place (Distribution)
 ● E-commerce enables many businesses to reach a global audience at a fraction of the costs. Nevertheless,
there are the logistics of ensuring that products sold online can reach the customer. The rise of e-
commerce has provided rising opportunities for courier companies such as DHL and FedEx.
● As fewer intermediaries are used, e-commerce shortens the channels of distributions. This means that
businesses can benefit from enormous savings on their operating costs.
● E-commerce is often more convenient for customers .e.g there is no need to visit retail outlet as purchases
can be done online.
● E-commerce offers a further advantage as a distribution channel offers languages that can be used to
capture even larger audiences.
● However, customers may not be willing to purchase online as they cannot examine or test the products.
People feel a sense of security in physical stores.

1. Product
● The products being sold by a business can be promoted online, making it more convenient for customers
to access the information any time they chose. It also benefits the business as there is no need to stock or
display all products, reducing storage costs.
● Packaging may also be less of an issue for e-tailers because they do not have to rely so much on
packaging to appeal to online customers, this can reduce costs. This can then transform into higher profit
margins for the business or reduced prices for its customers.
● Product specifications can be very detailed without causing environmental damage created by printing
lots of colourful and expensive brochures.
1. Promotion
● Businesses spend a huge amount of money every year to promote their products. With the growing
importance of globalisation, many firms have cut costs by using online marketing strategies that appeal to
a global audience.
● Marketers can use methods such as embedding video clips, audios and photos.
● E-commerce has also enable firms to implement viral marketing as a promotional strategy.
● Mass emails can also be sent to potential and existing clients, especially as email can be a very cost-
effective form of promotion.
● As more people go online and as e-commerce continues to prosper, further opportunities present
themselves for marketers using Internet technologies as a promotional tool.
Types of e-commerce
● E-commerce can be classified as B2B, B2C and C2C.
1. Business to business (B2B)
● Refers to e-commerce catered for the need of other business. Examples include; corporate banking,
suppliers of equipment, insurance and advertising agencies.
● Alibaba is the world’s largest e-commerce provide, in more than 240 countries.
● Specialists often argue that consumer-marketing strategies used by B2C businesses are not suitable or
sufficient for marketing B2B products and services. This is because B2B involves professional buyers, who
have different agendas.
1. Business to consumer (B2C)
● Refers to e-commerce directly catered for the end user i.e. the consumer. For example, consumers can
download music and learning materials (such as e-books and revision apps).
1. Consumer to consumer (C2C)
● Refers to an e-commerce platform such as eBay that enables customers to trade with each other. C2C is
forecast to continue its growth in the future because it is highly cost-effective. It minimises the advertising
costs to consumers, as a third-party providers are not involved.
● However, C2C suffers from a lack of quality control for the buyer and lacks payment guarantees from the
buyer. For example, customers may lack the confidence to pay other customers and may prefer buying
from online businesses instead
Benefits and limitations of e-commerce
BM 5.1 Notes - The Role of Operations Management
Operations management and business functions
● Operation management, often referred to as production
● Concerned with providing the right quantities and the right quality level in a cost effective and timely
manner
● The role impacts on all other areas of the business.
● These changes have a direct impact on the other functional areas of the organization.
 ○ Marketing implications: The production method used will affect the quality and the individuality of
the product. Exclusive à high price. As well as packing, physical evidence and people play a role in
the marketing mix.
○ HRM implications: direct impact on HR – management. Change in production à change in working
force. Motivation, technologies and training are factors that are affecting the production
management.
○ Finance implications: Capital intensity and lean production require heavy investment machinery
and equipment. The fixed cost can be paid over time and investment appraisals are used to find
the best asset to buy.
Operations management and the provision of goods and services
● Production is concerned with all four sectors of the economy
● Primary sector: extracting raw materials, mining, fishing and so on…
● Secondary sector: turning raw material into finished product.
● Tertiary sector: the provision of services.
● Quaternary sector: the provision of intellectual, knowledge based activities that generate and share
information. (Scientific research)
● The factors of production (CELL) are the 5 Ms for the production managers (marketing)
○ Material, Manpower, Money and Machines
● Value added during the production process. à Profit
CELL Factors --> (value added) --> Output (goods and services)
● The managers of production needs to deal with several key aspects of
○ Method of production Unit 5.2
○ Size, scope and timing Unit 1.6 and 1.7
○ Production planning Unit 5.5
○ Quality control systems Unit 5.3
○ Research, development and innovation Unit 5.6
● The role of operations management looks at the need for businesses to decide how production should
take place.
Operation management strategies and practices
● Important role in ensuring sustainability by creating a balance between the ecological, social and
economical needs of people today and those of future generations.
● Sustainability promotes intergenerational equity. Does not destroy the future.
Ecological sustainability
● Refers to the capacity of the natural environment.
● A lack of ecological sustainability means that production can exhaust.
● Key priority for many managers because it’s so important now.
● Ecological Sustainable practices
○ Green technologies: environmental friendly inventions.
○ Recycling: using waste products over again.
○ Ecological footprint: impact of resource consumption on natural environment.
○ Cradle to cradle production: products that can be recycled.
○ Conservation: Using renewable resources.
○ Preservation: reducing human impact on the resources.
Social sustainability
● Examines social interactions and structures that are necessary for sustainable development.
● Society to optimize the quality of life for people and their descendants.
● Social barriers prevent a community from advancing.
● Male business leaders needs to accept women as equal if there is to be social sustainability and
development
● Gender equality is fundamental to both economic and human development.
● A key social role of business is job creation.
● CSR in operation management practices.
● Social responsible = consult with internal and external stakeholders to determine the priorities.
Economical sustainability
● Refers to development that meets the economic needs of present and future generations.
 ● Requires production managers to consider which resources are not used efficiently in order to correct the
situation
● Overuse of resources makes it hard to sustain output over time.
● Economical sustainability encourages businesses to be more responsible in their use of resources.
● Potential higher cost of acting more sustainable.
● Vital for any business trying to establish profitability over the long time.

BM 5.2 Notes - Production Methods

Job production
● Involves customizing an individual product from start to finish. Unique items
● Cover a whole range of tasks.
● Advantages
○ Quality: of production. Highly skilled labour used, that others could not compete with.
○ Motivation: of workers. Proud of the product, feels like a part of it.
○ Flexibility: according to the customers wish, major marketing benefits
○ Uniqueness: of the product helps maintain staff; add value to the production process and unique
selling point. à Premium price
○ Choice: the customers are given choices when they can customize their products.
● Disadvantages
○ Time consuming: production process, specific requirements of the customer.
○ Labour intensive: expensive production process.
○ Long working capital cycle: the length involved in producing a product and then selling it. Still need
cash.
○ Few economies of scale: no mass production, like groceries.
○ Unpredictable production: the irregularity of orders may cause cash flow problems.
Batch production
● Involves simultaneously producing a limited number of identical products: Batch
● Work on one batch is complete before starting a new one. à Same staff and machinery
● Unique for businesses that make a range of products, unlike with job production.
● Tends to be used when the level of demand for a product is not clear.
● Advantages
○ Economics of scale: machinery can be used to produce larger quantities.
○ Specialization: in various productions process is likely to lead to increased productivity and better
quality products.
○ More choice: to the customers when a range of products is made.
○ Can reduce risk: of producing just a single product with limited sales potential.
● Disadvantages
○ Storage: result in high amount of stock. Insurance and other costs.
○ Boredom: workers get bored, repetitive work. Reduce motivation and efficiency.
○ Inflexibility: once the production run for a batch, it’s difficult to switch to or work on another batch. à
Delay in the overall production process.
○ High production costs: due to the reliance on machinery and equipment.
Mass production
● Is the manufacturing of large amounts of a standardized product. Assembly of individual components
bought from other companies.
● Capital-intensive
● Tasks relying on automation. Unit cost low.
● Specialization – capital equipment and people are used at each workstation to carry out a different
function, essential to the production process.
● High levels of productivity.
● Assembled on a large scale.
Flow production
● Focuses on a continuous production process of manufacturing products that are standardized in large
quantities.
 ● Production on a much larger scale (compared to mass), with production assembly lines often kept running
24 hours a day, 7 days a week à maximize production scale.
● Entirely on automated systems. With few workers.
Advantages and disadvantages of mass and flow production
● Advantages
○ Output on a large scale: Able to produce a lot of products every minute.
○ Spread the cost: over a huge volume of output. Reducing average fixed costs.
○ Standardized quality: dedicated and same machinery, same quality. Low defect rate.
○ Low labour costs: few workers and low skills.
● Disadvantages
○ Monotonous: the work might be boring.
○ Inflexibility: when you start the production process there is a little chance of altering the design or
specifications.
○ Capital-intensive: huge setup costs of machinery, running cost and maintenance.
○ Inflexible systems: not possible to rework products that are substandard as production is
continuous. Any change will bring other operations to halt.
Cellular manufacturing
● A key drawback of mass and flow production is that workers get bored.
● Affects level of motivation and productivity
● Cellular manufacturing is a modern adaption of assembly line production whereby sets of tasks are
completed as teams, by splitting the production process into a number of self-contained units.
● Each cell with a specialized grouping of machines, materials and manpower.
● Responsible for completing parts of the overall production process.
● Promotes teamwork
● Independent cells but they rely on each other to get a finished product.
● Combined with just – in time production à each cell responsible for quality assurance.
● Advantages
○ Autonomy: team selects leader, controls the team. They function as a small and cohesive industrial
unit.
○ Collective responsibility: can lead to an improvement in quality standards.
○ Motivation: each team will finish a product that will be passed on. This can help motivate, creating a
sense of achievement.
○ Specialization: dynamics and team spirit can lead to higher level of productivity.
● Disadvantages
○ Lower output: compared with traditional mass and flow production
○ Capital – intensive: money buying, installing and servicing new machinery for each cell.
○ Conflicts: within team can cause production problems.
○ Capacity utilization lower: than mass production à average fixed costs higher.
The appropriateness of different production methods
● Labour and capital – intensive
● Production methods that use a greater proportion of labour than any other factor input = labour- intensive.
● Capital-intensive industries are those that have a relatively high proportion of capital costs in comparison
with labour costs.
● Increasing capital expenditure can often lead to improved levels of output and productivity à mass
production. Machinery does not need breaks and can work for 24 hours.
● Disadvantage of capital – intensive: no USP à Lower selling price, with lower profit margins and they also
tend to have high fixed cost (machinery).
● Benefit of labour intensity: the ability of offers a personalized service. USP à high prices and high margins.
● Capital or labour depends on several factors
○ The relative cost of labour and capital
○ The size of the market: larger more capital, small more labour.
○ The aims and objectives of the organization's: profit – mass production, therefore more capital. Risk
– averse and worried about survival during a recession more likely to be labour, easier to control
costs and reduction.
● Combine different methods of production à can benefit from the methods that they are using.
BM 5.3 Notes - Lean Production and Quality Management
Features of lean production
● Lean production is the process of streamlining operations and process to reduce all forms of waste and to
achieve greater efficiency.
● Improved quality and reduced cost
● Different examples of waste
○ Materials and resources: Not been used efficiently.
○ Time: Delays have negative impact on the production process.
○ Energy: Leaving lights on, affecting the financial resources.
○ Human effort: work redone.
● In adopting lean production, several principles are followed
○ Waste minimisation: involves removing processes that does not add value to the product and using
the available resources more efficiently.
○ “Right first time”: not wasting tile or staff on redoing work.
○ Quality control: checking the output regularly.
○ Flexibility: resources adapted to the changes in the business.
○ Continuous improvement: requires constant strive to improve the production process.
○ Supply chain management: good and professional relationship with their suppliers to help
streamline the supply chain production.
Methods of lean production
● Kaizen (continuous improvement)
○ Change better
○ Small and continuous improvement
○ Small groups of employees whose role is to identify changes and improvements to the
organization’s products, processes and procedures
○ Aim: Establish a steady flow of small improvements.
○ Because: people don’t like change. So small steps is easier
○ Does not directly look at cost cutting, but quality (leads to cost cutting)
○ Eliminate waste by improving productivity and efficiency of the operations.
○ Integral part of quality management.
○ Everyone can make a contribution. No matter level or rank in the firm.
○ Improve motivation by including everyone in the decision-making.
● Just – in – time (JIT)
○ Inventory management system based on stock being delivered as and when they are needed in
the production process.
○ Stock delivered just before they are needed
○ No buffer stock or storage needed. à Cost cutting
○ Can produce different types of the same product on the same assembly line
○ Advantages and disadvantages Unit 5.5
● Kanban
○ Inventory is based on actual customer orders, rather then sales forecasts.
○ Card system; to only order the components that are needed to make the specific product.
○ Visual tool to monitor and manage workflow
○ Kanban boards are created using named columns to show each task is the production process.
○ Easier for operatives to see which tasks are completed.
○ WIP limits helps to ensure that production keeps flowing at a steady pace, workers complete tasks
before starting new once and reduce waste from less switching between tasks.
● Andon
○ Indicate the status of an aspect of the production process (Machinery, production line or work
process)
○ Often have sound systems to alert supervisors of a change in status.
○ Traffic light system
■ Green = normal operations in process
■ Yellow = attention will be needed soon
■ Red = Immediate attention is required
 ○ Provides visual feedback to workers and supervisors on the production floor.
○ The benefits of Andon
■ Bringing instant attention to production problems as they arise in the manufacturing
process
■ Providing a consistent and simple communication tool for all factory floor workers and
supervisors.
■ Encouraging workers and supervisors to take immediate action to deal with production,
quality and safety problems.
■ Improving the ability of supervisors to identify and resolve production issues in an efficient
and cost – effective way.
Cradle to cradle design and manufacturing
● Refers to a suitable model of production based on natural processes. Thus benefiting the environment.
● No waste in nature
● C2C provides a framework for operations managers to design the production techniques that are efficient
and suitable.
● Recycle and Reuse
● Important to the businesses corporate social image.
● Can be less cost efficient.
Quality control and quality assurance
● Quality means that a product fulfils its purpose and meets the expectations of the customer. Not exclusive
to expensive products.
● Sub-standard: when a product does not meet the expectations
● Factors that customers look at when perceiving quality
○ Physical appearance and design – appealing?
○ Image and reputation of manufacturer or seller – well known à higher quality
○ Reliability – good quality products are of high quality
○ Durability – how long will a product last?
○ Fit for purpose – how well it fulfils its purpose
○ Safety features – safe = good quality
○ Customer service – high quality firm = good customer service
○ After-sales services – guarantees, warranties, tech support and delivery
● Quality is important for two main reasons
○ Reputation
○ Ability to control cost
● Quality management is the function concerned with controlling business activities to ensure that products
are fit for their purpose.
● Quality = overall package, from the production and purchase to the product to its use and beyond.
● Factors leading to quality becoming an important priority.
○ Increasing customer awareness: easier access to information.
○ Increasing competition: with high quality you can establish brand loyalty and larger customer base.
○ Government legislation: changes and developments to competition laws have forced businesses to
improve their quality standards.
○ Increasing costumer incomes: people have more money and want better products.
● Two main categories of quality management
○ Quality Control (QC) it the traditional way of quality management that involves inspecting, testing
and sampling the quality of work.
■ Based on detecting faulty or poor quality output from raw material or product.
■ Advantages
■ Prevent faulty reaching the customer à reputation
■ Cheaper to train one QC then to do the whole team.
■ Widespread issues all over the organization
■ Disadvantages
■ Does not prevent mistakes being made yet can be expensive
■ The root cause of the problem is not dealt with as there is a lack of quality culture
■ Individuals are not accountable for their work à slack
 ■ Quality Assurance (QA) is the management of guaranteeing the customer of a product’s
quality by ensuring that everything is done “right first time” à no defects
■ Informs customers that products have been made to the required specification.
Quality standards meet.
■ Important source of competitive advantage.
■ Advantages
■ Employee participation. Workers have ownership à moral
■ New ideas of improving quality
■ Help break down the “them and us” culture between employees and
managers since there are no controls
■ Main Disadvantage: the time, energy and training needed to nurture a total culture
within the organization.
■ Quality from improving rather then inspecting
■ Four key phases
■ Plan – improve quality by designing or revising operations and processes.
■ Do – execute the plan
■ Check – monitor and measure the performance and assess the results.
■ Act – decide on improvements needed for the process.
■ QA is a major feature of total quality management, is an ongoing process.
■ Maintain standards that are meet.
■ Quality management can be costly to implement. Profitable in the long run.
■ Common methods of measuring quality
■ Reject rates – higher reject rate = lower quality
■ Level of product returns – faulty and substandard products are far more likely to be
returned by disgruntled customers.
■ Products recalls – recalled to prevent a public relations disaster.
■ Level of customer satisfaction – surveys
■ Degree of customer loyalty – good quality, people buy more. Customer retention
levels
■ Market share – good quality is likely to earn a business greater market share.
Methods of managing quality
● Quality circles
○ Small groups of people how meet regularly to examine issues relating to quality of output and make
recommendations for improvement.
○ Volunteers from various departments + senior manager
○ Encourage communication and teamwork to solve problems
○ Emphasise the importance of team cohesiveness in managing and improving quality.
○ Fail to have contribution from staff will experience a drop in motivation
○ Limitation: Some individuals remain unmotivated by team working. Work for pay.
● Benchmarking
○ Refers to a business comparing its products. Operations and processes with others in the same
industry. Market leaders
○ BPB becomes a point of reference, a target.
○ Two methods of benchmarking
■ Historical benchmarking – involves comparing the same performance data over time.
Performance measured.
■ Inter-firm benchmarking – involves comparing the same performance data of different
businesses
○ “Quality is not an act but an habit”
○ Advantages
■ Reduce the performance gap with competitors.
■ Dealing with issues by using external benchmark is more effective then guessing.
■ Should help the business to take appropriate action to meets its customers’ needs and
wants.
■ Improve competitiveness and cut costs at the same time.
○ Disadvantages
 ■ Cost and time for collecting data can be a major issue
■ Using the same method as the best might be second best without USP
■ High cost of having the best practice.
■ Hinder for innovative and creative thinking.
○ Total quality management (TQM)
■ Is a process that requires the dedication of everyone in the organization to commit to
achieving quality standards.
■ From the customer's perspective rather then the producer
■ Removes inefficiencies in all forms of business activity.
■ Employees need to be proper trained to correct own work.
■ Total Quality Culture (TQC) is a philosophy that embeds quality in every business operations
and process.
■ TQM empowers every employee to take corrective measures if quality is unacceptable. à
Zero defects
■ Advantages
■ Staff motivation is likely to improve. Involved
■ Reduce or eliminate wastage, done right the first time.
■ Improves the corporate image
■ Competitive advantage – customers in certain focus.
■ Improves chances of a business survival.
■ Disadvantages
■ Cost from establishing and maintaining a TQM system.
■ Can become bureaucratic
■ Funding for staff training
■ Only works if every member of the organization is fully committed
■ Time lag before benefits arrive.
■ National and international quality standards
■ Awards are used to show that certain quality standards have been meet.
■ Include the awards on their products and campaigns
■ They are important because they help businesses to
■ Promote quality awareness within the organization
■ Improve organizational performance
■ Recognize quality achievements
■ Motivate the workforce
■ Help attract high calibre employees
■ Strengthen the firm’s competitiveness
■ Examples of awards nationally and internationally
■ CE Mark, ASQ Award, BSI Kitemark and The Lion Mark
■ To get the awards the products are often tested by independent agents to prove
that they are of high quality.
■ The International Organization of Standardization (IOS) – 1947
■ Made up by 163 national quality standards bodies.
■ Providing a single set of quality standards that customers and businesses
throughout the world would recognise and respect.
■ Powerful NGO
■ The ISO 9000 awarded by independent authors accessing the following
factors
■ Monitored operations and processes to ensure that quality goods are
being produced.
■ Checked products for defect before they are distributed.
■ Regularly reviewed its operations and processes to sustain or
improve efficiency
■ Proper record keeping.
BM 5.4 Notes - Location
Factors affecting location decisions
● All businesses have to be located somewhere. Deepening on what type of business it is.
● Location: refers to the geographical position of a business. The location is a crucial one, and depends on
both quantitative and qualitative factors.
● Factors like; nature of business, nature of the product, and the nature of HR.
● Location decisions will accrue in different situations.
● New businesses or expanding internationally or relocating.
● Most important decision of senior managers – often an irreversible decision.
● Cost of relocating is extremely high.
● For many new businesses the location decision incurs a highly significant proportion of their costs.
● Not able to recover the cost – sunk costs.
Quantitative reasons for specific location of production
● Availability, suitability and cost of land
○ The quantity, quality and cost of land are important factors to consider
○ Cost of land with earnings potential
○ The difference between cheap, and good locations in profit and cost.
○ Two main reasons for higher prices in cities then elsewhere.
■ More demand of land in city properties
■ The supply of land is very limited in these areas
○ For some businesses the suitability must also be considered. (Agriculture)
○ Some organizations buy cheap land because they need a lot of it.
■ But then they also need infrastructure and communication to operate effectively
○ Also apply on a global scale. Lower cost locations have driven businesses to move their operations
overseas.
● Availability, quality and cost of labour
○ Affect the level of wages paid to the workers.
○ The supply and quality of workers varies even within a country, affected by education
socioeconomic demographics and regional employment rates.
○ Location after what workers you need, highly skilled or not.
● Proximity to the market (customers)
○ Bulk increasing businesses are involved with products that increase in weight during the
production process, so need to be located near their customers in order to reduce costs.
○ Since they produce heavy products you want to be close to the consumer.
○ JIT production means that you need to locate close to your suppliers. Reduce transportation cost.
○ Services need suitable locations to be attractive to customers.
● Proximity and access to raw material
○ The nearness to and availability of raw materials is a major determinant of location for firms that
are operating in primary and manufacturing industries.
○ Bulk reducing businesses are those that need to locate near other organizations that operate in
similar or complementary markets.
● Government incentives and limitations
○ Governments often try to attract businesses to locate in or relocate to a certain area by offering
financial incentives.
○ Some businesses will be approved to locate in Assisted areas that are regions identified by the
government to be suffering from relativity high unemployment and low incomes, so are in need of
regenerations through financial assistance.
○ Also be a limitation to the location decision.
○ Difficult to trade and work overseas for some companies
● Feasibility of e – commerce
○ E – commerce can have a huge effect on reducing the financial cost of location.
○ No need to be near customers because of the Internet.
Qualitative reasons for a specific location
● Management preferences
○ Managers might prefer a specific location because of personal preferences.
 ○ Managers also might consider location because of history.
● Local knowledge
○ Decide to locate in a certain area because they know the location and its culture.
○ Inside information makes it easier to and less risky to invest in that location.
○ Lack of local knowledge can provide disastrous.
● Infrastructure (transportation, commutation and support networks.)
○ Transportation networks – likes to roads rails, sea and air. The most appropriate transportation
network depends on its size and the product that it sells.
○ Communication network – covers access to telephone lines, Internet and postal services.
○ Support networks – refers to backup and complementary services that are essential for running a
business.
○ The government is responsible for the economy’s infrastructure.
○ Infrastructure also affects the international competitiveness of a country.
○ Businesses want s to locate in areas with good infrastructure so that they can supply goods and
services more efficiently and more cost effectively.
○ Infrastructure is also important to make sure that employees can get to and from work without to
much hassle.
● Political stability
○ Even if monetary – related factors are favourable in particular locations., manager may still need to
consider the political stability of the country that they wish to locate in.
○ Stable political environment helps businesses to trade effectively, reducing risks of operating
overseas.
● Government restrictions and regulations
○ Businesses need to consider government policies and regulations that constrain business activity
as administrative and bureaucratic processes vary from country to country.
● Ethical issues
○ Decisions regarding the international location or relocation of business often include an ethical
dimension.
○ The amount of waste, noise and pollution
○ Relocation can lead to major job losses and therefore decrease in profit, sales and reputation.
● Comparative shopping (clustering)
○ Clustering means that a firm locate near other businesses that cater for similar markets.
Reorganizing production
● Outsourcing is the practice of transferring internal business activities to an external organization to reduce
costs and increase productivity.
○ Subcontractors can carry out the outsourced work more cost effectively.
○ The main advantages
■ Activities that are not core to the function of the business can be outsourced to third parties.
Allows concentration
■ Quality output can occur despite the business lacing specific skills.
■ It helps to cut production costs for the contractor.
○ The main limitations
■ There must be a mutual trust between the business and the subcontractor. Conflict can be
damaging.
■ The quality of the outsourced service is passed onto an external party. Concerns regarding
the quality standard.
■ Still requires effective two – way communication and careful coordination.
■ Uncertainty among the workforce due to restructuring and staff redundancies.
○ Offshoring: involves relocating business functions and processes overseas. The offshored function
can remain within the business or outsourced to one other company overseas.
■ Advantages of outsourcing also refer to offshoring.
■ Often associated with unethical behaviour.
■ By exploration of labour in low-income countries such as poor working conditions, low pay,
the use of child labour and poor health and safety policies.
■ Can also be vulnerable to external influences such as economics and political instability.
■ Two categories of offshoring. Production and service offshoring
 ■ Take place in low-income countries where labour costs are low.
○ Insourcing: is the use of an organization’s own people and resources to accomplish a certain
function or task which would otherwise have been outsourced.
■ Two main reasons for insourcing
■ The business had previously outsourced a particular function or task but is no longer
satisfied with the quality of the work being done.
■ There is no longer cost saving benefits from using subcontractor.
■ Sometimes it’s more cost effective to use insourcing if work can be done better in – house.
■ Businesses may consider reshoring because of increased labour costs or higher rents being
demanded.
■ The problems with relocating is known as Industrial Inertia and it describes the reluctance
to relocate due to the inconvenience of moving. Managers may feel that the potential
inconveniences and costs of relocating outweigh the benefits.
○ The location decision is likely to affect all functional areas and aspects of business activity.
○ The scope of these impacts depends on the type and size of business, the products it sells and the
features of the location itself.
○ Potential limitations of relocation
■ Relocation costs. Transportation, insurance and legal fees.
■ Lower morale and higher anxiety caused to the workforce.
■ Damage corporate image if the firm is seen to value profit over people.
■ Loss of skilled and loyal workers
■ The likely need to find new customers and suppliers.
■ Strong links with existing local community will be lost.
■ Redundancy payments made to retrenched employees.

BM 5.5 Notes - Production Planning

Supply chain process
● System that moves a product/service from supplier to customer
● Involves transformation of inputs to outputs
● Includes every entity that comes into contact with the business during production
● Basic elements:
○ Customer
■ Starts the chain/process by creating demand
○ Planning
○ Purchasing
■ Purchases raw materials needed to satisfy demand
■ Purchase orders sent to suppliers
○ Inventory
■ Receiving, storing, and checking raw materials
○ Production
○ Transportation (to customer)

Just-in-time vs. just-in-case

● Just-in-case (JIC)
○ Traditional stock management system that recognizes need to maintain large amounts of stock
(reserve/buffer stock)
○ Important during supply or demand fluctuations or contingencies
○ Ensures there is always stock available to meet customer demands
○ Fatal to the business if they overestimate the demand for its products
○ Advantages:
■ Allows a business to meet sudden changes in demand
■ Increased flexibility
■ Purchasing economies of scale
■ Reduces down time
 ○ Disadvantages:
■ Costs of holding stock – costs for storage
■ Opportunity cost of money being tied in stocks
● Just-in-time (JIT)
○ See unit 5.3

Stock control
● Managing stock levels
● Careful planning to ensure sufficient stocks are available at the right time
● Disadvantages of stockpiling (holding too much stock):
○ Storage costs will increase
○ Stocks might be prone to fire, theft or damage
○ Stock might perish and deteriorate
○ Stocks can be illiquid and do not generate money
○ May become obsolete when demand changes
○ Excess stocks may need to be discounted to offload unwanted products
● Disadvantages of stock-out (not holding enough stock):
○ Lost sales
○ Damaged corporate image and disgruntled customers
○ Inefficiencies in machinery
○ Higher administration costs
● Goal is optimum level of stock/economic order quantity
○ Large orders = economies of scale but storage costs
○ Factors:
■ Type of product (e.g. FMCGs need to have large volume of stock)
■ Forecast level of demand
■ Lead times – large lead time = large volume of stock
■ Costs of stockholding

Stock control chart

● Assumes sales are constant
● Lead time – time it takes for ordered stock to arrive
● Buffer stock/minimum stock level – reserve stock (JIC)
● Reorder quantity – how much the business orders at reorder level
● Reorder level
○ Level of stock wherein the business reorders
○ (Minimum stock level) + (lead time * demand per day)
 (Image Source:
Tutor2U.com)
Capacity utilization rate
● (Actual output / productive capacity) * 100
● Measure of firm’s efficiency in terms of idle resources
● How to improve CU – marketing, subcontracting, reduce capacity
● High CU means:
○ Level of output is close to max (productive capacity)
○ Fixed costs are spread over high production
● High CU is important for firms that have
○ High fixed costs
○ Low profit margins
○ Low marginal costs
● Drawbacks of high CU
○ Machinery may be in constant use; no time for maintenance – breakdown
○ For service oriented businesses, may mean health and safety concerns, lower standards of service,
long waiting times, etc.
○ Quality may suffer
○ Diminishing marginal returns/less efficiency
○ Not a substitute for growth

Productivity rate
● (Units of output / units of output)
● Measures the efficiency of production
○ Whether inputs are effectively turned into outputs
● How to improve productivity – training, innovation, technology, motivation
● High productivity means a company can reduce prices or improve profit margins

Cost to make (CTM) or cost to buy (CTB)

● Quantitative analysis on whether an item should be made or bought
● CTB = Price x Quantity
● CTM = Fixed Cost + (Average Variable Cost x Quantity)
 ● Qualitative factors to consider:
○ Is it a core function that must be controlled and/or kept confidential?
○ Are there suppliers that are competent and reliable?
○ Do you have enough skill, time, and capacity to produce a desired volume/quantity?
○ How will it affect the brand?

BM 5.6 - Research and Development

Research and development (R&D)
● Research refers to the commercial investigation of the unknown such as new products and processes.
● Development is the use of research findings to create products that might be commercialised. It can also
mean improving existing processes or products.
● The purpose of R&D is to provide continual advancement and to launch new products to satisfy customer
need in a profitable way.
● R&D involves conducting extensive research into new products, their design, testing and development of
prototypes.
● Essential to long – term survival and success.
● R&D is often beneficial for businesses operating in sunrise industries (rapid growth potential).
● R&D can also give the first mover advantage. To be the first one to produce a type of product. Huge
advantage.
● In contrast the sunset industries it is likely to be unprofitable.
● Limitations of R&D
○ High costs – Investment in research and development are highly expensive and require sufficient
labour and financial resources.
○ High failure rate – most new ideas fail to materialise. Even for few new ideas that might work, most
are not commercially feasible. Failure not only leads to a loss of investments funds, it also
demoralises the workforce.
○ Budgetary constraints – R&D is often held back by funding problems. Even if an innovative idea is
realistically achievable, budget constraints can prevent the project from being undertaken.
● The goals and benefits of innovation
○ Growth opportunities: growth and evolution
○ Productivity gains: indicate productivity levels.
○ Brand switching: customers turn away from rival products for a more appealing or innovative
product.
○ Job creation: create employment opportunities.
○ Social benefits: improve the quality of life of people.
R&D and customers’ unmet needs
● Innovation is the process of commercially pioneering new ideas and creations in the production process. T
stems from successful R&D in order to meet the needs of customers in a profitable way.
● The unmet needs will be unknown to the customer
● Examples on innovation
○ Discovery of new production process – benefits of mass production (FORD)
○ Successful exploration of creative ideas – the invention of Hotmail.
○ Introduction of new products – the Apple iPod
○ Entering new markets – Ferrari selling more cars when expanding to China without damaging
image.
● All successful businesses have to make courageous decisions.
● R&D is needed to sustain and increase profitability.

Types of innovation
● Product innovation refers to new creations or the development and improvement of existing products.
○ Examples: introduction of new products, better functionality and performance. Like Colgate
introduced the toothpaste tube and not jar.
 ● Process innovation refers to change to the way production or delivery takes place. It aims to improve the
method of production and the logistics of getting the product from the factory to the consumer.
○ 3D – modelling software in the process of developing new products.
● Positioning innovation refers to changing the context of a product. It focuses on repositioning the
perception of an established product by the use appropriate innovation strategies.
○ Like Levis was jeans for workers it changed to be fashionable brand.
● Paradigm innovation refers to innovative change, usually of a radical nature. Such innovations change the
nature of certain markets and/or organizational cultures.
○ Henry Ford’s introduction of the assembly line in an example.
● Incremental innovation refers to minor improvements to products or work processes.
○ Car manufactures might work on developing safer and more energy efficient vehicles.
● Radical innovation refers to major and disruptive innovations that tend to involve high risks. They can be a
major source of competitive advantage.
○ When cassette tapes were replaced by CDs.
Adaptive and creativity and innovative creativity
● Creativity is the process of generating new ideas, often stemming from divergent thinking. They are divided
into two categories.
● Adaptive creativity is a category of incremental innovation that adjusts or develops something that already
exists.
○ Adaptors tend to approve the embedded paradigm within the organization.
○ Produce new ideas that are built on the practice of the organization.
○ Lower risk and cheaper to implement.
● Innovative creativity is radical in nature as it involves creating something that is new. Innovators redefine
problems and cultural norms.
○ Redefine problems and cultural norms. They create solutions aimed at doing things differently.
○ Intuitive decision – making
○ Unpredictable outcomes and high risk.
● Most successful organizations adopt both these different creative styles.

BM 5.7 - Crisis Management and Contingency Planning

Crisis management
● A crisis is a situation of instability that results in major problems for a business. Crises are usually
unexpected and often unpredictable.
● In the event of an actual crisis, its probable that costs to the business will be significant in terms of both
time and money.
● Managers devise plans to minimise the damage that crisis can cause to their organizations.
● Broad examples of crisis include
○ Lack of working capital to pay workers and suppliers
○ Theft and vandalism
○ Negative and damaging media publicly.
○ Computer hacking or data loss
○ Accident such as fire damage to stock and property.
○ Soaring levels of staff turnover
○ Natural disasters such as floods, storms and earthquakes
○ No power due to a blackout or power cut
○ Computer failure
○ Delayed flights due to computer failure at airports.
○ Outbreaks of infectious diseases.
○ Loss or long – term sickness of key personnel.
○ Terrorist attacks
● Crisis management is about being reactive to events and disasters that can cause serious disruptions and
harm to a business.
● Crisis can be both global and in the business itself.
● Most businesses find it very difficult and expensive to plan these unexpected events.
 ● Crisis management involves formulating the best response to a crisis.
● To minimise the impact on the firm.
● Successful managers can respond to disruptions to their business by implementing a Contingency plan to
restore the operations.
● Contingency planning is about being proactive to change in the business environment. It involves
developing a plan before an unwanted or unlikely event occurs by using “what if?” questions to identify all
probable threats.
○ Helps by preparing for a crisis. Managers examine what might happen, estimate the likelihood of
these events and assess the probable effects on the business.
○ The crisis plan needs to be tested.
● Some risks are uninsurable since they are so difficult to qualify. So contingency planning might be
meaningless.
Factors affecting effective crisis management
● Transparency – most effective to be open and honest during a time of crisis.
○ In times of crisis, acting in a socially irresponsible way is more likely cause a firm long-term damage
than if it had acted responsibly and taken necessary corrective measures from the outset.
● Communication – effective communication with all key stakeholders is critical in a crisis situation.
○ Requires managers to develop a crisis communication plan, understanding of how the media
works. Press release. Effective communication helps reassure employees, customers, suppliers,
investors and other stakeholder groups.
● Speed – in a crisis situation, the speed response n critical to the effectiveness of crisis management.
○ The speed of response to the crisis influence the chance of containing or reducing the damage
caused.
● Control – a major crisis truly tests the performance of the leadership team within an organization. Leaders
need to be able to control the situation.
○ Many skills are needed. To work under pressure, communicate with key stakeholders and to make
quick and effective decisions.
The advantages and disadvantages of contingency planning
● Advantages
○ Cost – the public can be quite forgiving. Contingency plans can help to minimise negative reactions
and hence the costs of crisis
○ Time – planning takes time, but can save time in the event of a crisis. Delays in responding to crisis
can allow problems to escalate beyond repair.
○ Risks – it helps to reduce risks as most risks or eventualities can be accounted for. A good plan
reduces overall risk.
○ Safety – immediate actions, such as communications with the organization's personnel, can help
alleviate or minimise the concerns of staff and meet their security needs.
● Disadvantages
○ Cost – crisis may never happen and therefore time and many might be wasted. Could have been
used somewhere else.
○ Time – uses valuable management time and resources, thereby increasing costs.
○ Risks – if planes are based on inaccurate and old data, then the inappropriate actions might be
taken when a crisis accrue. There is no guarantee that it saves the business.