A Level Business Studies

3.1 What is business?

3.1.1 Understanding the nature and purpose of business
Why businesses exist
Key business objectives:
- To make money
- To provide a service
- Provide employment opportunities
- Fill a gap in the market
- Help the community (social enterprise)
- Be environmentally friendly
- Improve existing products
- Survive

The relationship between mission and objectives

Mission Statement = this provides the overriding goal of a business and the reason for its existence; and a strategic
perspective for the business and a vision for the future

Benefits of a good mission statement:

- Clarifies purpose and focus
- Motivates staff and those interested in the business
- Attracts people (such as investors) and resources
- A good public relations tool

Characteristics of a good mission statement:

- Contains a formulation of objectives that enables progress towards them to be measured
- Differentiates the business from its competitors
- Defines the markets or business in which the firm wants to operate
- Is relevant to all major stakeholders – not just shareholders and managers
- Excites, inspires, motivates, and guides – particularly important for employees

Criticisms of mission statements:

- Not always supported by actions of the business
- Often too vague and general
- Views as a public relations exercise
- Sometimes regarded cynically by employees
- Not supported wholeheartedly by senior management

Corporate aims and objectives:

- Mission statement – the overall reason for the business’ existence
- Corporate aims – the long term targets and plans to fulfil the mission statement
- Corporate objectives – the medium to long term quantifiable targets to fulfil the mission statement
- Corporate strategy – the actions to be taken by the business to achieve its objectives

Common business objectives

Types of business objectives:
- Ethical – (e.g. completely cruelty free; change packaging to cut down on plastic use; no harmful chemicals
used throughout production; reduce waste; environmentally friendly)
- Profit (e.g. increase profit margins; maximise profit)
- Growth (e.g. number of shares (quantifiable) – volume; gain market share; increase number of outlets)
- Survival (e.g. achieve minimum level of sales and sales revenue to ensure costs are met and market share is
retained; maintain levels of stock)
- Cash flow (e.g. reduce outflows; increase inflows)
- Social (e.g. support and solutions; enhance brand images and reputation)
Why businesses set objectives
Main functions of objectives:
- A clear statement of what needs to be achieved
- Focus’ on all activities of the business (marketing, operations, finance, human resources)
- Provides targets for individual and group achievements
- A means of measuring performance (business, departments, individual employees)
- Provides a clear focus for decision making and a target to aim for
- Provides criteria for evaluating performance

The measurement and importance of profit

Profit = revenue – total costs
Total Costs = fixed costs (stay the same regardless of output eg rent) + variable costs (change in relation to the
number of items produced)

Importance of profit:
- Motivator
 Sole traders can keep all the profit
 Ltds owned by people running the business
 Profit sharing schemes in which staff are given incentives to work effectively
- Further investment
 Guide to see where it is easier to make profits
 Where profits are high and low
- Stakeholders
 Reliable customers
 Purchase goods
 Easier to establish links and work with others businesses
- Finance
 Avoiding paying interest
 Fund expansion plans and capital investment
- Success
 Compare profits to competitors
 Before this though, have to look at competitor business objectives
- Reward
 Many business owners take risks with money
 Every 6 months, plcs pay dividends to shareholders
 Retain profit to buy more resources to make more profit in the future

3.1.2 Understanding different business forms

Reasons for choosing different forms of business and for changing business form

Private = part of the economy that is not state controlled, and is run by individuals and companies, usually for profit
Public = this refers to all the businesses and organisations which are owned and run by the government
Factors affecting choosing business forms:
- Finances (including sources of)
- Size
- Taxes
- Profit (who shared with)
- Risks
- Ownership and control
- Registrations and payment
- Liability (limited and unlimited)

Unlimited Liability = owners are personally responsible for the debts of the business. This means their personal
possessions such as their cars etc would pay for debts should the business go bankrupt
Limited Liability = the business has its own legal identity

Strengths of a sole trader Weaknesses of a sole trader

Don’t need to register anywhere (only have to tell Unlimited liability – can take personal possessions if the
HMRC) business goes into debt
Owner keeps all of the profits Completely control (no other option)
Can’t sell shares so have complete control Can’t sell shares so so extra money
Are their own boss – no arguments Little start up capital to being with

Strengths of a private limited company Weaknesses of a private limited company

Limited liability – can only take assets that belong to Profits must be shared with the shareholders in the
the business to pay off debts form of dividends
Own legal structure Corporation tax
Can use lots of ways to raise finance Have to pay to register the business

Strengths of a public limited company Weaknesses of a public limited company

Limited liability – can only take assets that belong to Profit must be shared with the shareholders in the form
the business to pay off debts of dividends
Own legal structure £50,000 raised money to register with the Companies’
House
Can use all types to raise finance Corporation tax
ADD IN TABLE ON THE DIFFERENT BUSINESS FORMS
The role of shareholders and why they invest
Shareholders = they are the owners of a limited company and they gain their financial reward from share ownership
in two ways:
- A share of the profits earned by the company – paid out as a dividend
- Growth in the value of their shareholding (compared with the cost of buying the shares) – which is "realised"
when the shareholder sells the shares to someone else
- Shareholders play an important role in the financing, operations, governance, and control aspects of a
business

Shareholders in public companies whose shares are traded on the Stock Exchange have a daily insight into the
returns their investment is making:
- The share price indicates the market value of the business (share price x number of shares in issue)
- The latest share price can be shown as a multiple of the most recent annual earnings (or profits) per share,
to show a valuation ratio known as the Price/Earnings ratio
- The latest annual dividend can be compared with the share price to indicate an annual return ("dividend
yield")

Influences on share price and the significance of share price changes

Market Capitalisation = this represents the total market value of the issued share capital of the company.
- = the current share value x the number of shares issued
- When demand for shares increases, the share prices increase too

Factors that affect share price:

- Number of shares available – the more shares that are available, the more people will want to invest in them
- Business expansion – shareholders will receive more dividends due to an increase in profit margins
- Investment – if investment decisions work, then share value will increase and so more people will want to
buy them (however in the short term, most of the profit made will be reinvested back into the business so
dividends will decades significantly
- Publicity
- E-commerce
- A recession – this will devalue shares significantly

The effects of ownership on mission, objectives, decisions, and performance

A variety of factors affect the choice of business form which influences the ownership. This influences the firm’s
mission & objectives and it’s decision making which impacts on performance

Mission and Objectives – depending on business form:

- Sole trader – achieve a work life balance
- PLC – pressure to maximise shareholder’ return
- NGO – focused on achieving social actions

Decision – who makes the decisions the speed these are made at:
- Sole Trader – make decisions quickly and autonomously
- LTD – quickly consults shareholders
- PLC – go through more steps e.g. call a meeting
- NGO – consult members, difficult to co-ordinate

Performance
- Measure success – financial, employee engagement, environmental record
- Sole trader – judge themselves on performance, criticised same as PLC
- Ownership affect – ability to employ specialist staff, access to finance, ability to maintain competitive
advantage and embrace new tech
3.1.3 Understanding that businesses operate within an external environment
How the external environment can affect costs and demand
The different areas of the external environment that affect a business:
- Natural disasters
- Interest rates
- Availability of materials
- Recession
- Price of materials

Components of the external environment:

- Market conditions and competition
- Incomes
- Interest rates
- Demographic factors (eg trend, behaviours of people)
- Environmental issues

The external business environment and how it affects it:

- Current and changing conditions within the external environment have an impact upon a business
- It can have a direct impact on their mission statement, aims, and objectives
- The external environment helps us to understand choices that a business has made and helps a business
make future decisions
- It affects a firms costs and the demand for a product
- Firms would increase the price in order to restore lost profit margins
- Any factor that has the effect of increasing costs of a business could ultimately result in an increase in the
price of a product set by the business

Factors that affect demand:

- Price
- Income
- Substitutions
- Supply
- Market trends
- Complimentary goods
- Marketing and advertising
- Seasons
- Government actions and laws
ADD IN DEMOGRAPHIC BOOKLET
3.2 Managers, leadership, and decision making
3.2.1 Understanding management, leadership, and decision making
What managers do
Managers = their role is to plan, organise, and coordinate people and resources to follow orders
Leaders = decide on a direction for the firm and inspire & motivate staff to achieve aims that are set
- Managers have subordinate but leaders have followers

The role of managers:

- Setting objectives (e.g. attendance, financial and growth)
- Analysing (e.g. analyse data for future decisions)
- Leading (e.g. human resources, staff attendance, duties, qualifications)
- Making decisions (e.g. rewards, expansion)
- Reviewing (e.g. appraisals, decision making)

Types of management and leadership styles and influences on these

Influences on management and leadership styles:
- Company structure and the span of control
- Particular situation
- Organisational culture and structure
- Nature of the tasks involved
- Employees and their skills & abilities
- Group size
- Personalities and skills of managers and leaders
- Time frame

McGregor’s Theory X and Theory Y = this is a theory developed that explains the two theories of human behaviour at
work – Theory and X and Theory Y
- He did not imply that workers would be one type or the other. Rather, he saw the two theories as two
extremes - with a whole spectrum of possible behaviours in between

Theory X:
- This is an authoritarian approach to leadership, which is adopted by those leaders who believe that workers
dislike work and therefore need to be controlled to improve their performance. They tell them what to do
and supervise them doing it.
- Theory X managers assume that workers:
 Are lazy, dislike work and are motivated by money
 Need to be supervised and controlled or they will underperform
 Have no wish or ability to help make decisions or take on responsibility
 Aren’t interested in the needs of the organisation and lack ambition
- This can be useful in a crisis or where there are constantly changing workforces and workers need clear
instructions and supervision

Theory Y:
- This is an approach to leadership that assumes that workers have both initiative and self-control, which can
be used to achieve the goals of a business. Consequently, the role of management is to maximise the
commitment of the workers.
- Theory Y managers assume that workers:
 Have many different needs, enjoy work, and seek satisfaction from it
 Will organise themselves and take responsibility if they are trusted to do so
 Think that poor performance is due to boring and monotonous work and poor management
 Wish to, and should, contribute to decisions

Leadership styles:
- Authoritarian
 Autocratic leaders hold onto as much power and decision-making as possible
 Focus of power is with the manager
  Communication is top-down & one-way
 Formal systems of command & control
 Minimal consultation
 Use of rewards & penalties
 Very little delegation
 McGregor Theory X approach
 Most likely to be used when subordinates are unskilled, not trusted and their ideas are not valued

- Democratic
 Focus of power is more with the group as a whole
 Leadership functions are shared within the group
 Employees have greater involvement in decision-making – but potentially this slows-down decision-
making
 Emphasis on delegation and consultation – but the leader still has the final say
 Perhaps the most popular leadership style because of the positive emotional connotations of acting
democratically
 A potential trade-off between speed of decision-making and better motivation and morale?
 Likely to be most effective when used with skilled, free-thinking and experienced subordinates

- Paternalistic
 Leader decides what is best for employees
 Links with Mayo – addressing employee needs
 Akin to a parent/child relationship – where the leader is seen as a “father-figure”
 Still little delegation
 A softer form of authoritarian leadership, which often results in better employee motivation and
lower staff turnover
 Typical paternalistic leader explains the specific reason as to why he has taken certain actions

- Laissez-faire
 Laissez-faire means to “leave alone”
 Leader has little input into day-to-day decision-making
 Conscious decision to delegate power
 Managers / employees have freedom to do what they think is best
 Often criticised for resulting in poor role definition for managers
 Effective when staff are ready and willing to take on responsibility, they are motivated, and can be
trusted to do their jobs
 Importantly, laissez-faire is not the same as abdication

Management theories:
- Tannenbaum-Schmidt Continuum Theory
- The Blake Moulton Grid

Tannenbaum-Schmidt Continuum Theory:

The continuum represents a range of action related to the:
- Degree of authority used by the leader or manager
- Area of freedom available to non-managers

Four main styles of leadership are identified in the Tannenbaum and Schmidt Continuum of Leadership:
- Tells – leader identifies problems, makes decision and announces to subordinates; expects implementation
- Sells – leader still makes decision, but attempts to overcome resistance through discussion & persuasion
- Consults – leader identifies problem and presents it to the group. Listens to advice and suggestions before
making a decision
- Joins – leader defines the problem and passes on the solving & decision-making to the group (which
manager is part of)

The Blake Mouton Grid:

Through a series of questions about their leadership and management style, the position on the Blake Mouton grid is
mapped in terms of:
- Concern for people (High = 9 Low = 1): This is the degree to which a leader considers the needs of team
members, their interests, and areas of personal development when deciding how best to accomplish a task.
- Concern for task (High = 9 Low = 1): This is the degree to which a leader emphasises concrete objectives,
organisational efficiency and high productivity when deciding how best to accomplish a task.

The effectiveness of different styles of management and leadership

The Blake Mouton grid is an effective way to analyse different leadership styles due to its format which make it more
applicable to a wider audience. It also highlights the motives and impact for each leadership style. This helps
managers and leaders to assess the effects of their leadership styles and if they shouldn’t adapt it. However, it
doesn’t appreciate context and so many condemn some leadership styles even though they may work in certain
situations.
The Tannenbaum and Schmidt continuum concentrates more on delegation & freedom in decision making to
subordinates and there by on the team development. As the team’s freedom increases, the manager’s authority
decreases. This is a positive way for both teams and managers to develop delegations skills

3.2.2 Understanding management decision making

The value of decision making based on data (scientific decision making) and on intuition
Scientific decision making:
- Set the objective
- Gather and interpret information (market research)
- Select the chosen option
- Implement the decision
- Review

Advantages of a scientific approach:

- Provides a clear sense of direction for all involved in the business
- Decisions are made and based on business logic
- It is flexible – at any stage in making a decision, it can be reviewed and changed if needed

Non-scientific decision making (intuition):

- The ability to understand something without the need for conscious reasoning; similar to a ‘hunch’
- Making decisions with a lack of evidence to prove it is the right thing to do
- This would be appropriate when a quick decision is necessary as it provides quick results when under a time
scale
- It is mainly used by smaller businesses

The scientific approach vs intuition depends upon:

- Speed of decisions
- Information available
- Size of business
- Predictability of situation
- Character of person or culture

The use and value of decision trees in decision making

Characteristics of decision trees:
- They are good at choosing between several courses of action
- Provides a highly effective structure within which you can lay out options and investigate the possible
outcomes of choosing these options
- It uses estimates and probabilities to calculate likely outcomes
- It helps to decide whether the net gain from a decision is worthwhile
Expected Value = the financial value of an outcome.
- = the estimated financial effect x its probability
Net Gain = the value to be gained from taking a decision.
- = the expected value of each outcome – the costs associated with the decision.

Advantages of decision trees:

- Gives you a decision
- Evidence to gain a source of finance
- Set out logically
- Easy to understand and results are tangible
- Likely costs considered as well as benefits
- Assesses risks
- Potential options and choices are considered at the same time – direct comparison

Disadvantages of decision trees:

- Always probe to arrow
- Calculating probability can be rad
- Could be inaccurate or unreliable as only estimates
- Doesn’t necessarily reduce the amount of risk
- Prone to bias
- Uses quantitative data only – ignores qualitative aspects such as effects on employee motivation and brand
image

Influence on decision making

The influences on decision making:
- The business’ mission and objectives – do decisions match with the mission statement and current
objectives of the firm?
- Ethics – this is the desire to act in a way that it morally correct ( these decisions are often not quantifiable
and can attract negative publicity for the business
- The risk involved
 Non programmable = high risk – needs to be calculated and not taken on a hunch
 Programmable = low risk – can often be made using intuition or a hunch
- The external environment
 Demographics
 The environment
 Incomes
 Competition/market conditions
 Interest rates
- Resource constraints (e.g. information, time, labour, and materials)
 It may be costly to overcome these challenged associated with decision making
- Stakeholders – the different people who are an interest in the business

3.2.3 Understanding the role and importance of stakeholders

The need to consider stakeholder needs when making decisions
Stakeholder = anyone with an interest in the business and its operations

Stakeholder groups:
- Customers
- Employees
- Investors/banks
- Suppliers/distributors
- Shareholders
- Owners/managers
- Competitors
- The government
- Local communities
 - Environmental pressure groupies
- The media

Stakeholder mapping:

Power = their part in decision making or how much they would negatively affect you
Purpose = helps you when making decisions and prioritise stakeholders where there will be potential conflict

Stakeholder needs and the possible overlap and conflict of these needs
Stakeholders needs:
- Employees – happy environment, high wage, keeping their job, good & safe working conditions
- Suppliers – regular orders, contractual agreement, security
- Customers – low price, high quality, good customer service, value for money
- Competitors – price, customers, (affected by other decisions)
- Government – wants them to do well, collect taxes (and raise them)
- Local communities – local environment, friendly firms
- Owners and managers – dividends, potential benefits, expansions, happy employees, profit
- Investors and banks – repayments on time and with full interest
- Shareholders – regular dividends, how much profit the firm makes

Potential conflicts between stakeholders:

Influences on the relationship with stakeholders
Factors that affect stakeholder relationships:
- Quality of products made
- Information available
- How easy it is to communicate with them
- Their status
- Customer service
- Influence or power
- Workplace environment for employees
- How much money they have invested into the business
- Views on the environment
- Revenue produced
- Prices of products being sold
- Decisions made by the firm

How to manage the relationship with different stakeholders

How to communicate with stakeholders:
- General meetings
- Letters
- Email and social networking
- Posters of advertising
- Public forums
- Media release
3.3 Decision making to improve marketing performance
3.3.1 Setting marketing objectives
The value of setting marketing objectives
Marketing Objectives = the process of identifying, anticipating (predicting), and satisfying customer needs profitably
- Provided the marketing objectives are relevant and achievable, there are some important business benefits
from setting them and monitoring progress against them. Effective marketing objectives:
 Ensure functional activities consistent with corporate objectives
 Provide a focus for marketing decision-making and effort
 Provide incentives for marketing team and a measure of success/failure
 Establish priorities for marketing resources and effort

Types of marketing objectives:

- Sales volume
- Sales value (revenue)
- Market growth (%)
- Market share (%)
- Brand loyalty/awareness

External and internal influences on marketing objectives and decisions

External influences on marketing objectives and decisions:
- Economic environment – the key factor in determining demand (e.g. many marketing objectives have been
thwarted or changed as a result of the recession). Factors such as exchange rates would also impact
objectives concerned with international marketing.
- Competitor actions – marketing objectives have to take account of likely/possible competitor response (e.g.
an objective of increasing market share by definition means that competitor response will not be effective)
- Market dynamics – the key market dynamics are market size, growth and segmentation. Changes in any of
these undoubtedly influence marketing objectives. A market whose growth slows is less likely to support an
objective of significant revenue growth or new product development
- Technological change – consumer and other markets are now affected by rapid changes in technology,
shortening product life cycles and opportunities that have been created for innovation
- Social and political change – changes to legislation may create or prevent marketing opportunities. Change in
the structure and attitudes of society also have major implications for many markets.

Internal influences on marketing objectives and decisions:

- Corporate objectives – as with all the functional areas, corporate objectives are the most important internal
influence. A marketing objective should not conflict with a corporate objective
- Finance – the financial position of the business (e.g. profitability, cash flow, liquidity) directly affects the
scope and scale or marketing activities.
- Human resources – for a services business in particular, the quality and capacity of the workforce is a key
factor in affecting marketing objectives – a motivated and well-trained workforce can deliver market-leading
customer service and productivity to create a competitive marketing advantage
- Operational issues – operations has a key role to play in enabling the business to compete on cost
(efficiency/productivity) and quality. Effective capacity management also plays a part in determining
whether a business can achieve its revenue objective
- Business culture – a marketing-orientated business is constantly looking for ways to meet customer needs,
whereas a production-orientated culture may result in management setting unrealistic or irrelevant
marketing objectives

3.3.2 Understanding markets and customers

The value of primary and secondary marketing research
Market Research = the systematic and objective collation, analysis, and evaluation of information that is intended to
assist in the marketing process
Primary Market Research (field) = involves the collection of first hand data that did not exist before and therefore it
is original data. It fills gaps that secondary research cannot

Examples of primary research:

- Focus groups
- Interviews (online & in-person)
- Surveys & questionnaires
- Mystery shoppers
- Product testing and product trial

Advantages of primary research:

- Directly focused on research objectives = fit for purpose
- Tends to be more up-to-date than secondary research
- Provides more detailed insights – particularly into customer views

Disadvantages of primary research:

- Time-consuming and often costly to obtain
- Risk of survey bias – research samples may not be representative of the population

Secondary Market Research (desk) = research that has already been undertaken by another organisation and
therefore already exists

Sources of secondary research:

- Government publications
- Newspapers
- Magazines
- Company records
- Competitors
- Market research organisation
- Loyalty cards
- Internet

Advantages of secondary research:

- Already gathered so may be quicker to collect
- May be gathered on a much larger scale than possible for the firm
- In some cases it can be very cheap or free to access

Disadvantages of secondary research:

- Information may be outdated, therefore inaccurate
- The data may be biased and it is hard to know if the information was collected is accurate
 - The data was not gathered for the specific purpose the firm needs or is not relevant to the original context
- In some cases it can be costly (e.g. marketing firm reports)

Market Mapping = a framework for analysing market positioning is a ‘market (positioning) map’. A market map
illustrates the range of positions that a product can take in a market based on two dimensions that are important to
customers

Dimensions for the axes examples:

- Low price v high price
- Basic quality v high quality
- Low volume v high volume
- Necessity v luxury
- Light v heavy
- Simple v complex
- Unhealthy v healthy
- Low-tech v hi-tech

Advantages of positioning maps:

- Help spot gaps in the market
- Useful for analysing competitors – where are their products positioned?
- Encourages use of market research

Disadvantages of positioning maps:

- Just because there is a gap in the market doesn’t mean there is demand for the product
- Not a guarantee of success
- How reliable is the market research that maps the position of existing products based on the chosen
dimensions?

The value of sampling

Sampling = involves gathering data from respondents whose views or behaviours are representative of the target
market as a whole
- Random = member of target population has an equal chance of being chosen
- Quota/Stratified = based on obtaining a sample that reflects the types of consumers from whom the
business wished to gain information (e.g. gender, age)

Advantages of sampling:
- Provides a good indication
- Helps avoid expensive errors
- Can be used flexibly
- Reliable information
- Helps firms learn about the market quickly

Disadvantages of sampling:
- May be unrepresentative
- Bias
- Difficult to locate suitable correspondents
- May not have an accurate profile of customers
- Can be out of date due to time taken to collate

The interpretation of marketing data

Confidence Intervals = they measure the probability that a population parameter will fall between two set values.
The confidence interval can take any number of probabilities, with the most common being 95% or 99%
- Plus or minus numbers are used to show the accuracy of statistical results arising from sampling data
- It’s used to assess to reliability of sampled data when forecasting figures (e.g. sales levels)
Factors influencing confidence levels:
- Sampling size – the larger the sample, the better the reflection of opinion of the whole population, so
confidence levels fall
- Population size – the target market for the product has a minor effect on confidence intervals
- % of sampling choosing a particular answer – if high or low % of sample expresses the same opinion, then
confidence intervals are likely to be low

Extrapolation = it is like an educated guess or a hypothesis

- When you make an extrapolation, you take facts and observations about a present or known situation and
use them to make a prediction about what might eventually happen

Disadvantages of extrapolation:
- Less reliable if fluctuations occur (e.g. weather is unpredictable)
- Assumes past changes will continue
- Ignores qualitative factors (e.g. changes in tastes and fashion)
- Ignores the product life cycle

Correlations = another method of sales forecasting that looks at the strength of a relationship between two variables
- Positive correlations means the two sets of data are connected in some way (e.g the closer it gets to
Christmas, the more Christmas trees that are sold)
- Negative correlations also means the two sets of data are related but as x increases, y decreases

The value of technology in gathering and analysing data for marketing decision making
Big Data = the process of collecting and analysing large data sets from traditional and digital sources to identify
trends and patterns that can be used in decision-making
- large data sets are both structured (e.g. sales transactions from an online store) and unstructured (e.g.
posts) on social media

How the data is generated:

- Retail e-commerce databases
- User-interactions with websites and mobile apps
- Usage of logistics, transportation systems, financial and health care
- Social media data
- Location data (e.g. GPS-generated)
- Internet of Things (IoT) data generated
- New forms of scientific data (e.g. human genome analysis)

How technology enables more effective marketing decisions:

- Analytics and customer insights – this help businesses track how users and customers use their online
products and services
- Dynamic pricing – the technology behind dynamic pricing enables a business to adopt a pricing strategy
where prices are set flexibly for products or services based on current market demands
- Audience reach and segmentation – the widespread use of social media marketing is an example of how
technology is enabling businesses to more effective reach their target audience and communicate with them
- Customer relationship management (CRM) – this is a technology used to manage interactions with
customers and potential customers. A CRM system helps businesses build customer relationships and
streamline processes so they can increase sales, improve customer service, and increase profitability
- Campaign testing – this is a key feature of digital marketing technology. It allows a business to set up more
than one (and in some cases many thousands) of different marketing campaigns to test which is most
effective.
- Competitor analysis – software is available to monitor what competitors are doing

The interpretation of price and income elasticity of demand data

Price Elasticity of Demand (PED) = measures the responsiveness of quantity demanded for a product to a change in
price
- = percentage change in quantity demanded / percentage change in price
What firms use PED to predict:
- The effect of a change in price on the total revenue and expenditure on a product
- The likely price volatility in a market following changes in supply – this is important for commodity producers
who may suffer big price movements from time to time
- The effect of a change in an indirect tax (e.g. VAT, fuel or other duties) on price and quantity demanded and
also whether the business is able to pass on some or all of the tax onto the consumer
- Information on the PED can be used by a business as part of a policy of price discrimination (also known as
'yield management') – this is where a business decides to charge different prices for the same product to
different segments of the market (e.g. peak and off peak rail travel or prices charged by many of our
domestic and international airlines)
- A business contemplating a tactical price-war or planning a promotional discount based on price (e.g. 50%
off for a limited period) will want to know how responsive customer demand will be to the pricing tactics
used

The values of PED:

- If PED = 0 demand is said to be perfectly inelastic – this means that demand does not change at all when the
price changes (the demand curve will be drawn as vertical)
- If PED is between 0 and 1 (i.e. the percentage change in demand from A to B is smaller than the percentage
change in price), then demand is inelastic
- If PED = 1 (i.e. the percentage change in demand is exactly the same as the percentage change in price), then
demand is said to unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total
spending by the same at each price level
- If PED > 1 then demand responds more than proportionately to a change in price i.e. demand is elastic. For
example a 20% increase in the price of a good might lead to a 30% drop in demand. The price elasticity of
demand for this price change is –1.

Factors affecting PED:

- The number of close substitutes for a good – the more close substitutes in the market, the more elastic is
demand because consumers can easily switch their demand if the price of one product changes relative to
others.
- The cost of switching between products – there may be significant costs involved in switching between
products. In this case, demand tends to be relatively inelastic (e.g. mobile phone service providers may insist
on 12 or 18-month contracts being taken out)
- The degree of necessity or whether the good is a luxury – goods and services deemed by consumers to be
necessities tend to have an inelastic demand whereas luxuries tend to have a more elastic demand.
- The % of a consumer's income allocated to spending on the good – goods and services that take up a high
proportion of a household's income will tend to have a more elastic demand than products where large price
changes makes little or no difference to someone's ability to purchase the product.
- The time period allowed following a price change – demand tends to be more price elastic, the longer that
we allow consumers to respond to a price change.
- Whether the good is subject to habitual consumption – when this occurs, the consumer becomes less
sensitive to the price of the good in question because their default position is to buy the same products at
regular intervals.
- Peak and off-peak demand - demand tends to be price inelastic at peak times and more elastic at off-peak
times.
- The breadth of definition of a good or service – if a good is broadly defined, i.e. the demand for petrol or
meat, demand is often inelastic. But specific brands of petrol or beef are likely to be more elastic following a
price change.

Income Elasticity of Demand (YED) = measures the relationship between a change in quantity demanded for good ‘X’
and a change in real income
- = percentage change in demand / percentage change in income
- Most products have a positive income elasticity of demand – so as consumers' income rises more is
demanded at each price
- Normal necessities have an income elasticity of demand of between 0 and +1 for example, if income
increases by 10% and the demand for fresh fruit increases by 4% then the income elasticity is +0.4. Demand
is rising less than proportionately to income.
 - Luxury goods and services have an income elasticity of demand > +1 i.e. demand rises more than
proportionate to a change in income – for example a 8% increase in income might lead to a 10% rise in the
demand for restaurant meals. The income elasticity of demand in this example is +1.25.
- However, there are some products (inferior goods) which have a negative income elasticity of demand,
meaning that demand falls as income rises. Typically inferior goods or services tend to exist where superior
goods are available if the consumer has the money to be able to buy it (e.g. the demand for cigarettes, low-
priced own label foods in supermarkets and the demand for council-owned properties)

The income elasticity of demand is usually strongly positive for:

- Fine wines and spirits, high quality chocolates (e.g. Lindt) and luxury holidays overseas
- Consumer durables - audio visual equipment, 3G mobile phones and designer kitchens
- Sports and leisure facilities (including gym membership and sports clubs)

Income elasticity elasticity of demand is lower for:

- Staple food products such as bread, vegetables and frozen foods
- Mass transport (bus and rail)
- Beer and takeaway pizza
- Income elasticity of demand is negative (inferior) for cigarettes and urban bus services

The value of the concepts of price and income elasticity of demand to marketing decision makers
Limitations of using elasticity to make marketing decisions:
- Consumer tastes change
- Difficult to calculate
- It assumes things stay equal
- Consumers may not be able to predict their own spending so primary research could be unreliable
- Consumers may react differently to what’s expected
- Image of product may have changes
- Technology
- Competitors entering or leaving the market

The use of data in marketing decision making and planning

Data helps to make effective marketing decisions as it is accurate and can provide reliable results.

When marketing analysis is needed:

- Forecasting sales for new products or investments into new markets
- Gathering evidence to support a finance raising exercise
- To support a new marketing strategy or significant changes to the marketing objectives
- To help make decisions in relation to significant organisational or operational change

3.3.3 Making marketing decisions: segmentation, targeting, positioning

The process and value of segmentation, targeting, and positioning
Market Segmentation = splits up a market into different types (segments) to enable a business to better target its
products to the relevant customers

Advantages of market segmentation:

- Better matching of customer needs – needs differ frequently so creating separate products for each segment
makes sense
- Enhanced profits for business – customers have different disposable incomes and vary in how sensitive they
are to price. By segmenting markets, businesses can raise average prices and subsequently enhance profits
- Better opportunities for growth – market segmentation can build sales (e.g. customers can be encouraged to
"trade-up" after being sold an introductory, lower-priced product)
- Retain more customers – by marketing products that appeal to customers at different stages of their life, a
business can retain customers who might otherwise switch to competing products and brands
- Target marketing communications – firms need to deliver their marketing message to a relevant customer
audience. By segmenting markets, the target customer can be reached more often and at lower cost
 - Gain share of the market segment – through careful segmentation and targeting, businesses can often
achieve competitive production and marketing costs and become the preferred choice of customers and
distributors

Main bases of segmentation:

Target Market = the set of customers sharing common needs, wants, and expectations that a business tries to sell to

Approaches to market targeting:

- Mass marketing (undifferentiated)
 Business targets the WHOLE market, ignoring segments
 Products focus on what customers need and want in common, not how they differ
- Segmented (differentiated)
 Business target several market segments within the same market
 Products are designed and targeted at each segment
 Requires separate marketing plans and often different business units & product portfolios
- Concentrated (niche)
 Business focuses narrowly on smaller segments or niches
 Aim is to achieve a strong market position (share) within those niches

Influences on choosing a target market and positioning

The role of market positioning in marketing strategy:
- Businesses use marketing to create value for customers by making two key decisions:

Decision 1 – choose which customers to serve:

- Market segmentation (analysing the different parts of a market)
- Targeting (deciding with market segments to enter)

Decision 2 – choose how to serve those customers:

- Product differentiation (what makes it difference from the competition)
- Market positioning (how customers perceive the product)
3.3.4 Making marketing decisions: using the marketing mix
The elements of the marketing mix (7Ps)
Marketing Mix = the combination of marketing elements used by a firm to enable it to meet the needs and
expectations of the customer

The 7 elements (P’s) of the marketing mix:

- Product – the good or service that the customer buys
- Price – how much the customer pays for the product
- Place – how the product is distributed to the customer
- Promotion – how the customer is found & persuaded to buy
- People – the people who make contact with customers in delivering the product
- Process – the systems and processes that deliver a product to a customer
- Physical – the elements of the physical environment the customer experiences

The influence on and effects of changes in the elements of the marketing mix
Influences on the marketing mix:
- Economic influence (e.g. trends; domestic and international trade)
- Competitive influence (e.g. market structure; competitive strategy and position)
- Social and demographic influence (e.g. demographic trends; multiculturalism; lifestyles; ecological concerns)
- Technological influence (e.g. advances; research and development investment
- Information technology (e.g. legal and regulatory influence; federal laws/regulations; provincial
laws/regulations; self-regulation)

Product decisions
Product = the essence of what a business is trying to sell (it can be either a good or a service)

The Boston Matrix = a portfolio of products is analysed using this as it categorises the products into one of four
different areas based on market share and market growth

Market Share = whether the product has a high or lower share of the industry
Market Growth = the numbers of potential customers and whether this number is growing or not

The four categories of the Boston Matrix:

- Stars (high market growth and high market share)
  Often need heavy investment
 They will eventually become cash cows in investment isn’t retained and they lose their market share
- Cash cows (low market growth and high market share)
 Mature and successful products with little need for investment
 Have to be managed for continued profits
- Question marks (high market growth and low market share)
 Have potential but need substantial investment to growth their market share
- Dogs (low market growth and low market share)
 Only really generate enough cash to breakeven
 Rarely worth investing in

The Product Life Cycle = this describes the stages a product goes through from when it was first thought of, until it is
finally removed from the market

Stages of the product life cycle:

- Introduction – launching the developed product into the market place
- Growth – when sales are increasing at their fastest rate
- Maturity – sales are near their highest but the of growth is slowing down
- Decline – the final state when sales begin to fall
- Extension strategy – devised by a business to extend its life cycle

Examples of extension strategies:

- Advertising
- Price reduction
- Adding value
- Exploring new markets
- New packaging

Pricing decisions
Price = the money charged for a product or service

Pricing strategies:
- Penetration = aim to increase market share by setting an initial low entry price to attract new customers
 For this to be successful, the process has to be price elastic
- Cost Plus = aim to cover costs of production and then add a profit margin onto the price
- Contribution = aim to make a gross profit and use this to contribute to fixed costs of running of the business
- Elasticity = aim to use the PED calculation which is relevant to the product and raise or lower the price
according to how it would improve revenue
 If PED is <1 (inelastic), raise the price
  If PED is >1 (elastic), lower the price
- Marginal Cost = aim to set the price of a product above the marginal costs to produce it
- Market Skimming = involves setting a high price before competitors come into the market
- Premium = involves setting a high price to reflect the exclusive and luxury nature of the product
- Loss Leader = prices are set deliberately below the cost of production in order to attract customers who will
buy other, more profitable products
- Psychological = prices are set with a view to perceive customers of the price
 99p instead of £1
- Leadership = prices are set by the dominant leader in the market and all other smaller firms flow their price
 Done to avoid price wars or to maintain market share

Decisions about the promotional mix

Promotion = the way a firm makes it products known to the customers, both current and potential

Methods of promotion:
- Advertising
- Public relations and sponsorship
- Personal selling
- Direct marketing
- Sales promotion

Factors that influence which promotional method is used:

- Stage in the product life cycle
- Nature of the product
- How much information is required by customers before they buy
- Competition
- Marketing budget
- Marketing strategy
- Other elements of the mix
- Target market

The targeting of promotion:

- Above the line promotion – paid for communication in the independent media (e.g. advertising on TV or in
the newspapers). Though it can be targeted, it could be seen by any one outside the target audience
- Below the line promotion – promotional activities where the business has direct control (e.g. direct mailing
and money off coupons)

Distribution (place) decisions

Place = this is about how a business gets its products to the customers

Distribution is achieved by using one or more distribution channels, including:

- Retailers
- Distributors/sales agents
- Direct (e.g. via e-commerce)
- Wholesalers

Decisions relating to other elements of the marking mix: people, process, and physical environment
- People – all companies are reliant on the people who run them from front line Sales staff to the Managing
Director. Having the right people is essential because they are as much a part of your business offering as the
products/services you are offering.
- Process – the delivery of your service is usually done with the customer present so how the service is
delivered is once again part of what the consumer is paying for.
- Physical Evidence – almost all services include some physical elements even if the bulk of what the consumer
is paying for is intangible.
The importance of and influences on an integrated marking mix
Influences on an integrated marketing mix:
- The position in the product life cycle
- The Boston Matrix
- The type of product
- Marketing objectives
- The target market
- Competition
- Positioning

Understanding the value of digital marketing and e-commerce

Impact of e-commerce on marketing:
- Marketing strategy of differentiation increasingly effective (easier to reach niche markets online)
- Product life cycles are shortened (note the link with technological disruption)
- Greater use of digital promotion (much easier now to track effectiveness of promotion)
- Brands and retailers increasingly using multiple distribution channels
- Greater use of dynamic pricing (easier to maximise revenues, but is it fair for customers?)
- Increased need for localisation (but on its own, not enough)
- Ability to sell a much wider product range (the ‘long tail’)
3.4 Decision making to improve operational performance
3.4.1 Setting operational objectives
The value of setting operational objectives
Operations = the process if taking inputs and turning them into outputs

The importance of setting objectives:

- The operations function of a business is the ‘engine room’ of the business, and like all engine, performance
can and should be measured
- All business operations of whatever size and complexity should have objectives set

Cost and volume targets:

- However it chooses to compete, a business needs to ensure that operations are cost effective
- The traditional measure of cost effectiveness is “unit cost” = the average cost of producing a unit of the
product
- Business competing in the same industry face similar cost structure, but each will vary in terms of its
productivity, efficiency, and scale of production
- The business with the lowest unit cost is in a strong position to be able to compete by being able to offer the
lowest price, or make the highest profit margin at the average industry price
- Objectives relating to costs and volume tend to focus on:
 Productivity and efficiency (e.g. units per week or employee)
 Unit costs per item
 Contribution per unit (breakeven)
 Number of items to produce (e.g. per time period, or per machine etc)
- Example = Tkmaxx, a discount retailer, as they bring in old stock and they sell them at a lower price. They
also like to have a larger volume of a range of clothes/shoes/accessories etc so that the customer has a wide
range of choice. However they don’t have many if the same product as all of their products are end of
line/range.

Quality targets:
- Achieving or exceeding the required level of quality is also essential for a successful business
- There are many ways of measuring the achievement of quality including
 Scrap/defect rates – a measure of poor quality
 Reliability – how often something goes wrong; average lifetime use
 Customer satisfaction – measured by customer research
 Number/incidences of customer complaints
 Customer loyalty – percentage of repeat business

Speed of response and flexibility targets:

- This examines how effectively the assets of a business are being utilised, and how responsive the business
can be to short term or unexpected changes in demand
- Efficiency and flexibility are key drivers of unit costs. Relevant objectives would include
 Labour productivity – output per employee, units produced per production line, sales per shop
 Output per time period – potential output per week on a normal shift basis, potential output
assuming certain levels of capacity utilisation
 Capacity utilisation – the proportion of potential output actually being achieved
 Order lead times – the time taken between receiving and processing an order

Environmental targets:
- This is an increasingly important focus of operational targets as businesses face more stringent
environmental legislation, and consumers increasingly base their buying decisions on firms that take
environmental responsibility seriously
- Targets are usually closely integrated into a firms approach to corporate social responsibility
- Examples include
 Use of energy
 Proportion of production materials that are recycled
 Compliance with waste disposal regulations/proportion waste land fill
  Supplies of raw materials from sustainable sources

Added value targets:

- Added value is equivalent to the increase in value that a business creates by undertaking the production
process
- Adding value is the difference between the price of the finished product/service and the cost of the inputs
involved in making it

External and internal influences on operational objectives and decisions

Internal influences:
- Corporate objectives – as with all the functional areas, corporate objectives are the most important internal
influence. An operations objective (e.g. higher production capacity) should not conflict with a corporate
objective (e.g. lowest unit costs)
- Finance – operations decisions often involve significant investment and cost. The financial position of the
business (profitability, cash flow, liquidity) directly effects the choices available
- Human resources – for a services business in particular, the quality and capacity of the workforce is a key
factor in affecting the operational objectives. Targets for productivity, for example, will be affected by the
investment in training and the effectiveness of workforce planning
- Marketing issues – the nature of the product determines the operational set up. Regular changes to the
marketing mix – particularly product – may place strains on the operations, particularly if production is
relatively inflexible

External influences:
- Economic environment – crucial for operations. Sudden or short term changes in demand directly impact on
capacity utilisation, productivity etc. Changes in interest rates impact on the cost of financing capital
investment in operations
- Competitor efficiency flexibility – quicker, more efficient, or better quality competitors will place pressure on
operations to deliver at least comparable performance
- Technological change – also very significant – especially in markets where product life cycles are short,
innovation is rife and production processes are costly
- Legal and environmental change – greater regulation and legislation of the environment places new
challenges for operations objectives

3.4.2 Analysing operational performance

Interpretation of operations data
Operations data includes
- Labour productivity
- Unit costs
- Capacity utilisation
These measure how efficient the business is working and whether they are using the resources around them to their
full capacity. Operational data also five firms the chance to compare with other competitors and set further targets
to reach goals in order to achieve a larger market share within the industry the operate in.

Calculation of operations data

Labour Productivity = this measures the level of output achieved with a given number of employees (how efficient
the workforce is).
- = total output / number of employees
- The higher the number the better as it means there is a higher and more efficient rate of production per
employee

Unit Costs (average costs) = this measures the costs of producing ONE unit/product of output
- = total costs (fixed costs + variable costs) / total output
- The lower the number the better as it will give you more profit (higher profit margins – revenue is the same).
Also, if you have lower costs, then businesses tend to lower prices to gain more sales. If firms were to lower
the price at the same level that they lower costs, they maintain the same level of profit.
Capacity Utilisation = the percentage of total capacity that is being achieved in a given period
- = actual level of output / maximum level of output x 100
- This higher to percentage to better as it means the business is using their capacity to the best of its ability.
When a business is operating at less than 100% capacity, it has ‘spare capacity’

The use of data in operational decision making and planning

The use of data such as capacity utilisation, unit costs, and labour productivity, all allow for decisions to be made
more efficiently and effectively. It also means the business is able to flow at a steady pace to reach targets set by a
managers and the business itself. The use of data is instrumental in decision planning and making as it allows for
manager to make informed decisions based on the workforce around them and how they impact the firm as a
whole.

3.4.3 Making operational decisions to improve performance: increasing efficiency and productivity
The importance of capacity
Why capacity is an important concept:
- It is often used as a measure of productive efficiency
- Average production costs tend to fall as output rises – so higher capacity utilisation can reduce unit costs,
making a business more competitive
- So firms usually aim to produce as close to full capacity (100% utilisation) as possible

It is important to remember that increasing capacity often results in higher fixed costs. A business should aim to
make the most productive use it can of its existing capacity. The investment in production capacity is often
significant. Think about how much it costs to set up a factory; the production line with all its machinery and
technology.

The importance of efficiency and labour productivity

Why measuring and monitoring labour productivity matters:
- Labour costs are usually a significant part of total costs
- Business efficiency and profitability closely linked to productive use of labour
- In order to remain competitive, a business needs to keep its unit costs down

How to increase efficiency and labour productivity

How a business can improve its labour productivity:
- Measure performance and set targets
- Streamline production processes
- Invest in capital equipment (automation + computerisation)
- Invest in employee training
- Make the workplace conducive to productive effort
- Training – e.g. on-the-job training that allows an employee to improve skills required to work more
productively
- Improved motivation – more motivated employees tend to produce greater output for the same effort than
de-motivated ones
- More or better capital equipment (this links with the topic of automation)
- Better quality raw materials (reduces amount of time wasted on rejected products)
- Improved organisation of production – e.g. less wastage

How to improve efficiency:

- Improve land fertility
- Use renewable or recyclable materials
- Increase training and education
- Increase scale of production
- Use a optimal mix of output
- Invest more in capital equipment

Cost Minimisation = a financial strategy that aims to achieve the most cost-effective way of delivering goods and
services to the require level of quality.
Economies of Scale = these arise when unit costs fall as output increases
- Technical – large-scale businesses can afford to invest in expensive and specialist capital machinery
- Specialist – larger businesses split complex production processes into separate tasks to boost productivity –
by specialising in certain tasks or processes, the workforce is able to produce more output in the same time
- Purchasing – reduced costs for larger businesses in buying inputs, such as raw materials and parts, or of
borrowing money because of a larger discount given to a larger purchase than smaller businesses can make
- Marketing – a large firm can spread its advertising and marketing budget over a large output and it can
purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market
- Financial – larger firms are usually rated by the financial markets to be more 'credit worthy' and have access
to credit facilities, with favourable rates of borrowing – in contrast, smaller firms often face higher rates of
interest on overdrafts and loans
- Managerial – this is a form of division of labour – large-scale manufacturers employ specialists to supervise
production systems, manage marketing systems and oversee human resources

The benefits and difficulties of lean production

Lean Production = an approach to management that focuses on cutting out waste, whilst ensuring quality. This
approach can be applied to all aspects of a business – from design, through production to distribution. Lean
production aims to cut costs by making the business more efficient and responsive to market needs.
- Cut out or minimise activities that do not add value to the production process, such as holding of stock,
repairing faulty product and unnecessary movement of people and product around the business.
- Less waste therefore means lower costs, which is an essential part of any business being competitive:
 Over-production: making more than is needed – leads to excess stocks
 Waiting time: equipment and people standing idle waiting for a production process to be completed
or resources to arrive
 Transport: moving resources (people, materials) around unnecessarily
 Stocks: often held as an acceptable buffer, but should not be excessive
 Motion: a worker who appears busy but is not actually adding any value
 Defects: output that does not reach the required quality standard – often a significant cost to an
uncompetitive business

Key aspects of lean production:

- Time based management
- Simultaneous engineering
- Just in time production (JIT)
- Cell production
- Kaizen (Continuous improvement)
- Quality improvement and management

Advantages of lean production:

- Lead times are cut
- Damage, waste and loss of stocks/equipment are lowered
- A greater focus on customer needs
- Improved quality through the introduction of kaizen and quality circles
- Lower costs and contribute to improved profits
- Staff are more involved and potentially more motivated
- Working environments are safer and cleaner

Disadvantages of lean production:

- The business may struggle to meet orders if their suppliers fail to deliver raw materials on time
- The business is unlikely to 'bulk buy' its raw materials and, therefore, it may lose the benefit of achieving
economies of scale
- Buffer stocks are minimal and this may lead to the business having to reject customer orders requiring
delivery immediately
Difficulties increasing efficiency and labour productivity
Factors influencing how productive the workforce is:
- Extent and quality of fixed assets (e.g. equipment, IT systems)
- Skills, ability and motivation of the workforce
- Methods of production organisation
- External factors (e.g. reliability of suppliers)

How to choose the optimal mix of resources

The production operations of any business combine two factor inputs:
- Labour – management, employees (full-time, part-time, temporary)
- Capital – plant and machinery, IT systems, buildings, vehicles, offices

The relatively importance of labour and capital to a specific business can be described broadly in terms of their
"intensity" (or to put it another way, significance).
- Labour-intensive production relies mainly on labour
- Capital-intensive production relies mainly on capital

Labour intensive operations:

- Labour costs higher than capital costs
- Costs are mainly variable in nature = lower breakeven output
- Firms benefit from access to sources of low-cost labour

Capital intensive operations:

- Capital costs higher than labour costs
- Costs are mainly fixed in nature = higher breakeven output
- Firms benefit from access to low-cost, long-term financing

How to utilise capacity efficiently

To operate at higher than 100% moral capacity:
- Increase workforce hours (e.g. extra shifts; encourage overtime; employ temporary staff)
- Sub-contract some production activities (e.g. assembly of components)
- Reduce time spent maintaining production equipment

Problems with operating at a higher capacity:

- Negative effect on quality (possibly)
 Production is rushed
 Less time for quality control
- Employees suffer
 Added workloads & stress
 De-motivating if sustained for too long
- Loss of sales
 Less able to meet sudden or unexpected increases in demand
 Production equipment may require repair

How to use technology to improve operational efficiency

Main types of technology:
- Robots
- Stock control/sales order fulfilment programmes
- Automation
- Design software systems
- Communications

3.4.4 Making operational decisions to improve performance: improving quality

The importance of quality
Quality = a measure of the worth of a product, for example its durability, reliability, or reputation
The importance of quality to a business:
- Gaining a competitive advantage
- Impact on sales volume
- Impact on selling price
- Cost reductions
- Brand loyalty and reputation

Methods of improving quality

Quality Control = the process of inspecting products to ensure they meet the required quality standards (check the
product at the end for any mistakes)
- At its simplest, quality control is achieved through inspection. For example, in a manufacturing business,
trained inspectors examine samples of work-in-progress and finished goods to ensure standards are being
met.
- For businesses that rely on a continuous process, the use of statistical process control ("SPC") is common.
SPC is the continuous monitoring and charting of a process while it is operating. Data collected is analysed to
warn when the process is exceeding predetermined limits

Quality Assurance = the processes that ensure production quality meets the requirements of customers
(continuation of checking at each stage of production)

Total Quality Management (TQM) = a specific approach to quality assurance that aims to develop a quality culture
throughout the firm. In TQM, organisations consist of 'quality chains' in which each person or team treats the
receiver of their work as if they were an external customer and adopts a target of 'right first time' or zero defects.

Quality Benchmarking = a general approach to business improvement based on best practice in the industry, or in
another similar industry. Benchmarking enables a business to identify where it falls short of current best practice and
determine what action is needed to either match or exceed best practice. Done properly, benchmarking can provide
a useful quality improvement target for a business.

Kaizen = an approach of constantly introducing small incremental changes in a business in order to improve quality
and/or efficiency. This approach assumes that employees are the best people to identify room for improvements,
since they see the processes in action all the time. A firm that uses this approach therefore has to have a culture that
encourages and rewards employees for their contribution to the process.

The benefits and difficulties of improving quality

Advantages of quality control:
- With quality control, inspection is intended to prevent faulty products reaching the customer. This approach
means having specially trained inspectors, rather than every individual being responsible for his or her own
work.
- Furthermore, it is thought that inspectors may be better placed to find widespread problems across an
organisation.

Disadvantages of quality control:

- Individuals are not necessarily encouraged to take responsibility for the quality of their own work.
- Rejected product is expensive for a firm as it has incurred the full costs of production but cannot be sold as
the manufacturer does not want its name associated with substandard product. Some rejected product can
be re-worked, but in many industries it has to be scrapped – either way rejects incur more costs,
- A quality control approach can be highly effective at preventing defective products from reaching the
customer. However, if defect levels are very high, the company's profitability will suffer unless steps are
taken to tackle the root causes of the failures

Advantages of quality assurance:

- Costs are reduced because there is less wastage and re-working of faulty products as the product is checked
at every stage
- It can help improve worker motivation as workers have more ownership and recognition for their work (see
Herzberg)
 - It can help break down 'us and them' barriers between workers and managers as it eliminates the feeling of
being checked up on
- With all staff responsible for quality, this can help the firm gain marketing advantages arising from its
consistent level of quality

The consequences of poor quality

Consequences of poor quality:
- Reputation
- Lower sales volume
- Lower price
- Lower profits
- More waste
- Increased costs
All of these factors have a knock on effect on the others

3.4.5 Making operational decisions to improve performance: managing inventory and supply chains
Ways and value of improving flexibility, speed of response, and dependability
Improving flexibility:
- Product flexibility – switching from producing one product to another
 +ve = they may have more customer loyalty as they are branching out into different market sectors
and so they will have more diversity within their firm (seem like they care more about customers)
 -ve = they may mess up their product up and then not succeed in that sector meaning they will lose
out on money that they have spent to introduce, market, and advertise their new product/service
- Volume flexibility – changing the level of output to meet changes in demand
 +ve = they are able to operate at a greater capacity, meaning they will sell more and so revenue and
profit will increase too
 -ve = they will have to spend more money to expand their factories and storage facilities as they will
be producing more and may not have anywhere to put their other products
- Delivery flexibility – changing the timing and volume of customers deliveries
 +ve = they are offering a wider range of options suiting to more people. They may also decide to
charge extra for the different services meaning that will also cover their production and
advertisement costs
 -ve = sometimes the factories may not be able to send as many deliveries at once as they won’t have
facilities – meaning they will have to spend even more money to expand their delivery options
- Mix flexibility – providing a wide variety of alternative versions of the same product
 +ve = this may increase customer loyalty as the company is offering a wider range of options for
them to choose from, meaning they will see the company as more diverse
 -ve = they will have to expand their business and spend more money of factories and the production
line to be able to produce the amount of the different types of products

Mass Customisation = offering individually tailored goods and services to customers on a large scale
- Collaborative customisation – when the needs of a customer are understood and followed as part of the
manufacturing process (Example = houses are uniquely designed by architects)
- Adaptive customisation – a basic product is made for customers who then customise it to their needs
(Example = the Nike ID trainers which you can personalise)
- Transparent customisation – customers are provided with unique offerings without being told they are
customised (Example = hotels may look at their bookings and add small features to the room to please the
customer and ensure they return)
- Cosmetic customisation – products are offered in different formations to entice different customer (Example
= coke names on bottles)

Factors required for mass customisation:

- A market which customers value variety and individuality
- Quick responsiveness to market changes
- Ability to provide customisation
- Scope for the use of economies of scale
Advantages of mass customisation:
- Low unit costs due to the scale of production
- Low unit costs combined with personalised product leads to a higher added value
- The business is able to charge a premium price as their quality is of a very high standard
 The business is able to do this as they are tailoring their products to the customers meaning their
products are more valuable and are more exclusive; meaning the company can charge a higher price.
(Example = of this could be things like kitchen ware, or food)
- The business is able to build brand loyalty and strength
 If their quality remains the same and the products are delivered as said, then customers will stay
loyal to the business and therefore shop there more often
- Lower inventory (cash flow benefit)
 They will have lower stocks as their products are tailor made to what the customer orders

Disadvantages of mass customisation:

- There may be challenges if a customer was to return a customised product back
 This would be bad for the business as it would be hard to process and they may have to produce a
whole new product which may take quite a while as they are all tailor made
- Many businesses may struggle with supply chains as the systems of suppliers are designed and optimised for
producing a prearranged amount of products, rather than catering for an unforeseen demand
 This could be hard for a business as they need to be able to gain a strong bond with their suppliers
so that they can get the best deals. It may also be hard to organise a set amount of supplies
- It isn’t an appropriate option for all markets
- There will be higher costs to customise certain products and clients will have to wait longer for their product

How to manage supply to match demand and the value of doing so

Managing supply:
- A business will have a core capacity that produces a given level, of output
- This will then be supported by a flexible structure that enables the business to react quickly to changes in
demand
- Example = hotel rooms can add more space for sleeping with a sofa bed, as well as the standard bed

Ways to match demand with supply:

- Made to order
- Using temporary/part time workers
- Outsourcing

Made to Order = an approach to production where the production of an item begins only after a confirmed customer
order is received.
- By using mass customisation techniques, it is possible to include a customer's specific requirements into the
product.
- Example = most restaurants match demand with supply by using produce to order. You order what you'd
like from the menu and the production process begins! As a restaurant customer you might make some
specific requests about your food which can be incorporated into production. Alternatively, in a fast-food
environment, you pick a standard product from the menu.

Advantages of made to order:

- Lower levels of finished goods in inventory = lower inventory holding costs & less risk of obsolescence
- Greater customer satisfaction = customers get what they want

Disadvantages of made to order:

- Capacity to produce to order may be limited; although mass customisation is automated, it doesn't work for
all products
- It may be difficult to handle sudden or unexpected increases in demand

Part Time Workers = a form of employment with less than 35 hours worked per week
 - This is used by agencies to hire works as and when they need them. So when demand is higher a company
will hire part time workers to increase the supply. They are more flexibility than permanent worker as they
may not have a set number of hours to work or a contract.
- Example = toy factories will hire more part time works near the Christmas season as demand increases
rapidly. They will then let these workers go when the demand for toys decreases after the Christmas period

Advantages of part time workers:

- Only have to pay workers when the demand is high, rather than having surplus staff when demand, and
therefore production, is low
- When hiring from agencies, you will find the workers with the right qualifications and skills required for the
job and the firm in general
- Productivity may be increased as staff are more motivated if they have hours to suit them and their work-life
balance. Workers will feel more valued and therefore will be more loyal to the firm

Disadvantages of part time workers:

- There will be an increase in costs as agencies often charge high prices for their workers
- Temporary workers could be less motivated and they may not get the hours to suit them and firms will drop
them quickly if they don’t need them. This will then decrease productivity and thus could have a knock on
effect on the firms reputation if they aren’t efficient enough
- Retention of staff may be low and staff turnover will be high

Outsourcing = when a business sub-contracts a process, such as design or manufacturing, to another business

Advantages of outsourcing:
- Businesses can react to change quicker if they have access to other firms.
- Outsourcing can provide specialised workers that will be more efficient in their sector. E.g. a car
manufacture will buy its tyres in from a firm such as Michelin because they know they know they will be
better than if they make their own as they specialise in tyres.
- Outsourcing allows the business to focus on its core business instead of getting involved in activities that
would be less competent.
- A non-typical order can be given to another provider instead so that the business benefits from the order
but it does not disrupt its normal production.

Disadvantages of outsourcing:
- The quality of the service being provided is no longer under their own control. So an unreliable outsourcer
may influence the reputation of the business in a negative way. E.g. customers will blame a supermarket if
its own brand of products are poor quality even though it is not the supermarket that makes them.
- It comes at a cost that needs to be evaluated. The outsourcer will also want to make a profit so it is likely
that it will be more expensive to subcontract or outsource production.
- It may require you to be more confidential information to a supplier such as details of its methods. This
could lead to firm loses its competitive advantage if the supplier steals its ideas

Influences on the amount of inventory held

Types of inventory held by a business:
- Raw materials
- Work in progress
- Finished goods

Advantages of high inventory levels:

- Increased customer satisfaction
- Supplier price discounts (economies of scale)
- Production lines are not halted because of shortages of raw materials
- Customer demands are met properly
- Always stock in, in case of sudden increases of demand

Advantages of low inventory levels:

- Lower holding costs
 - Easier organisation
- Reduce in waste and products becoming outdated
- Security cost and pilferage are lower
- More space
- Less cash flow problems
- More useable cash

Stock control charts:

Maximum Level = the maximum level of stock a business can or wants to hold
Re-order Level = this acts as a trigger point, so that when stock falls to this level, the next supplier order should be
placed
- = buffer stock + the number of resources used during the lead time
Lead Time = the amount of time between placing the order and receiving the stock
Minimum Stock Level = the minimum amount of product the business would want to hold in stock.
Buffer Stock = an amount of stock held as a contingency in case of unexpected orders so that such orders can be met
and in case of any delays from suppliers

Influences on the choice of suppliers

Factors that influence that choice of suppliers and why they’re important to a business:
- Price – when looking for a supplier, a businesses primary thought would be how much they will have to pay
per unit for their product (usually in bulk – economies of scale)
- Payment terms – this is the arrangements that are made about the timing of payment and any other
conditions agreed between the buyer and the seller
- Quality – as society develops, consumers also develop to become more selective of the products they buy
and so it is crucial for businesses to deliver high quality products
- Capacity – this is the maximum possible output of an organisation – firms need to be reassured that
suppliers can provide the quantity of materials required to meet demands
- Reliability – this is the extent to which the suppliers meets the requirements of the buyer and typically, it can
be measured by the percentage of deliveries made on time or the degree to which a supplier meets the
terms of the contract to supply
- Flexibility – whilst running a business, there may be situations when an organisation needs to make a radical
change to its orders from their supplier. Examples of this may be:
 A sudden change in demand for a product
 The liquidation of a rival supplier, leaving the business short of a product or component
 Negative publicity concerning the ingredients or components of a product, or the way in which the
product is manufactured
 Transport difficulties preventing the delivery of supplies from other sources
 - Ethics – when choosing a supplier, the business needs to choose one that has the same ethics as them – this
is important because if they don’t, then they may receive bad publicity

Areas included in supply chain management:

- Matching supply to demand (part time workers, outsourcing, producing to order)
- Mass customisation
- Flexibility, speed of response, and dependability
- Channels of distribution (retailers, wholesalers)
- Choice of suppliers
- Managing inventory

How to manage the supply chain effectively and efficiently and the value of this
Approaches to supply chain management p:
- Traditional – VIKING (‘Volume Is KING’). Buying resources to in large amounts to benefit from economies of
scale. Firms focus their business on just part of the supply chain
- Modern – buying small amounts from a wider range of suppliers, it creates competition within the supply
chain causing prices to fall. There is more of a focus on how there action within the supply chain affects the
environment
- Porter’s value chain and suppliers- thus main purpose is how to gain an advantage over their rivals. It is a
combination of traditional and modern approaches
 Cost advantage
 Differentiation

The value of outsourcing

When a business transfers a part of its operations, which was previously undertaken within the business, to another
company, they are outsourcing as they are no longer responsible for that part of operations. For example, a business
with high demand for customer service, such as a mobile phone provider, may outsource their telephone calls to a
call centre in India as they do not have the capacity to meet the demand within their UK office, despite having
operated in this way in the past, due to increase in demand. This allows supply to be increased because the call
centre in India may work for several companies, or will have larger facilities and more staff available than the
business did in the UK and so more calls can be taken. This will increase customer satisfaction because they are not
waiting as long for their call to be answered and so the process of the service is quicker and easier.
Because the business can cope with greater demand, it means that it can take larger orders or produce larger
quantities of a product without having to invest in capital equipment (such as a larger factory or machinery) which
may not be used frequently if demand fluctuates. This would be a waste of money and cause the business to operate
at spare capacity. By outsourcing, supply can be adjusted easily and quickly without needing to invest in equipment
because the manufacturing company or call centre, for example, can take on a small contract or a large contract as is
required by the business. This allows them to meet demand if it increases or decreases, causing no waste for the
business themselves and maximising sales as all customer can be satisfied.
Outsourcing is paying another company to carry out operations which were once performed within the business but
are not anymore due to increase in demand, but subcontracting is when another business is paid to do an assigned
task which was never originally done by the business. For example, if a business grows and decides to use e-
commerce but does not have the staff or facilities to design and run a website, then it may subcontract a business
which does this, which will save them the money of paying to train staff and buying the software, but also increase
supply to match demand by creating the option of buying online.
3.5 Decision making to improve financial performance
3.5.1 Setting financial objectives
The value of setting financial objectives
Financial Objective = a specific goal or target relating to financial performance

What objectives can be based on:

- Revenue
- Costs
- Profit
- Cash flow
- Investment levels
- Capital structure
- Return on investment
- Debt as a proportion of long term funding

Benefits of setting financial objectives:

- Provides a focus for the business as a whole
- Focus for decision making and effort
- Can measure success and failure
- Reduces the risk of business failure (particularly prudent cash flow objectives)
- Improved coordination (of the different business functions) and efficiency
- Information for shareholders – priorities of management
- Allows external stakeholders to confirm financial viability
- Provides a target to help make investment decisions

Difficulties of setting financial objectives:

- Not always realistic
- External changes
- Difficulty in measuring
- May conflict with other objectives
- Responsibility may lie with finance department, when it is a whole business priority

Return on Investment (ROI) = this is the measure of efficiency of an investment in financial terms, used to compare
the financial returns of alternative investments
- = return on investment / cost of investment x 100 (return on investment = financial gains from the
investment – cost of investments)
- From the returns on investments, firms should be able to consider financial returns, trends in financial
performance, changing levels in return

The distinction between cash flow and profit

Profit = revenue – total costs
Cash Flow = the money flowing in and out of the business on a day to day basis
- This is essential to prevent a firm from becoming insolvent (when a business can no longer pay its debts off)
- Net Cash Flow = this is the money left over when a business takes its outflows from its inflows
Main cash inflows:
- Money invested by business owners
- Loan from the bank
- Income from sales

Main cash outflows:

- Wages and training
- Raw materials
- Advertising
- Rent, mortgage, and bills
- Taxes
- Interest on loans
- Maintenance and repair

The distinction between gross profit, operating profit, and profit for the year
Gross Profit = this shows how efficiently a business converts raw materials into finished goods and how much value
they add
- = revenue – cost of sales
Operating Profit (Net Profit) = gross profit – expenses
Profit for the Year = this is the profit available to shareholders and it includes the sale of assets, interest payments,
and tax

Revenue, costs, and profit objectives

Revenue objectives:
- Sales maximisation – volume/value
- Targeting a specific increase in sales revenue
- Exceeding the sales of a competitor
- Revenue growth (% or value)
- Market share

Cost objectives:
- Cost minimisation – this could be in terms of unit cost which are then further linked to efficiency, labour
productivity, and capacity utilisation
- Productivity – in terms of unit per worker and capacity utilisation

Profit objectives:
- Specific level of profit (in absolute terms)
- Rate of profitability (as a % of revenues)
- Profit maximisation
- Exceed industry or market profit margins

Cash flow objectives

Why cash flow is important:
- It can be used to support an application for sources of finance
- If a business does not have enough cash available to pay its bills it could fail
- A business that is not able to pay its suppliers will probably not receive any more supplies
- It may be unable to pay its workers, which will at the very least cause demotivation, and encourage them to
leave, at worst
- It is the main cause of failure of small businesses
- The principle of timing, managing when money flows in and when it flows out is vital

Setting cash flow objectives:

- This will ensure the firms can keep trading
 Maintain a minimum closing monthly balance
 Reduce bank overdraft by a certain amount by the end of the year
 Create a more even spread of sales revenue
  Spread costs more evenly
 Setting contingency fund levels

Cash flow objectives:

- Maximum level of debt (the absolute amount, rather than the gearing ratio)
- Amount of cash tied up in working capital (inventories, receivables)
- Cash flow to profit %

Advantages of cash flow forecasts:

- Identify problems in advance
- Guide to appropriate action
- Make sure there is sufficient cash to make payments
- Evidence for financial support
- Avoids failure
- Identifies if they are holding too much cash

Causes of cash flow problems:

- Poor management (spending too much)
- If the business isn’t performing well – the outflows are greater than inflows
- Offering customers too long to pay – slow cash inflow compared to outflow

Problems to forecasting:
- Changes in the economy
- Changes in consumer taste
- Inaccurate market research
- Competition
- Uncertainty

Objectives for investment (capital expenditure) levels

Investment objectives:
- Replacement capital/investment – to replace assets that have depreciated (this does not add to the stock of
capital goods)
- New investment – money spent on new capital goods which enables a business to increase its capacity to
produce
- Level of capital expenditure – at either an absolute amount (e.g. invest £5m per year) or as a percentage of
revenues (e.g. 5% of revenues)
- Return on investment – usually set as a target % return, calculated by dividing operating profit by the
amount of capital invested

Capital structure objectives

Capital Structure = to the balance of its finance in terms of how much is equity (or share capital) and how much is is
in the form of debt
- This is about how a business is funded in the long term through debt capital, equity capital, and debentures

Capital structure objectives:

- Gearing ratio (the percentage of total business finance that is provided by debt)
- Debt/equity ratio (the proportion of business finance provided by debt and equity)

External and internal influences on financial objectives and decisions

Internal influences on financial objectives:
- Business ownership – the nature of business ownership has a significant impact on financial objectives. A
venture capital investor would have quite a different approach to a long-standing family ownership.
- Size and status of the business – (e.g. start-ups and smaller businesses tend to focus on survival, breakeven
and cash flow objectives. Quoted multinational businesses are much more focused on growing shareholder
value)
 - Other functional objectives – almost every other functional objective in a business has a financial dimension
– which often brings the finance department into conflict with other functions

External influences on financial objectives:

- Economic conditions – economic downturn can force many firms to reappraise their financial objectives in
favour of cost minimisation and so they can maximise their cash inflows and balances. Significant changes in
interest rates and exchange rates also have the potential to threaten the achievement of financial targets
like ROCE.
- Competitors – competitive environment directly affects the achievability of financial objectives (e.g. cost
minimisation may become essential if a competitor is able to grow market share because it is more efficient)
- Social and political change – this is often an indirect impact (e.g. legislation on environmental emissions or
waste disposal may force an business to increase investment in some areas, and cut costs in others)

3.5.2 Analysing financial performance

How to construct and analyse budgets and cash flow forecasts
Budgets = these are set by businesses so that they have a future financial target/plan

Types of budgeting:
- Income (or revenue)
 Expected revenues
 Broken down into more detail
- Expenditure (or cost)
 Expected variable costs based on sales budget
 Expected fixed costs
- Profit
 Based on the combined sales and cost budgets
 May form basis for performance bonuses

Cash flow forecasting involves:

- The opening balance – this is cash balance at the start of the month
- The net cash flow – this is added to the opening balance to get the closing balance
- The closing balance – this will become the opening balance for the next month

The value of budgeting

The process of setting budgets:
- Setting objectives
- Market research
- Complete income budget
- Complete expenditure budget
- Complete profit budget
- Complete departmental budget
- Summarise in master budget

Why a business uses budgeting:

- Control income and expenditure (the traditional use)
- Establish priorities and set targets in numerical terms
- Provide direction and co-ordination, so that business objectives can be turned into practical reality
- Assign responsibilities to budget holders (managers) and allocate resources
- Communicate targets from management to employees
- Motivate staff
- Improve efficiency
- Monitor performance

Advantages of budgeting:
- Helps firms to get financial support through investors
- Ensures a business doesn’t overspend
 - Establishes priorities and sets targets in numerical terms
- Motivates staff
- Assigns responsibility to departments
- Improves efficiency

Disadvantages of budgeting:
- Budgets are only as good as the data being used to create them - in accurate and unrealistic assumptions can
quickly make a budget unrealistic
- They need to be changed as circumstances change
- It is a time consuming process
- Unexpected costs may arise
- May have difficulties in collecting information needed to create a forecast
- Managers may not have enough experience to budget
- Inflation (external change that the business has no control over)

Variance Analysis = this compares the expected budget to the actual figures (the difference found)
- This can be positive (favourable – meaning costs are lower than expected or revenue is higher) or negative
(adverse – meaning costs are higher than expected or revenue is lower)

Evaluative points of variance:

- Whether is it positive or negative
- Was is foreseen and foreseeable
- How big was the variance
- The cause
- Whether it is a temporary problem or the result of a long term trend

How to construct and interpret break-even charts

Break-Even = a business will break-even when it’s total revenue equals its total costs
- = fixed costs / contribution per unit

Contribution = this looks at whether an individual product is making a profit and only accounts for variable costs – if
sales revenue is higher than costs, it shows that the product is contributing to overall profits
- = selling price per unit – variable cost per unit

Margin of Safety = this is the difference between the actual output and the break-even output
The value of break-even analysis
Advantages of break-even analysis:
- Focuses entrepreneur on how long it will take before a start-up reaches profitability – i.e. what output or
total sales is required
- Helps entrepreneur understand the viability of a business proposition, and also those who will lend money
to, or invest in the business
- Margin of safety calculation shows how much a sales forecast can prove over-optimistic before losses are
incurred
- Helps entrepreneur understand the level of risk involved in a start-up
- Illustrates the importance of a start-up keeping fixed costs down to a minimum (higher fixed costs = higher
break-even output)
- Calculations are quick and easy – great for giving quick estimates

Disadvantages of breakeven analysis:

- Unrealistic assumptions – products are not sold at the same price at different levels of output; fixed costs do
vary when output changes
- Sales are unlikely to be the same as output – there may be some build up of stocks or wasted output too
- Variable costs do not always stay the same (e.g. as output rises, the business may benefit from being able to
buy inputs at lower prices (buying power), which would reduce variable cost per unit)
- Most businesses sell more than one product, so break-even becomes harder to calculate
- Break-even analysis should be seen as a planning aid rather than a decision-making tool

How to analyse profitability

Profitability = the firms ability to make a profit through selling goods and services

Ways of calculating and measuring profitability:

- Gross profit margin
- Operating profit margin
- Profit for the year margin

3.5.3 Making financial decisions: sources of finance

Internal and external sources of finance
Advantages and disadvantages of different sources of finance for short and long term uses
ADD IN SOURCES OF FINANCE TABLE

3.5.4 Making financial decisions: improving cash flow and profits

Methods of improving cash flow
Causes of poor cash flow:
- Poor management – a manager may not have sufficient financial training or experience and end up making
decisions that negatively affect cash flow
- The business is making a loss – the business is receiving less revenue than they are paying out in costs. This
makes the payment of bills very difficult
- Offering customers too long to pay – if you have to pay your bills before you receive payment from your
customers you are likely to experience a cash shortage
- Over optimistic forecasting – firms are sometimes over optimistic when forecasting their cash flow.
Essentially, they could end up spending money they don’t have because they think they will make it back in
the future (according to their forecast)

How to improve cash flow:

- Cut costs
- Use an overdraft
- New source of cash inflows
- Reschedule payments

For cash flow to be healthy, firms want long credit terms from suppliers and want to collect money from debtors as
soon as they can. They will need sufficient working capital to make sure they can pay all the bills
3.6 Decision making to improve human resource performance
3.6.1 Setting human resource objectives
The value of setting human resource objectives
Human Resources = this refers to the organisations employees in general, or the department responsible for their
management
Human Resource Management (HRM) = the actual management if the employees or department

Areas included in HRM:

- Health and safety
- Employees rights (trade unions)
- Hierarchy/promotion
- Recruitment and selection
- Legislation
- Appraisals
- Contracts
- Training
- Pay
- Consultations
- Motivation

Importance of setting human resource objectives:

- It gives employees something to work towards
- Improves efficiency
- Focus for decision making
- Improves coordination between departments

Internal and external influences on human resource objectives and decisions

Internal influences:
- Corporate objectives (e.g. an objective of cost minimisation results in the need for redundancies, delayering
or other restructuring)
- Operational strategies (e.g. introduction of new IT or other systems and processes may require new staff
training, fewer staff)
- Marketing strategies (e.g. new product development and entry into a new market may require changes to
organisational structure and recruitment of a new sales team)
- Financial strategies (e.g. a decision to reduce costs by outsourcing training would result in changes to
training programmes)

External influences:
- Market changes (e.g. a loss of market share to a competitor may require a change in divisional management
or job losses to improve competitiveness)
- Economic changes (e.g. changes in the level of unemployment and the labour market will affect the supply of
available people and their pay rates)
- Technological changes (e.g. the rapid growth of social networking may require changes to the way the
business communicates with employees and customers)
- Social changes (e.g. the growing number of single-person households is increasing demand from employees
for flexible working options)
- Political & legal changes (e.g. legislation on areas such as maximum working time and other employment
rights impacts directly on workforce planning and remuneration)

3.6.2 Analysing human resource performance

Calculating and interpreting human resource data
Labour Productivity = output per period / number of employees per period
Unit Labour Costs = total labour costs / total units of output
Employee Costs as a % of Revenue = employee costs / sales turnover x 100
Absenteeism = staff absent / total number of staff
Labour Turnover = number of employees leaving during period / average number employed during period
Labour Retention = number of employees for one year or more / overall workforce number x 100

The use of data for human resource decision making and planning
The workforce plays a very important role in the growth and expansion of the business. Because of this, analysing
data for the workforce is crucial to human resource decision making and planning because the company needs to
know that the workforce is working effectively and efficiently, and that they are meeting the demands of the firm in
order to meet the objectives set by the business for the future.

Categories involved in human resource objectives and planning:

- Employee engagement and involvement
 Maximise reported levels of engagement
 Extent of satisfactorily completed appraisals
- Talent development
 Investment (level) in employees training
 Staff retention rates
 Percentage of job vacancies filled by internal candidates
- Training
 Spend in total and per employee on training
 Measures of training effectiveness
- Diversity
 Diversity in senior management positions (gender, experience, ethnicity etc)
 Diversity in external recruitment (gender, ethnicity etc)
- Alignment of values
 Recruitment & induction training; extent focused on core values
 Employee awareness of core values
- Number, skills and location of employees
 Labour turnover
 Staff retention
 Recruitment targets
 Training budgets
 Extent of skills gaps in the workforce

3.6.3 Making human resource decisions: improving organisational design and managing the human resource
flow
Influences on job design
Job Design = the process of deciding on the content of the job in terms of its duties and responsibilities, on the
methods to be used in carrying out the job, in terms of techniques, systems, and procedures, and in the relationships
that should exist between the job holder and his superiors, subordinates and colleagues

Hackman and Oldham’s Job Characteristic Model = a model based in the belief that the task itself is the key to
employee motivation
Skill Variety:
- How many different skills and talents does the job require of a person?
- Are they asked to do a lot of different things, or is it a monotonous, repetitive job?
- It seems reasonable to conclude that a job that involves a variety of activists and perhaps stretches an
employees to develop their skills, is more likely to be motivating than menial and monotonous work each
day

Task Identity:
- Is there a clearly defined beginning, middle, and end to a given task?
- Dow a worker know what they are supposed to be doing, and when they have successfully completed the
task?
- There is no better felling at work than having completed a task successfully – a clearly-defined task is merely
likely to create opportunities for employees to enjoy the positive feelings of achievement

Task Significance:
- Does the job have a substantial impact?
- Will it matter to people, either within the organisation or to the society?
- Is the job/given task meaningful?
- It can be very demotivating at work if you feel your work has little or no meaning/ significance

Autonomy:
- How much freedom does an individual have to accomplish their tasks?
- Does this freedom include the ability to schedule work as well as figuring out how to get the tasks done?

Job Feedback:
- Is an employee kept in the loop about their performance?
- Are they being told when they are going well and when they’re not?

Influences on organisational design

Organisational influences:
- Machinery
- Money/finance
- Existing skills
- Nature, range, and volume of tasks for employees required to complete
- Physical capabilities
- The way work is organised/carried out
- Quality standards
- Time frame required for products to be completed

External environment influences:

- Technological developments
- Levels of education
- Social changes

Employee related influences:

- Autonomy
- Range of skills
- Feedback
- Variety of jobs

Authority = the rights of permission assigned to a particular role in an organisation in order to achieve organisational
objectives
Chain of Command = the order of authority and delegation within a business
Delegation = the process of passing authority down the hierarchy from a manager to a subordinate
Centralisation / Decentralisation = the degree to which authority is delegated within the organisation. A centralised
structure has a greater degree of central control, while and decentralised structure involves a greater degree of
delegated authority to the subordinates
Span of Control = the number of subordinates for whom a manager is directly responsible

External influences on organisational design:

- Objectives – expansion/growth
- Sources of finance
- Leadership type

Internal influences on organisational design:

- Levels of education in society
- State of economy
- Technological developments

Influences on delegation, centralisation, and decentralisation

Influences on delegation, centralisation, and decentralisation:
- History and nature of the organisation – centralisation or decentralisation of authority depends on the
manner, in which the organisation has built up over time i.e. history of the organisation
- Size of the organisation – in a large organisation, numerous decisions have to be taken at different places –
therefore it becomes difficult to coordinate the functions of different departments. To avoid slow decision-
making and to bring down the costs associated with managing a large organisation, authority should be
decentralised. Decentralisation means the firms can operate as a group of small independent units
- Availability of competent managers – decentralisation of authority may not be possible if the managers of
the organisation are not talented enough, and if they can’t handle the problems of decentralised units
- Time frame of decisions – in order to survive in a highly competitive environment, every organisation has to
capitalise on the available opportunities. In a decentralised organisation, the authority to make decisions lies
with the head of that particular unit – therefore, decisions can be made faster. The decisions are made
closer to the scene of action, and are therefore, timely and accurate.
- The importance of a decision – generally, decisions, which involve high risks and costs, are made by the top
management, while the decisions involving routine and low-risk activities are delegated to the subordinates
- Environmental influence – government regulation of private business is the most important factor, which
affects the extent of decentralisation

The value of changing job and organisational design

Organisational structure types:
- Functional – the traditional organisational structure where firms are divided into departments such as HR,
marketing etc
- Geographical – organised based on location
- Product line based – organised according to the different products made by the firm
- Customer/market based – the organisation is split by who it sells its products to
- Matrix: hierarchical and functional approaches are combined and it usually used for specific projects within a
firm
How managing the human resource flow helps meet human resource objectives
Human Resource Flow = the flow of people in and out of the business

What is included in the human resource flow:

- Inflow
 Recruitment and selection
 Induction
- Internal flow
 Evaluation of performance/appraisal
 Career development
 Promotion and demotion, transfers, and redeployment
 Training and development
- Outflow
 Employees leaving voluntarily, dismissal, redundancy, retirement

3.6.4 Making human resource decisions: improving motivation and engagement

The benefits of motivated and engaged employees
Motivation = the desire and energy to be continually interested and committed to a job, role, or subject, or to make
an effort to attain a particular goal

Benefits of motivation to a business:

- Improved productivity
- Reduced costs
- Improved reputation for the organisation
- Improved likelihood of meeting objectives
- Improved work ethic
- Competitive advantage

Motivation theories:
- Taylor
- Mayo
- Hertzberg

Taylor = workers are mainly motivated by pay

Key features of Taylor’s motivational theory:
- Workers do not naturally enjoy work and so need close supervision and control
- Therefore managers should break down production into a series of small tasks
- Workers should then be given appropriate training and tools so they can work as efficiently as possible on
one set task
- Workers are then paid according to the number of items they produce in a set period of time- piece-rate pay
- As a result workers are encouraged to work hard and maximise their productivity
- It links closely with an autocratic management styles as the managers take all the decisions and give the
orders to people below them

Mayo = workers are not just concerned with money but could be better motivated by having their social needs met
whilst at work
Key features of Mayo’s motivational theory:
- Better communication between managers and workers
- Greater manager involvement in employees working lives
- Working in groups or teams
- It closely fits in with a paternalistic style of management
- Workers motivated by having social needs met
- Managers should have greater involvement in employee's working life

Herzberg = hygiene factors and motivators are part of the two factor theory
Key features of Herzberg’s motivational theory:
- Motivators are more concerned with the actual job itself (e.g. how interesting the work is and how much
opportunity it gives for extra responsibility, recognition and promotion)
- Hygiene factors are factors which 'surround the job' rather than the job itself – for example a worker will
only turn up to work if a business has provided a reasonable level of pay and safe working conditions but
these factors will not make him work harder at his job once he is there.

Methods used to improve the nature and content of the job:

- Job enlargement – workers being given a greater variety of tasks to perform (not necessarily more
challenging) which should make the work more interesting.
- Job enrichment – involves workers being given a wider range of more complex and challenging tasks
surrounding a complete unit of work. This should give a greater sense of achievement.
- Empowerment means delegating more power to employees to make their own decisions

Maslow = there is a hierarchy of needs of each employee

Key features of Maslow’s motivational theory:

- Workers are motivated by having each level of needs met in order as they move up the hierarchy
- Levels of needs are: Physical, Security, Social, Self-esteem, Self-fulfilment
- Workers must have lower level of needs fully met by firm before being motivated by next level

How to improve employee engagement and motivation

Financial methods of motivation:
- Time-rate pay
- Piece-rate pay
- Commission
- Other performance-related pay (including bonuses)
- Shares and options
- Benefits in kind (fringe benefits)
- Pensions

The value of theories of motivation

A well-motivated workforce can provide the following advantages:
- Better productivity (amount produced per employee). This can lead to lower unit costs of production and so
enable a firm to sell its product at a lower price
- Lower levels of absenteeism as the employees are content with their working lives
- Lower levels of staff turnover (the number of employees leaving the business). This can lead to lower
training and recruitment costs
- Improved industrial relations with trade unions
 - Contented workers give the firm a good reputation so making it easier to recruit the best workers
- Motivated employees are likely to improve product quality or customer service

The use of financial methods of motivating employees

Why pay is important:
- It is an important cost for a firm (in some "labour-intensive" firms, payroll costs are over 50% of total costs)
- People feel strongly about it
- Pay is the subject of important business legislation (e.g. national minimum wage; equal opportunities)
- It helps attract reliable employees with the skills the business needs for success
- Pay also helps retain employees – rather than them leave and perhaps join a competitor
- For most employees, the remuneration package is the most important part of a job – and certainly the most
visible part of any job offer

3.6.5 Making human resource decisions: improving employer-employee relations

Influences on the extent and methods of employee involvement in decision making
Trade Unions = these are organisations of workers that seek through collective bargaining with employers

Why employees join trade unions:

- Protect and improve the real incomes of their members
- Provide or improve job security
- Protect workers against unfair dismissal and other issues relating to employment legislation
- Lobby for better working conditions
- Offer a range of other work-related services including support for people claiming compensation for injuries
sustained in a job

How to manage and improve employer-employee communications and relations

Methods to resolve industrial disputes:
- Arbitration – a third party comes in to help settle a dispute
 Non binding: the outcome can either be accepted if rejected by the parties involved
 Binding: the decision made is legally binding
 Pendulum: awards in favour of one party over another
- Conciliation – where a third person come in to help the parties involved reach an amicable solution amongst
themselves (advisory)
- Employment tribunal – informal courts where disputes are legally settled between the employee and the
employer (trade unions help with this)

Value of good employer-employee relations

Advantages of a good employee-employer relationship to the employee:
- Communication is better and clearer
- Change is easier to adapt to as the employees understand the need for it
- More motivated workforce – happier place to work
- Employees feel more comfortable and relaxed
- Innovative and more effective problem solving
- Employees feel more involved and part of the team

Advantages of a good employee-employer relationship to the employer:

- More motivated employees so they’ll work harder and produce more
- Organisations grow quicker as employees are happy and more motivated – they will have an increased
labour productivity
- Change is easier to implement as employees understand the need
- Happier employees means lower labour turnover
- Decision making is more efficient
- Organisations become more competitive
- Objectives will be easier to meet as the workforce is more coordinated
3.7 Analysing the strategic position of a business
3.7.1 Mission, corporate objectives, and strategy
Influences on the mission of a business
PESTLE Analysis = a framework for assessing the key features of the external environment in which a business
operate

Political:
- Competition policy
- Industrial regulation
- Government spending and tax policies
- Business policy and incentives

Economic:
- Interest rates
- Exchange rates
- Consumer spending and income
- Economic growth (GDP)

Social:
- Demographic change
- Impact of pressure groups
- Consumer tastes and fashion
- Changing lifestyles

Technological:
- Disruptive technologies
- Adoption of mobile technology
- New production processes
- Big data and dynamic pricing

Legal:
- Employment law
- Minimum/living wage
- Health and safety laws
- Environmental legislation

Environmental and ethical:

- Sustainability
- Tax practices
- Ethical saving (supply chain)
- Pollution and carbon emissions

Internal and external influences on corporate objectives and decisions

Internal influences on corporate objectives:
- Business ownership – who are the business owners and what do they want to achieve?
- Attitude to profit – is the business run to earn profits or it is not-for profit?
- Ethical stance – do ethics play a role in a business’ decision-making?
- Organisational culture – how is the business structured? How are objectives set and decisions taken?
- Leadership – how strong is the influence of leadership in the business in terms of objectives and how
decisions are made?
- Strategic position & resources – what options & choices does the business realistically have based on its
existing market position & resources?
- Stakeholder influence – how influential are internal stakeholders?
External influences on corporate objectives:
- Short-termism – external investor pressure to focus on and achieve short-term objectives at the expense of
long-term strategy?
- Economic environment – perspective on key economic indicators such as economic growth, consumer
spending & interest rates?
- Political/legal environment – impact of uncertainty about changes in the political & legal environment?
- Competitors – do competitor actions & strategies shape what a business thinks it can achieve?
- Social & technological change – how rapid is the pace of social & technological change in a business’
markets? Does this make objective-setting & decision-making easier or harder?

The distinction between strategy and tactics

Business strategy:
- Business strategy is mainly concerned with the longer-term. Business strategy is focused on:
 The long-term business plan, based on the business vision and mission
 What needs to be done to achieve corporate objectives
 What resources the business needs and to obtain and use them
- In terms of business theory, business strategy is more concerned with:
 Mission statements
 Vision and core values
 Organisational culture
 Business planning
 Growth strategy
 Segmentation, targeting & positioning

Business tactics:
- By contrast, business tactics:
 Tend to be focused on short-term issues, responding to opportunities & threats
 Are often influenced by functional objectives and decision-making
- In terms of business theory, the following are more relevant to the tactics employed by a business:
 Marketing mix
 Financial and non-financial rewards
 Inventory management
 Location decisions
 Day-to-day customer service decisions
 Recruitment, selection, and training processes

The links between mission, corporate objectives, and strategy

Mission = the overriding goal of the business and the reason for its existence. A mission provides a strategic
perspective for the business and a vision for the future

Corporate Objectives = those that relate to the business as a whole. They are usually set by the top management of
the business and they provide the focus for setting more detailed objectives for the main functional activities of the
business
- Mission statements inform corporate objectives which then inform the strategy for the firm and then the
tactics

The impact of strategic decision making on functional decision making

How strategic decisions are made:
- Most business decisions involve middle-ranking executives making decisions based on a combination of a
recommendation from decision trees and investment appraisal. Recommendations are based off of careful
research
- By contrast, even though strategic decisions can be worth millions or even billions they often are made by
managers that have very little to go on
The impact of strategic decision making on functional decision making:
- When a strategic decision is made new objectives need to be set that will affect functional departments.
Each of the 4 departments will get its own objectives set, each of the four will aim to knit the objectives
together in order to meet the wider objectives of the business.

Functional strategies:
- A strategy is a medium to long term plan for meeting objectives. This should be the result of a careful
process of though and decisions throughout the business. Although key decisions will almost always be
made at the top. A useful approach to decision making is known as ‘scientific decision making’ – it shows
that strategy must be:
 Based on clear objectives
 Based on firm evidence of the market and the problem/opportunity, including as much factual.
quantitative evidence as possible (e.g. trends in market size, data on costs, sales forecasts)
 Looking for options (alternative theories, e.g.to meet an objective of higher market share firms could
launch a new product)
 Be based on as scientific a test of the alternatives as possible
 Control the approach decided on – the final stage

The value of SWOT analysis

SWOT Analysis = a method for analysing a business, its resources and its environment – it focuses on the internal
strengths and weaknesses of a business (compared with competitors) and the key external opportunities and threats
for the business.

SWOT looks at:

- Internal strengths
- Internal weaknesses
- Opportunities in the external environment
- Threats in the external environment

Aims of a SWOT analysis:

- What the business does better than the competition
- What competitors do better
- Whether it is making the most of the opportunities available
- How a business should respond to changes in its external environment

Strengths and weaknesses:

- Are internal to the business
- Relate to the present situation

Opportunities and threats:

- Are external to the business
- Relate to changes in the environment which will impact the business
3.7.2 Analysing the existing internal position of a business to asses strengths and weaknesses: financial ratio
analysis
How to assess the financial performance of a business using balance sheets, income statements, and financial ratios
Balance Sheet = this shows the assets (what a business owns) and liabilities (what a business owes) at a particular
time throughout the financial year

- Assets and liabilities must equal each other else the balance sheet won’t balance. If a firm owes more than
what it owns, then this will limit their growth potential and they may have to consider retrenching (selling off
stock)
- Fixed Assets = anything the firm owns as long as it is useful to operating the firm (must last longer than a
year)
- Current Assets = these represent the working capital and are directly linked to what is sold to the customers
(lasts less than 12 months)
- Current Liabilities = things that a firm will need to pay out for within 12 months
- Working Capital (Net Current Assets) = this shows the liquidity of the business – so if liabilities acceded
assets, they the firm would go into liquidation
 = current assets – current liabilities

Influences on the amount of working capital:

- The volume of sales – rising sales indicate that costs will rise as well to pay for the resources that create the
goods and services
- The amount of trade credit offered by a business – a long pay back time requires more working capital
- Growth of the business – over trading can occur if the business grows too fast without arranging the needed
working capital
- Length of the operating cycle – the time between paying for materials and receiving payments for goods and
services (the longer the period, the greater the need for working capital)
- The rate of inflation – when prizes rise, greater working capital is needed

Depreciation = when the value if a non-current asset decreases

- Assets will eventually become worthless over time without continuous investment
Income Statement = this describes the income and expenditure of a business over a given period of time (usually a
year) – it shows the profits and losses of a firm

- Gross Profit = revenue – cost of sales

- Operating Profit = gross profit – expenses
- Profit Before Tax = operating profit – finance costs + finance income
- Profit for the Year = profit before tax – tax expenses

Purpose of an income statement:

- Legal requirement
- Review progress
- Allows shareholders to access if investment is needed
- Comparisons can be made
- Used to show potential investors

Analysing expenditure:
- Capital expenditure – when spending money on items that will be used in the long run (e.g. property,
machinery, vehicles, and office equipment)
- Revenue expenditure – spending on day to day items (e.g. raw materials, wages, and power)

Order of an income statement:

- Revenue
- Cost of sales
- Gross profit
- Expenses
- Operating (net) profit
- Finance costs
- Profit before tax
- Taxation
- Profit for the year (retained)
Ratio Analysis = ratios assess the financial information by comparing two sets of linked data

Stakeholders who are interested in financial ratios:

- Shareholders
- Customers
- Employees
- Government
- Competitors
- Manager
- Banks
- Suppliers

Liquidity and Gearing Ratios:

- These allow managers to control the business’ cash flow and ensure they have sufficient working capital

The Current Ratio = this is used the keep track of the working capital within a business and make sure it can pay off
the debts
- = current assets / current liabilities
- The ratio should be between 1:1 and 3:1
- If the figure is below 1, the business doesn’t have sufficient short term assets and many need to raise
additional finance
- If the figure is above 3, then they may have to much cash and aren’t using it effectively

The Gearing Ratio = this is used to show whether a firm’s structure is likely to be able to co tune to meet interest
payments and to repay long term borrowing
- = long term liabilities / capital employed x 100 (capital employed = long term liabilities + total equity (total
capital and reserves))
- The figure should be between 25% and 50%
- If > 50%, then the business is highly geared
- If < 25%, then the business is low geared
- Between 25% and 50% is considered normal for a well established business

The Profit Ratios:

 - These allow managers to measure the performance if the business in generating profit compared to the
costs involved

Profit Margins = this is an indication of a business’ ability to control costs

- = ‘X’ profit / sales revenue x 100
- Profit includes gross, operating, net, and retained
- The higher the percentage the better as they are receiving more profit for the money they are investing in to
the business and its products
- The percentage reduces as further costs are subtracted
- Profit margins depend upon the product life cycle and the placing of the product on the Boston matrix

Return on Capital Employed (ROCE) = this shows what returns (profits) the business has made on the resources
available to it
- = operating profit / capital employed x 100
- The higher the figure the better as the firm will be getting more profit back for the resources and money it
has used
- The figures can be compared with previous figures as other competitors to gain an idea of where they stand
in the market

Efficiency Ratios:
- These allow managers to measure how well the business is managing its stock and working capital

Payables (Creditor Days) = this estimates the average time it takes a business to settle its debts with the trade
suppliers
- = trade payables / cost of sales x 365
- In general, a firm that wants to maximise its cash flow should take as long as possible to pay its bills
- However a high figure could illustrate liquidity problems which could cause legal claims
- Thus figure should be higher than the debtor days

Receivables (Debtor Days) = this is the time is takes for trade debtors to settle its bills
- = trade debtors / sales revenue x 365
- A high figure could suggest a general problem with debt collection or the financial position of major
customers
- This should be lower than the payables

Inventory Turnover = this helps firms to answer questions like ‘how much money do we have tied up in stock?’
- = cost of sales / average stock held
- The quicker a firm turns over its inventories, the better
- But, it is also important to do that profitable rather than sell inventory at a low gross profit margin or worse
a loss
- A high inventory turnover figure could indicate poor stock management

The value of financial ratios when assessing performance

Internal users who need to know the financial position of the business:
- Managers – whether the firm is reaching objectives and using resources efficiently
- Employees – whether the firm is stable and secure and if they are receiving the right amount of pay for the
job they are doing
- Shareholders – how does the return on investment compare with other investors

External users who need to know the financial position of the business:
- Creditors – how much cash a firm had and if it will be able to pay its bills
- Government – the tax liability
- Competitors – how the business is performing in relation to others in the industry

Financial ratios help for firms to compare with competitors in the same market as them and therefore to set
objectives in order to beat them and gain a higher market share overall. Also, it can be analysed over time internally.
3.7.3 Analysing the existing internal position of a business to assess strengths and weaknesses: overall
performance
How to analyse data other than financial statements to assess the strengths and weaknesses of a business
Comparing performance over time:
- A danger with just looking at one year's results is that the numbers can hide a longer term issue in the
business
- By looking at data over several years, it is possible to see whether a trend is emerging. Public companies in
the UK are required to publish a five-year summary of the income statement to help shareholders assess
trends

Comparing performance against competitors or the industry as a whole:

- Assuming that the detailed information is available, a comparison against competitors provides a useful way
for management and shareholders to assess relative performance.
- Has the business' revenues grown as fast as close competitors? How has the business performed compared
with the market as a whole?

Benchmarking against best-in-class businesses:

- Comparison against other businesses who are not direct competitors can also be useful – particularly if they
help set the standard that the business aims to achieve. Care has to be taken with this, though. The
benchmark business might operate in a very different industry, with significantly different profit margins and
balance sheet norms.

The importance of core competences

Core Competence = something unique a business has or can do strategically well

The test of core competencies:

- Do they provide access to a wide range of markets?
- Do they contribute significantly to the end product received by the customers?
- Are they difficult for competitors to imitate?

Assessing short and long term performance

Short term metrics:
- Helps to indicate whether growth and return on investment for shareholders can be sustained (e.g. sales
productivity and capital productivity)
- These measures or performance indicate the current health of the business

Medium term metrics:

- Helps to predict whether a business can maintain or improve its performance over the next few years (e.g.
commercial health, cost structure health, asset health)

Long term metrics:

- Helps measure the ability of a business to sustain or expand its current operations (e.g. anticipated changes
in consumer tastes, new technology, share price)
The value of different measure of assessing business performance
The Kaplan and Norton Balanced Scorecard = a framework based on four perspectives which is a strategic planning
and monitoring system used to ensure that a firms a citizens are linked to its vision statement

The four perspectives:

- Financial – how does the firm look to shareholders
- Customer – how to customer view the firm
- Internal – how well does it manage its operational processes
- Innovation and Learning – can the firm continue to improve and create value, and it examines how an
organisation learns and grows

Advantages of the Balanced Scorecard:

- Provides a broader view of business performance
- Allows business progress to be monitored through the use of specific (SMART) targets
- It links objectives closely to strategy
- Targets can act as a motivator
- Consistent monitoring allows weaknesses to be identified and hopefully solved

Disadvantages of the Balanced Scorecard:

- Some objectives are not easily quantifiable
- Excessive numbers of targets can cause confusion and apathy
- Getting the right balance between the four perspectives

Elkington’s Triple Bottom Line = this is a bottom line that continues to measure profits, but also measures the
organisation’s impact on people and the planet (a way of expressing a company’s impact and sustainability on both a
local and global scale)

People:
- Considering the impact the firms actions have on all people involved with them
- Everyone’s being taken into consideration
 Companies should offer health care, goods working hours, opportunities, clean and safe working
places, and doesn’t exploit their labour force
- Include the community where the company does business

Planet:
- Reducing or eliminating their ecological footprint
- They strive for sustainability – going green can be more profitable in the long run
- Triple bottom line companies look at their entire life cycle of their actions
 - Reduce energy waste

Profit:
- The financial bottom line is the one that all companies share
- Profits empower and sustain the community as a whole, and not just flow to the CEO and shareholders

3.7.4 Analysing the external environment to assess opportunities and threats: political and legal change
The impact of changes in the political and legal environment on strategic and functional decision making
Competition Law:
- EU and UK laws exist in order to try to prevent the exploitation of monopoly power.
- Prevent companies agreeing to work together to the detriment of consumers by operating a cartel, agreeing
with supposed rivals to hold supply down in order to keep prices artificially high.
- Monitor the behaviour of any business with a strong enough position within its market to potentially be able
to abuse its power eg. investigations into supermarkets paying a fair price to farmers.
- Ensure that takeovers and mergers do not break the rule of thumb, which is that 25% should be the ceiling
on any firm's share of a UK market.

Effects of competition law:

- CMA get involved in any potential takeovers or mergers that will have an impact on the UK consumers. The
EU also have the powers to look into anything affecting the EU consumers.
- This would impact of strategic decision as they may not be able to do takeovers % mergers, may force them
to enter new markets, with or without a joint venture

Labour Law:
- Employment law is designed to prevent the exploitation of employees by businesses. Therefore, the major
areas covered include pay, working conditions such as entitlement to leave and holidays, physical working
conditions and the right to trade union representation.
- The key area of the law governing payment is the need for employers to pay at least the national minimum
wage
- Legislation also exists to prevent discrimination in the workplace

Effects of labour law:

- Tightening employment laws may make firms adapt their operations strategies to reduce their reliance on
UK-based HR. Strategic options could include offshoring certain operations to countries where wage rates
are lower
- Many employment laws have been influenced by EU attempts to create a 'level playing field' among
European countries. This ensures that competition between EU members cannot be based on one country
offering poor labour conditions

Environmental Law:
- Environmental laws exist to try to minimise the negative impacts of business on the natural environment eg.
preventing pollution, products packaging and recycling legislation. The environment agency is responsible for
enforcing most environmental legislation within the UK
- It operates at arms length from politicians, yet is funded by government-funded.

Effects of environmental law:

- Additional costs
- First movers benefit from a 'greener image' which allowed them to tap niche markets of environmentally
conscious consumers. Nowadays, many of the effects of complying with environmental legislation centre on
how reducing material and energy use can form part of a lean production programme to reduce costs

Tax Law:
- The two most significant taxes are Value Added Tax (VAT) and Corporation Tax. A businesses with a turnover
above £81,000 must register for VAT with the HMRC. A VAT registered business can claim back VAT that they
have bought.
 - Corporation tax is a tax on profit. A limited company must pay tax on its profits, currently at a rate of 20%.
Profits generated in certain ways, including successful R&D, new patents or theatre, film or TV production
are exempt from corporation tax.

Effects of laws governing tax:

- The major effect of the VAT system is to create more work for accountants. Ensuring VAT is recorded,
handed over to HMRC and claimed back on items purchased keeps accounting departments busy all year
round.

Help for enterprises:

- Enterprise allowance
 Get a business mentor to help develop ideas and start trading
 Get a weekly allowance of 26 weeks
 Apply for a loan to help with start up costs
 The loan has to be paid back, the allowance doesn’t
 Any money you get doesn’t affect your housing benefits, tax credits, income tax, universal credit, or
access to work grant
- Funding for lending
 The bank and HM Treasury launched the scheme in 2012
 Designed to incentivise banks and building societies to boost their lending
 Provides funding to banks and building societies for an extended period, with both the price and
quantity of funding linked to their lending performance
 Aimed at small and medium sized enterprises
- The enterprise finance guarantee
 A guarantee scheme to facilitate lending to viable businesses that have previously been turned down
 Can provide finance between £1000 and £1.2million
 Pay back between 3 months and 10 years for term lending and between 3 months and 3 years for
overdrafts

Regulation = the enforcement of principles of rules that result from the passing of a low or a series of laws
Self Regulation = some industries have been given the power to regulate themselves such as ASA and CAP
- Regulation is designed to create free and fair competition within markets
- Controlling prices prevents prices rising too high, and often sets the current ratio of inflation
- Restricting ROCE prevents firms from earning excessive profits and prices could increase as companies
become less concerned in keeping costs low
- Unbundled access provides a source of extra income, and means that new firms don’t have to pay high fixed
costs

3.7.5 Analysing the external environment to assess opportunities and threats: economic change
The impact of changes in the U.K. and the global economic environment on strategic and functional decision making
Economic factors include:
- GDP
- Taxation
- Exchange rates
- Inflation
- Fiscal and monetary policy
- More open trade v protectionism

Gross Domestic Products (GDP) = a measure of economic activity (the total value of a countries output) over a given
period of time, usually provided as quarterly or annual figures
- The difference between GDP and real GDP is that on its own, GDP is nominal, whereas real means that the
effect of inflation has been removed

Direct and Indirect Tax = taxes that firms pay in the UK

Corporation tax:
- This is a form on direct taxation, which is a tax on the trading profits made by a business over the course of
their financial year as well as any profit from investments and disposal of assets

Value added tax:

- This is a form of indirect taxation, collected by businesses for the government. It is a tax placed on the sale of
goods and services in the UK – it is a type of ‘consumption tax’

The business cycle:

Causes of the business cycle:

- Changes in business confidence
- Periods of inventory building and then de-building (usually due to seasons factors such as Christmas or
Halloween; or due to expansion of the firm)
- Irregular patterns of expenditure on consumer durables
- Confidence in the banking sector

Injections:
- Investment
- Government expenditure
- Exports

Withdrawals:
- Savings
- Taxes
- Imports

ADD IN IMPACT OF SECTORS ON THE BUSINESS CYCLE

Exchange Rates = the rate between two distinct countries
- Currency demand – demand from currency comes from a need to purchase the currency of a particular
economy
- Sources of demand include:
 Exports of goods
 Exports of services
 Inflows of foreign investment
 Speculative demand
 Official buying of sterling by the Bank of England
- Currency supply – supply of currency comes from economic agents needing to demand overseas currency in
exchange for their own
- Sources of demand include:
 Imports of goods
 Imports of services
 Outflows of foreign investment
 Speculative selling
 Official selling of sterling by the Bank of England

Free floating exchange rates:

- Rate determined purely by market demand and supply
- No government intervention
- Current finds its own value
- Means that businesses need to be concerned about how the ER may change when international sales and
imports of materials occur
- For large transactions, firms may need to use the futures market
- If the pound is weak, it is good for exporters but bad for importers

Managed exchange rates:

- Government may seek to influence the market value of the currency
- Intervention is done by the Bank of England
 Uses stocks of gold and other foreign currencies
 May change short erma interest to manage the external value of the pound
- Increasingly difficult to manage the exchange rate fine the size and power of the FOREX market
- Provides stability for businesses but means they neither benefit nor lose out

Fully fixed exchange rates:

- Central target for the exchange rate (currency peg)
- No fluctuations permitted
- Occasional revaluation or devaluation when economic fundamentals demand one
- Central bank intervention to maintain the currency
- Illegal to trade away from the currency peg
- Eurozone countries ‘locked’ their exchange rates together from 1999-2002 before the introduction of the
euro

Inflation = a measure of how much the price of goods and services have gone up over time

Consumer Price Index (CPI):

- The main measure of inflation for the UK
- The Government has set the Bank of England a target for inflation (using the CPI) of 2%
- The aim of this target is to achieve a sustained period of low and stable inflation
- Low inflation is also known as price stability
- Inflation has remained at a relatively low level in the UK in recent years

Effect of inflation on consumers:

- As prices rise (inflation) money loses its value and people lose confidence in money as the value of savings is
reduced
 - Inflation can get out of control – price increases lead to higher wage demands as people try to maintain their
living standards
- Consumers on fixed incomes (e.g. pensioners) lose out because the their real incomes fall

Positive effects of inflation on businesses:

- Industry-wide price rises enable revenues to grow
- Growing revenues + constant gross margin = higher gross profit
- Makes using debt as a source of finance cheaper in real terms

Negative effects of inflation on businesses:

- If costs are rising due to inflation, a business may not be able to pass them onto customers (PED)
- Inflation can disrupt business planning and lead to lower investment
- Rising inflation is associated with higher interest rates - this reduces economic growth and can lead to a
recession

Government Polices = economic policies are the actions taken by the chancellor of exchequer and the government in
order to meet their economic objectives

Fiscal policies :
- Expansionary – this means that they are aiming to increase economic activity by borrowing more than the
government gets in tax and using it to inspire growth
- Contractionary – this means they are aiming to decrease economic activity by spending less than the
government gets in tax and using it to slow down economic growth
- Neutral – this means they are trying to balance the books and spend what it taxes

Monetary polices (interest rates):

- This refers to the availability of money, credit, and the price of credit
- In the UK, it is done through the Bank of England and the Monetary Policy Committee (MPC)
- Every month, the MPC meets to look at the state of the economy, and the governments policy to set the
interest rate
Quantitative Easing = a tool that central banks use to inject digital money directly into the economy should it be
weak or failing – create digital money and use it to buy government debt in the form of bonds

Supply side polices:

- The government tries to improve the supply of goods and services from firm in the UK, including:
 Privatisation
 Nationalisation
 Deregulation
 Freeing up labour laws
 Incentives to work
 Immigration
 Education and training
 Transport infrastructure

Protectionism = this involves any attempt by a country to to impose restrictions on the open trade in goods and
services
- The main aim of protectionism is to cushion domestic businesses and industries from overseas competition
and prevent the outcome resulting solely from the interplay of free market forces of supply and demand

Open Trade = this involves the removal or reduction of barriers to international trade

Main forms of protectionism:

- Tariffs – these are a tax or duty that raises the price of imported products and causes a contraction in
domestic demand and an expansion in domestic supply
- Quotas – these are quantitative (volume) limits on the level of imports allowed or a limit to the value of
imports permitted into a country in a given time period. Quotas do not normally bring in any immediate tax
 revenue for the government although if they cause domestic production and incomes to expand, there will
be a beneficial impact on taxes paid.
- Export subsidies – this is a payment to encourage domestic production by lowering their costs (loans can be
used to fund the dumping of products in overseas markets)
- Domestic subsidies – these involve government help (state aid) for domestic businesses facing financial
problems

Why governments protect:

- Develops new trade advantages
- Improves the balance of trade
- Response to dumping
- Employment protection
- Desire to increase government revenue

Reasons for greater globalisation of a business

Globalisation = the process through which an increasingly free flow of ideas, people, goods, services, and capital
leads to the integration of economies and societies
- The main driver of globalisation are businesses as multinationals was to increase sales, profit, and
shareholder value; and the government wants to encourage domestics firms to expand further

What globalisation involves:

- An expansion of trade in goods and services between countries
- And increase in FDI by multinational countries (MNC)
- The development of global brands
- Shifts in production
- Increased levels in labour migration
- The entry of countries into the global trading system

The importance of globalisation for business

Drivers of globalisation:
- Rising living standards
- Less protectionism
- Lower transport costs
- Digital communication
- Diverging consumer cultures
- Market liberalisation

Advantages of globalisation:
- Opportunities for trade and investment overseas
- Access to cheaper goods and services
- Lifted millions out of poverty
- More intense competition
- Bigger export markets (economies of scale)
- Opportunities to live, study, and travel overseas

Disadvantages of globalisation:
- Increased unemployment for firms that lose demand to lower cost competition
- Rising income and wealth inequality
- Surge of inward migration of labour has brought economic and social tensions
- National governments gave less control
- Globalisation of brands means there is a loss of cultural diversity
- Environmental damage

The importance of emerging economies for business

Features of less developed economies:
- Low incomes and levels of productivity in terms of labour and capital
 - Often endowed with rich natural resources
- Higher dependency of export incomes from primary commodities/low export diversification
- Much of the population works in agriculture and lives in rural areas
- Limited support provided
- Distant from technological frontiers
- Relatively fast growth of population and a younger average age
- Rapid urbanisation and large scale rural-urban migration
- Weaknesses in infrastructure such as telecommunications, transport, ports, water, and sanitation
- Higher tariffs and other import controls
- Lower access to advances country markets

Potential business opportunities from emerging economies:

- They tend to have relatively high rates of economic growth compared with more mature developed
economies like the UK, US, Japan and Europe.
- Many emerging economies have seen the rapid growth of a "middle class" with rising disposable incomes
that might simulate demand for the products of businesses located in developed economies.
- Emerging economies may be a suitable location for international operations - either as a location for
production and/or to sell into the domestic market

Potential business challenges from emerging economies:

- Many domestic businesses based in emerging economies are now actively pursuing expansion into
developed economies
- Doing business in emerging economies is not straightforward – an increased risk of intellectual property
theft, restrictions on the methods of doing business and competitive challenges from established domestic
businesses are threats that need to be overcome

3.7.6 Analysing the external environment to assess opportunities and threats: social and technological
The impact of the social and technological environment on strategic and functional decision making
Key features of demographic information:
- Population growth
- Age of population
- Migration
- Gender
- Household composition
- Race

The growth of technology:

- Internet
- E-commerce
- Email
- Robotics
- Software robotics
- Health
- Cars
- Security
- Wearable technology
- Gaming industry
- Audio visual technology
- Drones

Social problems:
- Lack of education
- Poverty
- Climate change
- Public health
- Homelessness
 - Water and food security
- Unemployment
- High morbidity
- Pollution

How the government combats social problems:

- Investing money into public services
- Tax and regulate products and the amount of pollution
- Nationalisation to reduce unemployment
- Regional grants and aid to encourage business startup
- Minimum wage

How businesses solve social problems:

- Businesses are more aware of problems and introduce many policies to help solve them and create more
social awareness amongst the public
- Many believe NGOs have the solutions for these social problems (true that these organisations have had a
growth through the years) – but this growth is too slow, thus, the solutions that they are achieving and their
impact are small because of lack of resources
- Business generate the resources to make a large scale impact because of the amount of revenue they
receive due to making products/services to meet the needs and demands of customers
- Profits allow for solutions to become self-sustaining
- Firms should analyse social problems that can be related with their business activities and make changes
relating to this
- Creating shared value – a business strategy designed to solve social issues profitably. It does this by
leveraging the resources and innovation of the private sector to create new solutions to some of society's
most pressing issues

Corporate Social Responsibility (CSR) = the duties a business has towards its stakeholders
- Changes from making money to becoming socially responsible
- Sustainability and long term profitability

Advantages of CSR:
- Improved financial performance
- Reduced operating costs
- Enhanced brand image and reputation
- Increased sales and customer loyalty
- Attracts and retains employees
- Access to capital

Disadvantages of CSR:
- May decrease efficiency
- Can be costly
- Stakeholders tend to have differing views/opinions
- Goes to the back of the queue in terms of priority when the economy is struggling
- Not legally binding
- May only be done to meet changing consumer tastes instead of real commitment

The pressures for socially responsible behaviour

Carroll's CSR Pyramid = a simple framework that helps argue how and why organisations should meet their social
responsibilities

Key features of Carroll’s CSR pyramid:

- CSR is built on the foundation of profit – profit must come first
- Then comes the need for a business to ensure it complies with all laws & regulations
- Before a business considers its philanthropic options, it also needs to meet its ethical duties

Advantages of Carroll’s CSR pyramid:

- The model is easy to understand and so evaluation can be simple
- Simple message – CSR has more than one element
- Emphasises importance of profit

Disadvantages of Carroll’s CSR pyramid:

- Too simplistic so evaluation isn’t in depth and can’t be done extensively
- Weak/no relationship between each stage of the CSR activities involves and so it is have to link and therefore
make a valid evaluation
- Businesses don’t always do what they claim when it comes to CSR

3.7.7 Analysing the external environment to assess opportunities and threats: the competitive environment
Porter’s five forces, how and why these might change, and the implications of these forces for strategic and functional
decision making and profits
How markets differ:
- Size (e.g. sales revenue, volumes, numbers of customers)
- Structure (e.g. the number of brands and competitors)
- Distribution channels (how the product gets from producer to final consumer)
- Customer needs and wants (the basis of marketing segmentation)
- Growth (the rate of growth and which businesses are growing faster or slower than the market)
- Product life cycle (the stage of the life cycle for the industry as a whole and for products and brands within
it)
- Alternatives for the consumer (e.g. substitute products)

Porter’s Five Forces = a framework for analysing the nature of competition within an industry
 - It helps to develop strategies for specific industries by taking into account variables such as power,
relationships, threats, and the intensity of competition
Porter identified five factors that act together to determine the nature of competition within an industry. These are
the:
- Threat of new entrants to a market
- Bargaining power of suppliers
- Bargaining power of customers (buyers)
- Threat of substitute products
- Degree of competitive rivalry

Threat of new entrants:

- If new entrants move into an industry they will gain market share & rivalry will intensify
- The position of existing firms is stronger if there are barriers to entering the market
- If barriers to entry are low then the threat of new entrants will be high, and vice versa
- Barriers to entry are, therefore, very important in determining the threat of new entrants. An industry can
have one or more barriers. The following are common examples of successful barriers:

Bargaining power of suppliers:

- If a firm's suppliers have bargaining power they will:
 Exercise that power
 Sell their products at a higher price
 Squeeze industry profits
- If the supplier forces up the price paid for inputs, profits will be reduced. It follows that the more powerful
the customer (buyer), the lower the price that can be achieved by buying from them.
- Suppliers find themselves in a powerful position when:
 There are only a few large suppliers
 The resource they supply is scarce
 The cost of switching to an alternative supplier is high
 The product is easy to distinguish and loyal customers are reluctant to switch
 The supplier can threaten to integrate vertically
 The customer is small and unimportant
 There are no or few substitute resources available
 - Just how much power the supplier has is determined by factors such as:

Bargaining power of customers:

- Powerful customers are able to exert pressure to drive down prices, or increase the required quality for the
same price, and therefore reduce profits in an industry.
- Example = the dominant grocery supermarkets which exert great power over supplier firms.
- Several factors determine the bargaining power of customers, including:

- Customers tend to enjoy strong bargaining power when:

 There are only a few of them
 The customer purchases a significant proportion of output of an industry
 They possess a credible backward integration threat – that is they threaten to buy the producing
firm or its rivals
 They can choose from a wide range of supply firms
 They find it easy and inexpensive to switch to alternative suppliers

Threat of substitute products:

- A substitute product can be regarded as something that meets the same need
- Substitute products are produced in a different industry – but crucially satisfy the same customer need. If
there are many credible substitutes to a firm's product, they will limit the price that can be charged and will
reduce industry profits.
- The extent of the threat depends upon:
 The extent to which the price and performance of the substitute can match the industry's product
 The willingness of customers to switch
 Customer loyalty and switching costs
- If there is a threat from a rival product the firm will have to improve the performance of their products by
reducing costs and therefore prices and by differentiation.
Intensity of rivalry:
- If there is intense rivalry in an industry, it will encourage businesses to engage in:
 Price wars (competitive price reductions)
 Investment in innovation & new products
 Intensive promotion (sales promotion and higher spending on advertising)
- All these activities are likely to increase costs and lower profits
- Several factors determine the degree of competitive rivalry; the main ones are:

3.7.8 Analysing strategic options: investment appraisal

Financial methods of assessing an investment
Investment Appraisal = the process of analysing whether investment projects are worthwhile

Financial methods of assessing investment:

- Payback
- Average rate of return
- Net present value (NPV)

Reasons why businesses invest:

- Investment is the process of purchasing non current assets like buildings and machinery
- Investment considers the buying of an asset that will pay for itself over a period of more than one year
- It is done to replace and renew assets, and to introduce additional assets

Payback = the length of time it takes for an investment to recover the initial expenditure (usually measured in
months or years)
 - It focuses on cash flow and looks at a cumulative cash flow of the investment up to the point which the
original investment has been recouped from the investment cash flow

Advantages of payback:
- Simple and easy to calculate, and easy to understand the results
- Focuses on cash flows – good for use by businesses where cash is a scarce resource
- Emphasises speed of return; may be appropriate for businesses subject to significant market change
- Straightforward to compare competing projects

Disadvantages of payback:
- Ignores cash flows which arise after the payback has been reached (i.e. does not look at the overall project
return)
- Takes no account of the time value of money
- May encourage short-term thinking
- Ignores qualitative aspects of a decision
- Does not actually create a decision for the investment

Average Rate of Return (ARR) = the total net returns divided by the expected lifetime of the investment, expressed
as a % of the initial cost of investment
- Business investment projects need to earn a satisfactory rate of return if they are to justify their allocation of
scarce capital – the ARR looks at the total accounting return for a project to see if it meets the target return
- = average rate of return / asset’s initial cost x 100 (average annual profit (AAP) = total net profit before tax
over the assets lifetime / life of asset in years)

Advantages of average rate of return:

- ARR provides a percentage return which can be compared with a target return
- ARR looks at the whole profitability of the project
- Focuses on profitability – a key issue for shareholders

Disadvantages of average rate of return:

- Does not take into account cash flows – only profits (they may not be the same thing)
- Takes no account of the time value of money
- Treats profits arising late in the project in the same way as those which might arise early

Net Present Value (NPV) = this compares the amount invested today to the present value of the further cash receipts
from the investment
- It reflects the time value of money by discounting the value of future cash flow
- When applying the discount factor, divide by 1.(the rate) (e.g. 10% = 1.1 and 5% = 1.05)
Advantages of net present value:
- Takes account of time value of money, placing emphasis on earlier cash flows
- Looks at all the cash flows involved through the life of the project
- Use of discounting reduces the impact of long-term, less likely cash flows
- Has a decision-making mechanism – reject projects with negative NPV

Disadvantages of net present value:

- More complicated method – users may find it hard to understand
- Difficult to select the most appropriate discount rate – may lead to good projects being rejected
- The NPV calculation is very sensitive to the initial investment cost

Factors influencing investment decisions

Characteristics of capital investment decisions:
- Involves long terms commitment of capital sums
- Benefits are received as a stream stretching long into the future
- They are almost impossible to reverse without accepting a significant loss
- Contain an element of uncertainty
- Costs are incurred today but benefit in the future
- They affect future probability and the firms very existence

Factors that affect investment decisions:

- Interest rates (the cost of borrowing)
- Economic growth (changes in demand)
- Confidence/expectations
- Technological developments (productivity in capital)
- Availability of finance from banks
- Others such as depreciation, wage costs, inflation, and government policy

The value of sensitivity analysis

What sensitivity analysis includes:
- Allows key assumptions to be changed to analyse the effect
- Helps judge the degree of risk
- Recognises there is no such thing as an accurate forecast
- Considers one variable/assumption at a time

Advantages of sensitivity analysis:

- Helps assess risks and prepare for a less than favourable scenario
- Identifies the most significant assumptions (which therefore enquire closer attention)
- Helps make the process of business forecasting more robust

Disadvantages of sensitivity analysis:

- Only tests one assumption at a time
- Only as good as the data which the forecast is based upon
- Complicated concept
3.8 Choosing strategic direction
3.8.1 Strategic direction: choosing which markets to compete in and what products to offer
Factors influencing which markets to compete in and which products to offer
Strategy = a long-term plan of how a business sets out to achieve its aims and objectives
- As part of this strategy, firms must decide what direction they would like to move and then set out a plan to
achieve it
- The strategic direction a business chooses determines the products it sells and the markets it operates in
- Most firms operate in dynamic markets with changing internal and external factors. This constant change
will require the firm’s strategic direction to constantly be assessed and changed when necessary

Ansoff’s Matrix = a marketing planning model that helps a business determine its product and market strategy
- It suggests that a business’ growth strategy depends if whether it markets new or existing products in new or
existing markets

Market penetration:
- Market penetration is the name given to a growth strategy where the business focuses on selling existing
products into existing markets.
- Market penetration seeks to achieve four main objectives:
 Maintain or increase the market share of current products – this can be achieved by a combination
of competitive pricing strategies, advertising, sales promotion and perhaps more resources
dedicated to personal selling
 Secure dominance of growth markets
 Restructure a mature market by driving out competitors; this would require a much more aggressive
promotional campaign, supported by a pricing strategy designed to make the market unattractive for
competitors
 Increase usage by existing customers – Example = loyalty schemes
- A market penetration marketing strategy is very much about “business as usual”. The business is focusing on
markets and products it knows well. It is likely to have good information on competitors and on customer
needs. It is unlikely, therefore, that this strategy will require much investment in new market research.

Market development:
- Market development is the name given to a growth strategy where the business seeks to sell its existing
products into new markets.
- There are many possible ways of approaching this strategy, including:
 New geographical markets; for example exporting the product to a new country
 New product dimensions or packaging
 New distribution channels (e.g. moving from selling via retail to selling using e-commerce and mail
order)
 Different pricing policies to attract different customers or create new market segments
- Market development is a more risky strategy than market penetration because of the targeting of new
markets
 - Example = Amazon sell lots of products around the world in new markets

Product development:
- Product development is the name given to a growth strategy where a business aims to introduce new
products into existing markets. This strategy may require the development of new competencies and
requires the business to develop modified products which can appeal to existing markets.
- A strategy of product development is particularly suitable for a business where the product needs to be
differentiated in order to remain competitive. A successful product development strategy places the
marketing emphasis on:
 Research & development and innovation
 Detailed insights into customer needs (and how they change)
 Being first to market

Diversification:
- Diversification is the name given to the growth strategy where a business markets new products in new
markets.
- This is an inherently more risk strategy because the business is moving into markets in which it has little or
no experience.
- For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects
to gain from the strategy and an honest assessment of the risks. However, for the right balance between risk
and reward, a marketing strategy of diversification can be highly rewarding.

The reasons for choosing and value of different options for strategic direction
Factors impacting the choice of strategic direction:
- The level of risk involved, including the management and owner’s attitude to risk.
- The level of shareholder support
- The impact on the existing brand image and customer reaction.
- The existing employee reactions
- Existing strengths, assets and skills and their fit with the new direction.
- Availability of staff, skills, assets and investment
- Costs of pursuing the strategy and the firm’s financial position
- The likely returns in sales and profit
- The opportunity costs
- CSR and ethical factors
- Any potential government intervention

3.8.2 Strategic positioning: choosing how to compete

How to compete in terms of benefits and price
Porter’s Generic Five Forces = this includes strategies that could be adopted in order to gain competitive advantage.
The strategies relate to the extent to which the scope of a business' activities are narrow versus broad and the
extent to which a business seeks to differentiate its products

Cost leadership:
 - The objective is to become the lowest-cost producer in the industry
- Produce on a large scales as this enables businesses to exploit economies of scale
- Associated with large scale firms offering standard products with relatively little differentiation that are
readily acceptable to the customers
- Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a
significant cost advantage over the competition and, in doing so, it can further increase its market share
- The lowest-cost produce will likely achieve or use several of the following:
 High levels of productivity
 High capacity utilisation
 Use of bargaining power to negotiate the lowest prices for production inputs
 Lean production methods (e.g. JIT)
 Effective use of technology in the production process
 Access to the most effective distribution channels

Cost focus:
- Businesses seek a lower-cost advantage in just one or a small number of market segments.
- Products are basic and sometimes similar product to the higher-priced and featured market leader, but
acceptable to sufficient consumers
- Such products are often called "me-too's"

Differentiation focus:
- Businesses aim to differentiate within just one or a small number of target market segments.
- The special customer needs of the segment mean that there are opportunities to provide products that are
clearly different from competitors who may be targeting a broader group of customers
- Firms have to ensure customers have different needs/wants (valid basis for differentiation)
- Also have to make sure competitors aren’t meeting these needs too
- Niche marketing strategy
- Small firms establish themselves in a niche market segment using this strategy
- They achieve higher prices than un-differentiated products through specialist expertise or other ways to add
value for customers.

Differentiation leadership:
- Businesses targets much larger markets and aims to achieve competitive advantage through differentiation
across the whole of an industry
- Involves selecting one or more criteria used by buyers in a market, and then positioning the business
uniquely to meet those criteria
- Associated with charging a premium price for the product
- Higher prices reflect the higher production costs and extra value-added features provided
- Give customers clear reasons to prefer these products over others
- Methods to achieving this include:
 Superior product quality (features, benefits, durability, reliability)
 Branding (strong customer recognition & desire; brand loyalty)
 Industry-wide distribution across all major channels (i.e. the product or brand is an essential item to
be stocked by retailers)
 Consistent promotional support – often dominated by advertising, sponsorship etc

Bowman’s Clock Strategy = a model that explores the options for strategic positioning (ie how a product should be
positioned to give it the most competitive position in the market
- The purpose of the clock is to illustrate that a business will have a variety of options of how to position a
product based on two dimensions – price and perceived value
Low price and low value added (position 1):
- Not a very competitive position
- The product is not differentiated (very standardised)
- Customer perceives very little value, despite a low price. This is a bargain basement strategy
- The only way to remain competitive is to be as ‘cheap as chips’ and hope that no one else is able to undercut
you
- Example = paperclips

Low price (position 2):

- Low cost leaders in the market
- Cost minimisation is needed, often associated with economies of scale
- Profit margins are low but they produce a high volume of output which generates high overall profits
- Competition is usually intense – often involving price wars
- Example = pens such a disposable biros

Hybrid (position 3):

- Elements of low price and differentiation
- The aim is to persuade consumers that there is a good added value through the combination of a reasonable
price and acceptable product differentiation
- This can be a very effective positioning strategy, particularly is the added value involved is offered
consistently
- Example = Lidl or Aldi as they sell branded items but also their own branded products

Differentiation (position 4):

- The aim of a differentiation strategy is to offer customers the highest level of perceived added value
- Branding plays a key role in this strategy, as does the quality of the good
- Example = BMW and Audi for their family range cars such as 4x4s

Focused differentiation (position 5):

- Customers buy the product because of a high perceived value with a higher price
- Adopted by luxury brands, who aim to achieve premium prices by highly targeted segmentation, promotion,
and distribution
- Done successfully, this strategy can lead to very high profit margins but usually short term
- Example = Rolex watches as they have maintained their high position in the watch and accessory industry
with a high price

Risky high margins (position 6):

- A high risk positioning strategy that this might argue is doomed to fail
 - High prices without offering anything extra in terms of perceived value
- Customers will find a better-positioned product that offers more perceived value for a lower price. Very
short term
- Example = Iceland if they were to bring out their own luxury brand

Monopoly pricing (position 7):

- Only one business offering the product
- The monopolist doesn’t need to be too concerned about that value the customer perceives in the product –
the only choice they have is to buy or not
- Fortunately, in most countries, monopolies are tightly regulated to prevent them from setting prices as high
as they wish
- Example = eurotunnel / local rail company

Loss of market share (position 8):

- This position is a recipe for disaster in any competitive market
- Setting a middle range or standard price for a product with low perceived value is unlikely to win over many
customers who will have much better options (eg higher value for the same price from other competitors)
- Example = British Home Stores or Ryanair/EasyJet

Influences on the choice of a positioning strategy

Influences on the choice of positioning:
- Competitors:
 How strong are the competitors a business faces in its chosen strategic position? What advantages, if
any, do those competitors face?
- A business considering positioning itself using a cost leadership strategy (Porter) will want to assess whether
it is capable of achieving the same level of efficiency and productivity as key competitors who also adopt a
cost leadership strategy. Can the business access the same economies of scale as competitors?
- Similarly, a strategy of differentiation may be attractive, but are existing competitors already exploiting the
market opportunities for a differentiated product or service? What are their market shares of the market
segments a business might want to target?

Core competencies:
- A honest view about the ability of the business to compete is essential. Does the business has a unique
selling point that might enable it to sustain a strategy of differentiation?
- If innovation is key to positioning, does the business have the appropriate resources, organisational culture
and reward systems to create a suitable flow of innovation?

External environment:
- Careful and regular scanning of changes in the external environment is key to effective strategic positioning.
For example, changes in the political and/or regulatory environment can create opportunities as well as pose
threats to the existing positions of businesses in a market.
- Similarly, changes in the economic environment can challenge existing position (e.g. a significant economic
downturn might increase the attractiveness of businesses that are positioned as "low cost" operators if
demand for such products and services increases at the expense of higher-priced and higher-cost
alternatives)

The benefits of having a competitive advantage

Competitive Advantage = an advantage over competitors gained by offering consumers greater value, either by
providing lower prices or by providing greater benefits and service that justifies higher prices

Importance of having a competitive advantage:

- It distinguishes a company from its competitors
- It contributes to higher prices, more customers, and brand loyalty
- It remains one of the main goals of any firm
The difficulties of maintaining a competitive advantage
Challenges in maintaining a competitive advantage:
- It can be hair to maintain your target audience when tastes and fashions are constantly changing and
customers are always wanting something different
- Many competitors will always try to outdo you and bring out new product ranges and decrease prices even
further
- To build a sustainable differentiation strategy, firms need to build their reputation around those distinctive
characteristics and make their expertise exceptionally visible to your target audience
3.9 Strategic methods: how to pursue strategies
3.9.1 Assessing a change in scale
The reasons why businesses grow or retrench
Retrenchment = when a business decided to significantly cut or scale back its activities, and use their resources more
effectively/carefully

Factors that cause retrenchment:

- An uncompetitive cost structure
- Inadequate returns on investment
- Poor competitive position
- Financial distress (e.g. decline in sales revenue)
- Market decline – more people buy online rather than going to department stores
- Failed takeovers
- Economic downturn (e.g. during a recession, a firm will reconsider their options)
- Change of ownership

Methods of retrenchment:
- Reduced output and capacity
- Product and market withdrawal
- Downsizing/rationalisation
- Disposals of business units
- De-mergers

Why businesses grow:

- Profit - firms grow to achieve higher profits and provide better returns for shareholders. The return to
shareholders might be a combination of a rising share price allied with a share of profits via dividend
payments.
- Costs – economies of scale in the long run increase the productive capacity of the business whilst also
leading to lower average costs. Experiencing economies of scale help a business to raise their profit margins
at a given market price
- Market share – firms may wish to increase market dominance giving them increased pricing power. This
market power can also be used as a barrier to the entry of new businesses in the long run
- Risk – growth might be motivated by a desire to diversify production and/or sales so that falling sales in one
market might be compensated by stronger demand in another sector.
- Managerial – motivational theories of the firm predict that business expansion might be accelerated by the
demands of senior and middle managers whose objectives differ from major shareholders.

The difference between organic and external growth

Internal (Organic) Growth = this involves expansion from within a business, for example by expanding the product
ranges or number of business units and location
- It builds on the business’ own capabilities and resources. For most firms, this is the only expansion method
used

Types of organic growth:

- Developing new product ranges
- Launching existing products directly into new international markets (e.g. exporting)
- Opening new business locations – either in the domestic market or overseas
- Investing in additional production capacity or new technology to allow increased output and sales volume

Advantages of organic growth:

- Less risk than external growth (e.g. takeovers)
- Can be financed through internal funds (e.g. retained profits)
- Builds on the firms strengths (e.g. brands, customers)
- Allows the business to grow at a more sensible rate
Disadvantages of organic growth:
- Growth achieved may be dependant on the growth of the overall market
- Hard to build market share if business is already a leader
- Slow growth – shareholders may prefer more rapid growth as they will receive lower dividends
- Franchises (if used) can be hard to manage effectively

External Growth = this involves expansion from outside the business mostly through mergers (where two company’s
work together usually because both are starting to become unsuccessful) and takeovers (original company no longer
exists – e.g. Asda is owned by Walmart but is still called Asda in the UK)
- For positive synergy to occur, the result should mean higher revenue or profits than the two individual
businesses achieved

How to manage and overcome the problems of growth or retrenchment

Barriers to growth:
- Economies of scale (including technical, purchasing, and managerial) and diseconomies of scale
- Economies of scope
- The experience curve
- Synergy
- Overtrading

Economies of Scope = this occurs when it is cheaper to produce a range of products rather than specialise in an
handful of products
- The management structure, administration systems, and marketing departments are capable of hung out
these functions for more than one product
- Expanding the product range to exploit the value of existing brands is a wag of exploiting economies of scope
- Brand extension to widen the brand appeal
 Example = Easy Group under the control of Stelios where the distinctive Easy Group business model
has been applied (with varying degrees of success) to a range of markets (e.g. EasyJet, EasyMoney,
EasyBookings, EasyCar etc)

The Experience Curve = a curve showing the theory that the more experienced the firm is apt making a product, the
better, faster, and cheaper it is able to make it

Logic behind the experience curve:

- As firms grow, they gain experience
- Experience provides an advantage over the competition in the industry
- The ‘experience effect’ of lower unit costs is likely to be particularly strong for large and successful
businesses (market leaders)
- Therefore:
 Experience is a key barrier to entry
  Firms should try to maximise their market share to gain experience
 External growth (e.g. takeovers) may be the best way to do this

Evaluative factors of the experience curve:

- Market leaders often become complacent
- Experience can cause resistance to change and innovation
- This could cancel out cost benefits of experience
- The experience curve concept is a relatively old theory that is less relevant in a competitive environment
that changes is rapidly
- Example = Yorkshire Tea was founded in 1886 in Harrogate and has remained one of the leading brands for
tea bags – it has recently overtaken Tetley to become the 2 nd largest tea brand in the market (shows market
share is expanding due to the experience they have gained throughout the years they have been in business)
OR Amazon who have learnt that their model of selling more than any other retailer is their key strategy and
it works very effectively

Synergy = a key concept associated with external growth. It happens when the value of two businesses brought
together is higher than the sum of the value of the two individual businesses
- Cost synergy is where cost savings are achieved as a result of external growth – this is an example of
economies of scale
- Revenue synergy is where additional revenues are achieved as a result of external growth

Cost synergies:
- Eliminating duplicated functions and services (e.g. combining the two accounting departments) – achieve
managerial economies of scale
- Getting better deals from suppliers which might be possible if combining two businesses gives them
improved bargaining power – achieve purchasing economies of scale
- Higher productivity and efficiency from shared assets; can capacity utilisation of the combined businesses be
improved, perhaps by closing down spare capacity – achieve commercial economies of scale

Revenue synergies:
- Marketing and selling complimentary products
- Cross selling into a new customer base
- Sharing distribution channels
- Access to new markets (e.g. through existing expertise of the takeover target)
- Reduced competition – more control over the market

Overtrading = this happens when a business expands too quickly without having the financial resources (capital
employed and working capital) to support such a quick expansion. If suitable sources of finance are not obtained,
then overtrading can lead to business failure

Symptoms of overtrading:
- High revenue growth but low gross and operating profit margins
- Persistent use of a bank overdraft facility
- Significant increases in the payables days and receivables days ratios
- Significant increase in the current ratio (current assets and current liabilities)
- Very low inventory turnover ratio
- Low levels of capacity utilisation

Managing the risk of overtrading:

- The most effective steps to avoid overtrading are essentially those that would be taken as part of a sensible
cash flow and working capital management. For example:
 Reducing inventory levels
 Scaling back the pace of revenue growth until profit margins and cash reserves have improved
 Leasing rather than buying capital equipment
 Obtaining better payment terms from suppliers
 Enforcing better payment terms with customers (e.g. through prompt payment discounts)
Greiner’s Model of Growth = this suggests and attempts to predict that there are six phases and five crises that
businesses may experience as they grow

Direction – crisis of leadership:

- Informal communication starts to fail
- Business is now too big for leaders to get involved in everything

Delegation – crisis of autonomy:

- Business now has functional management
- The founder/leader is still struggles to let go

Coordination – crisis of control

- More formal management structures in place – separate departments
- New layers of hierarchy are needed to keep control

Collaboration – crisis of red tape:

- A dangerous growth in organisational bureaucracy, rather than in fundamental activities
- Slowing decision-making, and the businesses misses external changes (e.g. in the economy or in social
trends)

Alliances – crisis of growth:

- Growth slows down due to the business running out of ideas
- Alliances are sought (including new business owners)

Evaluative points of Greiner's growth model:

- Growth is a difficult thing to achieve
- Growth poses many management and leadership challenges (crises) that firms have to overcome
- Leadership and organisational structure have to evolve to reflect the growth of a business
- Businesses that don’t adjust as they grow will experience lower growth than those that do

Disadvantages of Greiner's growth model:

- Like most models, it is simplistic
- Not every business will suffer crises as it grows as many adapt easily without enduring any obvious panics or
crises – this could be due to the type of business, the environment they operate in, and the style of
leadership they adopt
- The model doesn’t really take account of the pace of growth, particularly in an increasingly dynamic external
environment

The impact of growth or retrenchment on the functional areas of the business

Constraints on growth:
- Resistance to change by employees and unions
- The cost of implementation
- Availability of finance
 - The time period required
- The effect upon the brand image and marketing
- Types of organisational culture

Cost of implementing growth:

- Growth will incur all sorts of fixed, variable, and sunk costs. This can restrict a business from changing
because:
 Short term owners (shareholders) may not see the need for the change which undermines their
profit and dividends
 Fixed costs in terms of an increase in salaries and management systems
 Variable costs in terms of an increase in payments to reward performance
 Sunk costs in terms of reorganising employees and training

Availability of finance to implement change:

- Growth will always require finance, however it may be difficult to source additional funds because:
 Banks may be unwilling to lend to a business that needs to change as the risk may be deemed too
high
 The returns from the growth are difficult to quantify and hence justify finance

The time needed to implement growth:

- It is necessary for individuals to have time to adapt to the change
- High labour turnover may undermine successful implementation of growth
- Short term objectives must support the overall strategy rather than undermine it

Marketing implications of growth:

- Growth will affect how the good or service is perceived by the customer:
 Bad social media or press reviews may undermine the morale of the employees as the organisation
changes
 Marketing campaigns may need to be adapted to signal a change in the organisation of the business
and how it affects customers
 Attention must be paid to the quality of service and the goods to ensure that they meet the
expectations of the customer
 The change may cause an aggressive response from competitors

Implications of retrenchment for change management:

Assessing methods and types of growth
Types and direction of integration:

Backward Vertical Integration:

- This involves acquiring a business operating earlier in the supply chain (e.g. a retailer buys a wholesaler)
- Example = IKEA buying forests in Romania and Bulgaria in order to reduce unit costs and have a sufficient
supply of raw materials at the right price. This also eliminates suppliers as they have their own prices for the
materials now

Conglomerate Integration:
- This involves the combination of firms that are involved in unrelated business activities (e.g. investment
funds that fund in entrepreneurs)
- Example = when Dragons Den invests in entrepreneurs who come to pitch their ideas and products OR when
Walt Disney and American Broadcasting Company merged and the combined company brought together the
most profitable television network and its ESPN cable service with Disney's Hollywood film and television
studios, the Disney Channel, its theme parks and its well-known cartoon characters and the merchandise
sales they generate

Forward Vertical Integration:

- This involves acquiring a business further up in the supply chain (e.g. a vehicle manufacturer buys a car parts
distributer)
- Example = Bookers took over £40m worth of Budgens and Londis grocery stores. This would’ve caused
positive synergy to occur because neither grocery stores had sufficient market share and bookers has a large
market share in the wholesaled industry. Because of this, their profits/revenue would be much huger
combined

Horizontal Integration:
- Businesses in the same industry and which operate at the same stage of the production process are
combined
- Example = Marriott bought Starwood to become to largest and most successful hotel chain in order to
reduce competition and expand their hotels into other cities and areas. This would’ve caused positive
synergy to occur because their net profit would be much more than what it was before

Merger = this is a combination of two previously separate firms which is achieved by forming a completely new
business into which the two original firms are integrated.
- A merger can be seen as a decision made by two businesses that are broadly “equal” in terms of factors such
as size, scale of operations, customers etc.
- The enlarged, merged business, through the changes made by combining both together, can cut costs, grow
revenues and increase profits – which should benefit shareholders of both the original two businesses.
- What typically happens in a merger is that a new company is formed – and the shares in the new company
are distributed to the shareholders of the two original businesses in a suitable split.

Takeover (or Acquisition) = this involves one business acquiring control of another business
- Takeovers are the most common form of external growth, particularly by larger businesses.
Reasons for undertaking takeovers:
- Increase market share
- Acquire new skills
- Access economies of scale
- Secure better distribution
- Acquire intangible assets (brands, patents, trade marks)
- Spread risks by diversifying
- Overcome barriers to entry to target markets
- Defend itself against a takeover threat
- Enter new segments of an existing market
- Eliminate competition

Why takeovers are preferred over organic growth:

- Existing products are in the later stages of their life cycles, making it hard to grow organically
- The business (in particularly its management) lacks expertise or resources to develop organically
- Speed of growth is a high priority
- Competitors enjoy significant advantages that are hard to overcome other than acquiring them

Disadvantages of takeovers:
- Takeovers are the highest risk method of growth
- High cost involved – with the takeover price often proving too high
- Problems of valuation (see the price too high, above)
- Upset customers and suppliers, usually as a result of the disruption involved
- Problems of integration (change management), including resistance from employees
- Incompatibility of management styles, structures and culture
- Questionable motives

Why takeovers fail:

- Price paid for takeover was too high (over-estimate of synergies)
- Lack of decisive change management in the early stages
- The takeover was mishandled
- Cultural incompatibility between the two businesses
- Poor communication, particularly with management, employees and other stakeholders of the acquired
business
- Loss of key personnel and customers post acquisition
- Competitors take the opportunity to gain market share whilst the takeover target is being integrated

3.9.2 Assessing innovation

The pressures for innovation
Innovation = this is about putting a new idea or approach into action and is commonly described as ‘the
commercially successful exploitation of ideas’
- Invention is the formulation of new ideas for products and processes whereas innovation is the practical
application of new inventions into marketable products or services

Product Innovation = launching new or improved products (or services) in to the market
- Example = Lush – this is because they constantly introduce more bath products and different ranges to suit
the customer needs and trends/fashions

Advantages of product innovation:

- First mover advantage
- Higher prices and profitability
- Added value
- Opportunity to build customer loyalty due to an established brand name
- Enhanced reputation as an innovative company
- Public relations (e.g. news coverage)
- Increased market share
Process Innovation = finding better or more efficient ways of producing existing products, or delivering existing
services
- Example = Tesla as they invested in different technologies to boost their sales and ideas/manufacturing

Advantages of process innovation:

- Reduced costs
- Improved quality
- More responsive customer service
- Greater flexibility
- Higher profits

Business requirements for innovation:

- Challenge the status quo in a market
- Have a deep understanding of customer needs and wants
- Develop imaginative and novel solutions to how these needs might be met

What innovation includes:

- Improving or replacing business processes to increase efficiency (average unit costs) and productivity (output
per worker/machine), or to enable the firm to extend the range of quality of existing products/services
- Developing entirely new and improved products and services – often to meet rapidly changing customer or
consumer demands and needs
- Adding value to existing products, services, and markets to differentiate the business from its competitors
and increase the perceived value to the customers and markets

The value of innovation

Advantages of innovation:
- Improved productivity and reduced costs – a lot is process innovation is about reducing unit costs and this
could be achieved by improving the production capacity and/or flexibility of the business to enable it to
exploit economies of scale
- Better quality – by definition, better quality products or services are more likely to meet customer needs
assuming that they are effectively marketed, resulting in higher sales and profit
- Building a product range (diversification) – a firm with a single product or limited product range would
almost certainly benefit from innovation. A broader product range provides an opportunity for higher sales
and profits, and also reduced the risk for shareholders
- Environmentally friendly and meeting laws – innovation can enable firms to reduce its carbon emissions,
produce less waste, or comply with changing product legislation – changes in laws often force firms to
innovate when they might not otherwise do so
- Added value – effective innovation is a great way to establish a unique selling proposition (USP) for a product
– something which the customer is prepared to pay more for and which helps firms differentiate itself from
competitors
- Improved staff retention, motivation, and easier recruitment – potential goods quality recruits are often
drawn to a firm with a reputation for innovation and inspiring places of work

Disadvantages of innovation:
- High levels of competition – an innovation only confers a competitive advantage is competitors are not able
to replicate it in its own businesses – whilst patents provide some legal protection, the reality is that may
innovative products and processes are hard to protect
- Uncertain commercial returns – much research is speculative and there is no guarantee of future revenues
and profits – the longer the development timescale, the greater the risk that research is overtaken by
competitors too
- Small availability of finance – like other business activities, research and development has to compete for
scarce cash. Given the risks involved, research and development demands a high required rate of return
which means that firms have limited cash resources and the opportunity cost of inventing can be very high

The ways of becoming an innovative organiser

Process innovation theories:
 - Efficiency
- Kaizen
- Benchmarking
- Entrepreneurship v intrapreneurship

Efficiency = this includes how well a business is using its resources to produce
- High vs low level of output to produce output
- Efficiency can be measured by looking at cost per unit – the lower this is, the more efficient the business is
and the higher the profit margin

Factors that influence efficiency:

- How well employees are managed
- How good suppliers are
- Investment in machinery and technology
- The way in which products are produced – flow production may be more efficient and firms can cut back on
waste (lean production)
 Lean production involves techniques which are aimed to reduce waste (e.g. when production
exceeds demand and products have to be thrown away; wasted time; faulty products being re-
made; holding stock) in order to become more efficient and reduce costs
 Just in time production (JIT) occurs when firms produce products to order. Instead of producing as
much as they can and bulking up stock, firms only produce goods when they know they can sell the
items – similarly, components and suppliers are only bought in by a firm as and when they are
needed

Kaizen = continuous improvement involving constantly introducing small incremental changes to improve the quality
and efficiency throughout a business

What kaizen involves:

- Customer focus – greater attention paid for customer requirements and needs
- JIT and Kanban – efficient stock control methods help reduce costs and improve cash flow
- Flexible working practices and empowerment – helps increase efficiency, reduce costs, and improve
motivation
- Quality assurance – using ISO 9002 and other quality methods marks to create a brand image of quality
products
- Leadership and future thinking – leadership and the ability to communicate a clear vision is vital
- High quality – change charge premium prices for items that consumers see as high quality and hence
improve their profit margin
- Low cost – improves efficiency in terms of resources used to create a product
- Reductions in waste – often characterised as lean production – reducing waste, zero defects, and high
quality control measures at all stages
- Punctuality – in all aspects – delivery, supply, manufacture etc to reduce work in progress and the
warehouse costs

Benchmarking = the objective of this is to understand and evaluate the current position of a firm in relation to best
practice and to identify areas and means of performance improvement

What benchmarking includes:

- An understanding in detail of existing business processes
- Analyse the business process of competitors
- Compare own firms performance with that of others analysed
- Implement the steps necessary to close the performance gap

Types of benchmarking:
- Strategic
 Long term and so relatively inflexible
 Examines competences and product range
 Used for closing gaps in performance
 - Performance
 Specific processes and operations
 Form partnerships of best practice within the industry
 Uses process maps (flow diagrams)
 Used to gain short term benefits
- Functional
 For partnerships of best practice outside of the industry to find cross over technologies
 Can lead to innovation and dramatic improvements
- Internal
 Between units within a firm (e.g. different factories or locations)
 Access to data, cheaper, but less innovation
 Fewer barriers to adoption across the business
- External
 Follow the leading firm
 Comparability may be difficult if data lacking
 Used for introducing new ideas
- International
 Follow the leading firm from a different country
 Globalisation has led to global partnerships
 However there may be cultural/political issues l
 Leads to ‘international standards’

Entrepreneurship = activities done by an entrepreneur along with risks and rewards

Intrapreneurship = entrepreneurial activity done by managers and employees along with risks – rewards are invested
back into the business

How to protect innovation and intellectual property

Intellectual Property = this is aimed at protecting the property of an individual or business with had innovated
- It helps to stop people stealing and copying the names of a firms products or brands, inventions, designs of
products, and things that have been written, made, or produced

Automatic protection:
- Copyright writing and literary works (e.g. art, photography, films, TV, music, web content, and sound
recordings)
- Design right (e.g. the shape of a product)

Protection to be applied for:

- Trade marks – minimum 4 months (e.g. product names, logos, and jingles)
- Registered designs – minimum 1 month (e.g. appearance of a product such as colour, shape, packaging, and
patterns)
- Patents – minimum 5 years (e.g. inventions and products such as machines and parts, tools, and medicines)

Non-Disclosure Agreements = a legally binding document that can be used to stop those consulted from stealing the
idea
- It can be used with potential partners such as investors, manufacturers, and stockists
- It can also be used with advisors such as accountants, banks, insurance brokers and marketing agencies
- It is a relatively simple document that can be used as innovators must not assume that conversations are
automatically confidential

Patents = these protects invention and gives the inventor the rights to take legal action against anyone who makes,
uses, sells, or imports it without their permission
- They are expensive (£4,000 with professional help) and take a long time to go through (5 years) – it also has
to be renewed every year
- To apply for a patent, the product must adhere to certain guidelines and rules such as it being new,
innovative, and something that can be made or used
- Many things cannot be patented such as literacy, music, ways of doing business, a discovery, math,Arica,
methods, mobile apps, and methods of medical treatment
 - The process is long (there are 8 steps in total)

Copyrights = exclusive legal rights that protects the publication, production, or sale of the rights to a literacy,
dramatic, musical, or artistic work, or computer programme, or the use of a commercial print/label

Trademarks = this refers to distinctive designs, graphics, logos, symbols, words, of any combination of the above that
uniquely identifies a firm and/or its goods and services
- It guarantees the item’s genuineness, and gives its owner the legal rights to prevent the trademarks
unauthorised use
- It must be distinctive instead of descriptive, affixed to the item sold, and registered with the appropriate
authority to obtain legal ownership and protection rights

3.9.3 Assessing internationalisation

Reasons for targeting, operating in, and trading with international markets
Internationalisation = this is the act of designing a product that is can be readily consumed across multiple countries
- It fits under the market development sector of Ansoff’s matrix

Methods of internationalisation:
- Exporting directly to international customers – collect orders from customers overseas and ship the
goods/products directly to them (Example = e-commerce businesses especially)
- Selling via overseas agents or distributors – a contract is made with one or more intermediaries (Example =
Coca-Cola)
- Opening an operation overseas – involves physically setting up one or more business locations in the target
markets
- Joint venture or buying a business overseas – the firm acquires or invests in an existing business that
operates in the target market (Example = airlines)

Factors influencing the attractiveness of international markets

Influences on the attraction of international markets:
- Size and growth of the market (e.g. population)
 Does the size of the target market justify the investment and risk involved with selling
internationally?
 Which key market segments the business wants to target?
 How large are they and how fast are they growing?
- Economic growth and levels of disposable income
 Emerging economies have experienced faster rates of economic growth than developed economies
– this has created a growing "middle class" with rising disposable incomes that have fuelled demand
for the products and services of international and domestic businesses
- Ease of doing business/political environment
 How reliable are the legal systems in the target country?
 Can the intellectual property of the business be protected?
 How volatile is the political environment?
- Exchange rates
 Trading in international markets is very likely to result in greater exposure of a business to exchange
rate fluctuations
- Domestic competition
 If an international market is attractive, chances are that a business will have to compete effectively
against local or domestic competition
 What advantages do domestic competitors enjoy?
 Do they have control of, or better access to key distribution channels?
 How important is their more detailed understanding of customer needs and wants?
- Infrastructure
 This covers aspects such as the ease of transportation (into, out of and inside); strength and
reliability of data systems (e.g. broadband)
Reasons for producing more and sourcing more resources abroad
Reshoring = this is the reverse of offshoring – it involves a business returning production or operations to the host
country that had previously been moved to a different international location.

Reasons for reshoring:

- Greater certainty around delivery times (including shorter delivery times)
- Minimising risk of supply chain disruptions
- Reducing the complexity of the supply chain
- Making it easier to collaborate with home-based suppliers
- Getting greater certainty about the quality of inputs and components
- Recognising that the cost advantage of producing or sourcing overseas is not as significant as it used to be
(particularly in China where unit labour costs have risen significantly in recent years)

Offshoring = this involves the relocation of business activities from the home country to a different international
location – this is where the business is done! (Not who – this is outsourcing)
- It is the changed international location of where the business activity is performed that is key to
understanding offshoring
- It has traditionally been associated with the relocation of manufacturing activities from a domestic economy
overseas (e.g. from the US to China, or UK to Poland)
- However, offshoring is also increasingly common with business services (e.g. UK financial services using call
centres based in India)

Reasons for offshoring:

- To access lower manufacturing costs (particularly in emerging markets which enjoy the advantage of lower
labour costs)
- To access potentially better skilled & higher quality supply
- To make use of existing capacity overseas
- To take advantage of free trade areas and avoid protectionism
- To make it easier to supply target international markets (where it is important to be located in, or near to,
those markets)

Disadvantages of offshoring:
- Longer lead times for supply & risks of poorer quality
- Implications for CSR (harder to control aspects of operating long distances away from the home country)
- Additional management costs (time, travel)
- Impact of exchange rates (potentially significant)
- Communication: language & time zones

Influences on buying, selling, and producing abroad

Attraction of internationalisation to businesses:
- Stronger economic growth job emerging economies (BRICs and MINT)
- Market saturation and maturity (slow or declining sales) in domestic markets
- Easier to reach international customers using e-commerce
- Greater government support for businesses wishing to expand overseas

Managing international business including pressures for local responsiveness and pressures for cost reduction
The Bartlett and Ghoshal Model of International Strategy = thus indicates the strategic options for businesses
wanting to manage their international operations based on two pressures: local responsiveness & global integration

Force for local responsiveness (questions to consider):

- Do customers in each country expect the product to be adapted to meet local requirements?
- Do local (domestic competitors) have an advantage based on their ability to be more responsive?
- Example = McDonalds would have to change their menu depending on where they open up shop (usually to
do with religions)

Force for global integration (questions to consider):

- How important is standardisation of the product in order to operate efficiently?
 - Is consistent global branding required in order to achieve international success?
- Example = Mercedes have high pressure for global integration (produce identical products for different
markets and therefore benefit from economies of scale)

Global strategy:
- Low pressure for local responsiveness and high pressure for global integration
- Highly centralised
- Focus of efficiency (economies of scale)
- Little sharing of expertise locally
- Standardised product
- Example = CAT and Pfizer and Amazon

Transnational strategy:
- High pressure for local responsiveness and high pressure for global integration
- Complex to achieve
- Aim is to maximise local responsiveness but also gain benefits from global integration
- Wide sharing of expertise (such as technology, staffing, etc)
- Example = Starbucks and Unilever

International strategy:
- Low pressure for local responsiveness and low pressure for global integration
- Aims to achieve efficiency by focusing on domestic activities
- International operations are largely managed centrally
- Relatively little adaptation of product to local needs
- Example = McDonalds (franchises) and UPS

Multi-domestic strategy:
- High pressure for local responsiveness and low pressure for global integration
- Aims to maximise benefits of meeting local market needs through extensive customisation
- Decision-making decentralised
- Local businesses treated as separate businesses
- Strategies for each country
- Example = Nestle and MTV and Walmart (own Asda)

3.9.4 Assessing greater use of digital technology

The pressures to adopt digital technology
Digital technology:
- E-commerce & M-commerce
- Big data
- Data mining
- Enterprise resource planning

E-Commerce = buying and selling online when business transactions are conducted electronically on the internet
M-Commerce = business transactions are conducted electronically by mobile phone (this is a subset of e-commerce)

Steps to adopting e-commerce/m-commerce:

- Designing and posting a website – many sites such as WordPress and SquareSpace offer e-commerce
templates that help get stores up and running quickly
- Collecting payments from customers – owners need a way to collect credit card payments from consumers
online using ways through PayPal and Apple Pay
- Delivering products to the consumer – when selling physical goods, firms need to consider how to ship them
using companies such as DPD and DHL
- Gaining reviews from customers – social media sites such as Facebook and Twitter need monitoring to
ensure that positive comments are emphasised and complaints are quickly dealt with
- Example = Amazon is their biggest e-commerce site which has a focus on long term strategy and not their
profit – they want to sell the most

Concerns of e-commerce:
- Lack of handling the product by the consumer before purchase
- Growth in transport – higher pollution and more vehicles on the road
- Not adopted equally by all age segments
- Lacks the personal contact between the consumer and business
- The decline of high street shops leading to growing local unemployment
- Lack of local council business rates leading to less local public services
- Social problems of a lack of used shops

Big Data = this is the process of collecting and analysing large sets from traditional and digital sources to identify
trends and patterns that can be used in decision making
- Example = supermarkets use loyalty cards to look at trends and popular products and times for shopping
which improves their business performance because they can tailor offers and products to their customers
- These large data sets are both structured (e.g. sales transaction from an online store) and unstructured (e.g.
posts on social media)

How big data is generated:

- Retail e-commerce databases
- User-interactions with websites and mobile apps
- Usage of logistics, transportation systems, finance, and health care
- Social media data
- Location data (e.g. GPS generated)
- Internet of things (IoT) data generated (e.g. google search)
- New forms of scientific data

Data Mining = this is the process of analysing data from different perspectives and summarising it into useful
information, including discovery of previously unknown interesting patterns, unusual records, or dependencies
- Example = McDonalds identify trends of customers and promotes the foods that are most popular

Enterprise Resource Planning (ERP) = a software system that helps businesses integrate and manage their complex
financial, supply chains, manufacturing, operations, reporting, and human resource systems
- Although the introduction and management of ERP systems is both complex and costly, there are some
significant business benefits if ERP is implemented successfully
- Example = UPS has a system that means that customers can change where their parcel is being delivered
whilst it is already on route OR multi car dealerships would use ERP system whereby they wouldn’t hold all
of their stock but still offer the option of buying their product – stock control

The value of digital technology

Key uses of big data:
- Tracking and monitoring the performance, safety and reliability of operational equipment (e.g. data
generated by sensors)
 - Generating marketing insights into the needs and wants of customers, based on the transactions, feedback,
comments (e.g. from e-commerce analytics, social media posts) – it is revolutionising traditional market
research such as questionnaires and surveys
- Improved decision-making – for example analysing the real-time impact of pricing changes or other elements
of the marketing mix (the use of big data to drive dynamic pricing is an example of this)
- Better security of business systems – big data can be analysed to identify unusual activity, for example on
secure-access systems
- More efficient management of capacity – the increasing use of big data to inform decision-making about
capacity management (e.g. in transportation and logistics systems) helps firms to run more efficiently

Advantages of data mining:

- Identify previously unseen relationships between business data sets
- Better prediction of future trends and behaviours
- Extract commercial (e.g. performance insights) from big data sets
- Generate actionable strategies built on data insights (e.g. positioning and targeting for market segments)

How data mining supports marketing competitiveness:

- Sales forecasting – analysing when customers bought to predict when they will buy again
- Database marketing – examining customer purchasing patterns and looking at the demographics and
psychographics of customers to build predictive profiles (how customers respond)
- Market segmentation – a classic use of data mining, using data to break down a market into meaningful
segments like age, income, occupation, or gender
- E-commerce basket analysis – using mined data to predict future customer behaviour by past performance,
including purchases and preferences

Advantages of enterprise recourse planning:

- Financial management – better control over assets, cash flow, and accounting
- Supply chain and operations management – streamlined purchasing, manufacturing, inventory, and sales
order processing
- Customer relationship management – improved customer service, and opportunities to cross-sell
- Project management – complex projects are better managed and costs are lowered
- Human resource management – may help attract and retain good employees
- Business intelligence – improved management reporting, analysis, and business analytics
- International business – helps coordinate multi-location business management

Disadvantages of enterprise resource planning:

- Expense of implementation (high fixed cost)
- Resistance to change from the employees leading to low user adoption
- Poor training during implementation means that it is too complex for the staff to use
- Departments become possessive over the data (SILOS)
- Ongoing upgrading and management costs

3.10 Managing strategic change

3.10.1 Managing change
Causes of and pressures for change
Organisational change:
 - For organisations, the last decade has been fraught with restructuring, process enhancements, mergers,
acquisitions, and layoffs – all in hope of achieving revenue growth and increased profitability
- While the external environment will continue to play a role in an organisations ability to deliver goods and
services, the internal environment within the organisation will increasingly inhibit it from delivering products
required to meet the demands of the marketplace unless it is able to adapt quickly

Causes and types of change:

- Internal
- External
- Incremental
- Step
- Disruptive

Internal Causes of Change = this is change caused by decisions taken by the business itself
- It includes restructuring – this usually involves changes to the capital structure of the business to reduce the
amount of debt, as well as reductions in the scale and scope of the business' activities (e.g. closing down
business units)
- It also includes delayering – this involves removing one or more layers from the organisational hierarchy –
the aim of which is usually to reduce costs and improve decision-making and communication through a
flatter organisational structure
- New leadership is also included in this – the arrival of new leadership is often followed by a change in
business strategy and subsequent changes to the products and markets in which a business operates and
how it competes. An attempt to change the organisational culture is also frequently a feature of change
instigated by new leadership

External Causes of Change = these are linked to changes in the external environment facing all businesses or
businesses in specific markets and/or locations (link to the PESTLE analysis)
- Social trends/attitudes: for example the growing resistance by consumers to businesses using single-use
plastic in products and packaging
- Economic conditions: for example the economic uncertainty created by Brexit or the growth of
protectionism in developed economies
- Laws/regulations: for example changes to minimum pay requirements (National Living Wage), data
protection (GDPR) and restrictions on advertising & selling
- Technological advances: a significant source of external change, particularly through the creation of new
business models (e.g. streaming) to challenge existing, established business models

Incremental Change = these are the many small changes that businesses make day-to-day as management respond
to opportunities and threats
- This refers to efficiency and sustainability improvements in a company’s processes, operations, and supply
chains
- They usually involve relatively little, if any, resistance to the changes made
- These changes make day to day management more efficient
- Example = small and continuous changes to the quality of a product and the quality process it undertakes

Step Change = these are the more dramatic or radical changes which management make
- They are often triggered through the arrival of new senior leadership and/or when it is recognised that the
business is suffering from strategic drift
- Step changes are substantial – they often involve significant alteration in the business' activities and require
a well-organised change management process to enable them to be made successfully

Disruptive Change = this is a form of step change that arises from changes in the external environment
- Thus is business changed and challenged fundamentally
- It impacts the market as a whole, challenging the established “business model”
- Rapid improvements in technology have been a leading driver of disruptive change since technological
innovation provides new ways of delivering goods and services as well as reducing barriers to market entry
Lewin's Force Field Model = this is an important contribution to the theory of change management – the part of
strategic management that tries to ensure that a business responds to the environment in which it operates
- It provides an overview of the change problems that need to be tackled by a business, splitting factors into
forces for and against change
- Change is the result of dissatisfaction with present strategies (performance, failure to meet objectives etc)
- Change doesn't happen by itself – it is essential to develop a vision for a better alternative
- Management have to develop strategies to implement change
- There will be resistance to change – it is inevitable, but not impossible to overcome

- In Lewin's model there are forces driving change and forces restraining it
- Where there is equilibrium between the two sets of forces there will be no change
- In order for change to occur the driving force must exceed the restraining force

What Lewin’s analysis can be used for:

- Investigate the balance of power involved in an issue
- Identify the key stakeholders on the issue
- Identify opponents and allies
- Identify how to influence the target groups

Internal forces for change (from within the business/organisation):

- A general sense that the business could "do better"
- Desire to increase profitability and other performance measures
- The need to reorganise to increase efficiency and competitiveness
- Natural ageing and decline in a business (e.g. machinery, products)
- Conflict between departments
- The need for greater flexibility in organisational structures
- Concerns about ineffective communication, de-motivation or poor business relationships

External forces for change (outside the control of the business/organisation)

- Increased demands for higher quality and levels of customer service
- Uncertain economic conditions
- Greater competition
- Higher cost of inputs
- Legislation & taxes
- Political interests
- Ethics & social values
- Technological change
- Globalisation
- Scarcity of natural resources
- Changing nature and composition of the workforce

Restraining forces (making change harder):

- Despite the potential positive outcomes, change is nearly always resisted
- A degree of resistance is normal since change is disruptive and stressful
Reasons why change is resisted:
- Parochial self interest – Individuals are concerned with the implications for themselves; their view is often
biased by their perception of a particular situation
- Habit – this provides both comfort and security, and habits are often well-established and difficult to change
- Misunderstanding of the need for or purpose of change – this includes communication problems and
inadequate information
- Low tolerance of change – this can relate the a sense of insecurity
- Different assessment of the situation – this involves disagreements over the need for change and over the
advantages and disadvantages
- Economic implications – employees are likely to resist change which is perceived as affecting their pay or
other rewards; and established patterns of working and reward create a vested interest in maintaining the
status quo
- Fear of the unknown – proposed changes which confront people tend to generate fear and anxiety; and the
introduction new technology or working practices creates uncertainty

Overall organisational barriers to change:

- Structural inertia
- Existing power structures
- Resistance from work groups
- Failure of previous change initiatives

A failure by management responsible for the change to:

- Explain the need for change
- Provide information
- Consult, negotiate and offer support and training
- Involve people in the process
- Build trust and sense of security
- Build employee relations

Reasons commonly associated with failed change programmes are:

- Employees do not understand the purpose or even the need for change
- Lack of planning and preparation
- Poor communication
- Employees lack the necessary skills and/or there is insufficient training and development offered
- Lack of necessary resources
- Inadequate/inappropriate rewards

Types of organisational change:

- Strategic
- Structural
- Process orientated
- People centred

Strategic Change = this is the management needed to adjust the firms strategy to achieve the goals of the company,
or even to change the mission statement of the organisation in response to demands of the external environment
- Changing the mission statement of a firm clearly shows that it is strategic change and not anything else
- Adjusting a firm’s strategy may involve changing its fundamental approach to doing business in terms of:
 The markets it will target
 The kind of products it will sell
 How they will be sold, and it’s overall strategic orientation
 The level of global activity
 It’s various partnerships and other joint business arrangements
- Example = Nokia started off by making wood pulp and paper based products such as toilet paper in 1865
until 1967 when they diversified into forestry, cable rubber, and electronics – they made computers and
started to enter the phone industry in 1985 and became the market leader – from 2008-14, they went into
serious decline following the collapse of the Finnish economy
Structural Change = organisations often find it necessary to redesign the structure of the company due to influences
from the external environment (relating to the PESTLE analysis)
- Almost all change on how an organisation is managed falls under the category of structural change
- A structural change may be as simple as implementing a no smoking policy, or as involved as restructuring
the company to meet the customer needs more effectively

What structural change involves:

- Hierarchy of authority
- Goals
- Structural characteristics – (e.g. labour to capital)
- Administrative procedures
- Management systems

Process-Orientated Change = organisations may need to reengineer processes to achieve optimum workflow and
productivity
- This is often related to an organisations production process
- Example = the adoption of robotics in manufacturing plant OR of laser scanning checkout systems at
supermarkets

People-Centred Change = this type of change alters the attitudes, behaviours, skills, or performance of employees in
the company
- Changing people-centred processes involves communicating, motivating, leading, and interacting within
groups
- This focus may entail changing how problems are solved, the way employees learn new skills, and even the
very nature of how employees perceive themselves, their jobs, and the organisation

The value of change

Advantages of change:
- Sustain a competitive advantage
- Align its business strategy with changing customer needs and wants
- Take advantage of developing technologies
- Gain from improved productivity and a better work environment
- Develop a more appropriate and effective organisational structure which will result in better communication
and decision-making
- Build a reputation for embracing change rather than fearing it

ADKAR = this is an acronym that represents the five outcomes an individual must achieve for organisational change
(Awareness, Desire, Knowledge, Ability, Reinforcement)
- This focuses on driving individual change which achieves positive results for the organisation
- Easy to use framework for planning change
- Fits with change management models and theories

The elements of ADKAR:

- Awareness – this is of the business reasons for change and is the goal/outcome of early communications
related to organisational change
- Desire – this is in terms of engaging and participating in the change and is the goal/outcome of sponsorship
and resistance management
- Knowledge – this is about how to change and is the goal/outcome of training and coaching
- Ability – this relates to realising or implementing the change at the required performance level and is the
goal/outcome of additional coaching, practice, and time
- Reinforcement – this is to ensure change stays and is the goal/outcome of a potion measurement, corrective
action, and recognition of successful change
The people and business side of change:

The value of a flexible organisation

Flexible Organisation = this is one that is able to adapt and respond relatively quickly to changes in its external
environment in order to gain advantage and sustain its competitive position
- Firms need to be flexible in order to cope with internal and external pressures

Characteristics of a flexible organisation:

- Encouragement and adoption of methods of flexible working
- Flatter rather than tall hierarchies in the organisational structure
- An organisational culture that embraces change – i.e. see change as an opportunity rather than something to
be resisted
- Decision-making based on strong communication; likely to be decentralised, with widespread use of
employment empowerment

Methods of being a more flexible organisation:

- Restructuring
- Delayering
- Flexible employment contracts
- Organic vs mechanistic structures
- Knowledge and information management

Restructuring = this is the corporate management term for the act of reorganising the legal, ownership, operational,
of other structures of a company for the purpose of making it more profitable of better organised for its present
needs

Delayering = this involves the removal of one or more layers of hierarchy from the management structure of an
organisation

Advantages of delayering:
- It offers opportunities for better delegation, empowerment, and motivation as the number of managers is
reduced and more authority passed down the hierarchy
- It can improve communication within the business as messages have to pass through fewer levels of
hierarchy
- It can remove departmental rivalry if department heads are removed and the workforce is organised more in
teams
- It can reduce costs as fewer (expensive) managers are required
- Innovation can be encouraged further
- It brings managers into closer contact with the business’ customers – which should (in theory) result in
better customer service
Disadvantages of delayering:
- Not all organisations are suited to flatter organisational structures – mass production industries with low
skilled employees may not adapt easily
- It can have a negative impact on motivation due to job losses, especially if it’s just an excuse for
redundancies
- A period of disruption may occur as people take on new responsibilities and fulfil new roles
- Those managers remaining will have a wider span of control which, if it is too wide, can damage
communication within the business
- There is the danger of increasing the workload of the remaining managers beyond that which is reasonable
- It may also create skill shortages within the business – firms may lose managers and staff with valuable
experience

Flexible Employment Contracts = these give employees the flexibility to only pay staff when they need to them
(essentially a 0 hour contract)

Organic vs Mechanistic Structures = this is a type of structure that a flexible organisation with adopt
- Example = Google and Innocent Smoothes adopt an organic structure where the workforce is relaxed and
informal – they also encourage employees to have fun in order to maintain their motivation and work ethic
- Example = universities, schools, and the NHS adopt a mechanistic structure as they rarely have to change
and have long, and strict procedures which all employees and students have to follow

Organic structure characteristics:

- Informality
- Flexible and fluid (easy to change)
- Favours informal verbal communication
- Associated with decentralised decision making and employee empowerment
- Find change easer to handle

Mechanistic structure characteristics:

- More formal and bureaucratic
- Associated with centralised decision making and supervision
- Reliance on formal communication methods
- Favours standardised policies and procedures
- Little perceived need for change
- Greater resistance to change when implemented

The value of managing information and knowledge

Knowledge Management (KM) = this is the process of creating, sharing, using, and managing the knowledge and
information of an organisation
- This refers to a multidisciplinary approach to achieving organisational objectives by making the best use of
knowledge
- It is an enabler of flexible organisations
- Example = car manufacturers such as Ford apply knowledge and information management to product
development processes and to maintain quality standards

Barriers to change

How to overcome barriers to change

3.10.2 Managing organisational culture
The importance on organisational culture
Handy’s Model of Organisational Structure = a leading authority on organisational culture, defined four different
kinds of culture: power, role, task and person

Power culture:
- In an organisation with a power culture, power is held by just a few individuals whose influence spreads
throughout the organisation
- There are few rules and regulations in a power culture. What those with power decide is what happens
- Employees are generally judged by what they achieve rather than how they do things or how they act
- A consequence of this can be quick decision-making, even if those decisions aren't in the best long-term
interests of the organisation
- A power culture is usually a strong culture, though it can swiftly turn toxic

Role culture:
- Organisations with a role culture are based on rules
- They are highly controlled, with everyone in the organisation knowing what their roles and responsibilities
are
- Power in a role culture is determined by a person's position (role) in the organisational structure.
- Role cultures are built on detailed organisational structures which are typically tall (not flat) with a long chain
of command
- They can be slow to change as they lack creativity and empowerment
- A consequence is that decision-making in role cultures can often be painfully-slow and the organisation is
less likely to take risks
- In short, organisations with role cultures tend to be very bureaucratic
Task culture:
- Task culture forms when teams in an organisation are formed to address specific problems or progress
projects
- The task is the important thing, so power within the team will often shift depending on the mix of the team
members and the status of the problem or project
- It can be a constraint on growth as it created sub-cultures that can restrict overall changes
- Whether the task culture proves effective will largely be determined by the team dynamic. With the right
mix of skills, personalities and leadership, working in teams can be incredibly productive and creative

Person culture:
- In organisations with person cultures, individuals very much see themselves as unique and superior to the
organisation
- The organisation simply exists in order for people to work
- It is difficult to grow the organisation and individuals will resist any change/threat that undermines their
position
- An organisation with a person culture is really just a collection of individuals who happen to be working for
the same organisation

The influences on organisational culture

The reasons for and problems of changing organisational culture

3.10.3 Managing strategic implementation

How to implement strategy effectively
The value of leadership in strategic implementation
The value of communications in strategic implementation
The importance of organisational structure in strategic implementation
The value of network analysis in strategic implementation
3.10.4 Problems with strategy and why strategies fail
Difficulties of strategic decision making and implementing strategy
Planning vs emergent strategy
Reasons for strategic drift
The possible effect of the divorce between ownership and control
Evaluating strategic performance
The value of strategic planning
The value of contingency planning