Unit 1: Business and its environment

Chapter 06 : External influences on

business activity

Political and legal influences

A range of political decisions can help to determine the business environment.

For example, many countries operate minimum wages which can result in

businesses paying increased costs for labour. Additionally, businesses face a

variety of laws which constrain many of their activities including the emission

Privatisation

Privatization is the process of transferring an enterprise or industry from

the public sector to the private sector. Privatization may involve either sale of

government-held assets or removal of restrictions preventing private

individuals and businesses from participating in a particular industry.

Forms of Privatization

 The sale of nationalized industries completely

 The sale of part of the nationalize industry (partial privatization)
 De-regulations: It involves lifting restrictions and lowering down barriers
to entry in a particular market.
 Contracting out
 Sale of previously government owned land and property

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Arguments for Privatisation

1. Financial Resources

The main advantage of privatization is to generate financial resources for the

government in order to generate resources disinvestment of public sector

enterprises.

2. Optimum Utilisation of Resources

It has been observed that the public sector has failed in the optimal use of

national resources. The private sector may success in the optimum use of

resources by maintaining efficiency.

3. Fostering Competition

Most of the public Enterprises enjoy the status of monopoly. It results in

inefficiency and losses. Privatization creates a situation of competition for

public Enterprises and they are forced to improve their efficiency.

4. Reduce Fiscal Burden

Privatization reduces the fiscal burden of the state by relieving it of the losses

of the public enterprise and reducing the size of the bureaucracy.

5. Economic Democracy

Privatization helps to control government Monopoly. It helps to attract more

resources from the private sector. It emerges economic democracy by private

participation in Economics sphere.

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6. Better Industrial Relations

Privatization may increase the number of workers and the common man who

are shareholders. This could make the Enterprises subject to more public

vigilance.

7. Reduction in Political Interferences

The process of privatization reduces political interferences in the public sector

enterprises by giving more representation to the private sector in the

management of Public Enterprises.

Arguments against Privatisation

1. Problem of Price

The government usually want to sell the least profitable Enterprises, those that

the private sector is not willing to buy at a price acceptable to the

government.

2. Opposition from Employees

Disinvestment tends to arise political opposition from employees who may

lose their jobs, from politicians who fear short-term unemployment

consequence of liquidation of cost reduction by private owners, from

bureaucrats who stand to lose patronage and from those sections of the

public who fear that national assets are being concerned by foreigners, the

rich or a particular ethnic group.

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3. Problem of Finance

In the developing countries under the developed capital market sometimes

makes it difficult for the government to float shares and for individual buyers

to finance the large purchase.

4. Improper Working

The main disadvantage of the private sector is that it has fallen much short of

what this sector is capable of or what it has achieved in some other countries.

The private sector is not interested in cost reduction and quality production.

5. Independence on Government

There has been an excessive Regulation and control of the private sector by

the government. This has prevented and competition from becoming a

generalized phenomenon of the economy.

6. High-Cost Economy

Another problem with the private sector is that its cost, in general, are large

and the price of products are unduly high.

7. Widespread Sickness

The private sector Industries such as Textiles, engineering, Chemicals, iron, and

steel and people are suffering from the problems of industrial sickness.

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Nationalization

Nationalization refers to the action of a government taking control of a

company or industry, which generally occurs without compensation for the

loss of the net worth of seized assets and potential income.

Arguments for nationalization

 The government will have control of major industries.

 Integrated industrial policy (e.g. for water supply) should now be
possible.
 It prevents private companies operating as monopolies and exploiting
consumers.
 Economies of scale can be achieved by merging all private businesses
in an industry into one nationalised corporation.

Arguments against nationalization

 There is less profit motive, so less incentive to operate the industry

efficiently, and the government may provide subsidies to lossmaking
nationalised industries.
 Government may intervene too much in business decision-making for
political reasons.
 The cost to the government of buying private companies could be very
high.
 It removes the ability of the industry to raise finance from private sources
(e.g. through the stock exchange).

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PROTECTION OF WORKERS

DISMISSAL

 Occurs when an individual is fired from a job due to indiscipline or

insubordination
 An employee is dismissed totally from the job if the employer feels that

 However the reason for dismissal should be fair

 When the employee is dismissed due to his/her own fault then no
financial benefit is given

REASONS FOR DISMISSAL

o In ability to do the job

o Continuous negative attitude towards work
o
o Bullying of other employees

UNFAIR DISMISSAL

 Occurs when a female member of staff is dismissed for falling pregnant

 Occurs when a worker is dismissed on a discriminatory reason e.g race,
gender, religion or political affiliation
 Employee being fired for being a member of a certain trade union
 When no warnings were given before hand

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UNFAIR DISMISSAL AND THE LAW

o If a worker is unfairly dismissed, he/she can report to the Employment

Tribunal, Labour Court or Trade Union etc
o The business can be asked to give the person his/her old job and to pay
some financial damages to the victim

REDUNDANCY

 Occurs when the employer has to lay off employees in-order to save
costs
 When a job is no longer required, thus the person doing that job
becomes unnecessary through no fault from his/her side
 Employees made redundant will be given compensation for the loss of
income
 When firms are retrenching workers, t -in-First-
out (LIFO) method

REASONS FOR REDUCING SIZE OF THE WORKFORCE

o To save money by employing less workers

o When the product made by employees is no longer required i.e decrease
in demand for the product
o When the business is now using machines (automation)
o In the mining sector when minerals are exhausted (finished)

UNFAIR DISCRIMINATION

o The practice of unfairly treating a person or group of people differently

from other people
o In the work place it occur when workers are discriminated on the basis
of gender, race, political orientation, religion, culture, language etc

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UNFAIR DISCRIMINATION AND THE LAW

a) Gender Discrimination Act- people of different genders must have equal

opportunities
b) Race Relations Act-people of all races and religions must have equal
opportunities
c) Disability Discrimination Act-it must be made suitable for disabled
people to work in businesses
d) Equal Opportunities Policy-that is what everything is all about

HEALTH AND SAFETY AT WORK

 Laws protect workers from dangerous machinery

 The business must provide safety equipment and clothing eg overalls,
safety shoes, helmet, gloves etc
 The business should ensure that there is adequate ventilation (fresh air
to the room) and lighting
 Should provide hygienic conditions and washing facilities
 Provide breaks in the work timetable

WAGE PROTECTION

 The employee must be aware of how frequently wages are paid

 The employee must be aware of what deductions will be made from his
or her wage e.g income tax, pension
 Must be aware of the basic salary
 The business has got the responsibility to the employees fair wages
 The government usually set a minimum wage to protect workers from
unscrupulous employers.

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N.B A minimum wage is the lowest remuneration that employers may legally
pay to workers. Equivalently, it is the price floor below which workers may not

sell their labour services

ADVANTAGES OF A MINIMUM WAGE

 Prevents strong employers from exploiting unskilled workers who could

not easily find work
 Encourages employers to train unskilled employees to increase
efficiency
 Encourage more people to look for jobs (it reduces voluntary
unemployment)
 Low paid workers can now spend more . i.e improvement in their
standard of living

DISADVANTAGES OF A MINIMUM WAGE

 Increases costs and prices of finished goods

 Employers who cannot afford these wages might make employees
jobless
 Higher paid workers will demand higher salaries so that the previous
salary gap is maintained.

Consumer Protection legislations

Most of the countries have consumer protection laws aimed at making sure

that businesses act fairly towards their consumers: A few examples are

Weight and Measures Act: goods sold should not be underweight. Standard

weighting equipment should be used to measure goods.

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Trade Description Act: deliberately giving misleading impression about the

product is illegal.

Consumer Credit Act: According to this act consumers should be given a

copy of the credit agreement and should be aware of the interest rates, length

of loan while taking a loan.

Sale of Goods Act: It is illegal to sell products with serious flaws or problems

and goods sold should conform to the description provided.

The law and business competition

Restrictive practices done by firms

 Refusal to supply a retailer if they do not agree to charge the prices

determined by the manufacturer
 Full-line-forcing- is when a major producer forces a retailer to stock the
whole range of products from the manufacturer
 Market sharing agreements and price fixing
 Predatory pricing-when a firm tries to block new competitors by
charging very low prices for certain goods
Government attempt to encourage and promote competition between

businesses by passing laws that:

 Investigate and control monopolies through anti-merger policies

 Limit or outlaw uncompetitive practices between firms
 control the entry of imports
 promote inventions through enacting patent laws and copyrights

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Benefits of free and fair competition

 Wider choice of goods and services than when just one business
dominates a market
 Lower prices
 Quality goods

Social Influences

Corporate social responsibility

Corporate social responsibility is a business philosophy that emphasises that

firms should behave as good citizens. They should not merely operate within

the law but should consider the effects of their activities on society as a whole.

Thus, a socially responsible business attempts to fulfil the duties that it has

towards its employees, customers and other interested parties. Collectively,

these indi

Meeting social responsibilities has many implications for

businesses:

 taking into account the impact of their activities on the local community
protecting employment and avoiding noise pollution, for instance
 producing in a way that avoids pollution or the reckless use of finite
resources
 treating employees fairly and not simply meeting the demands of
employment legislation
 considering the likely sources of supplies (and whether they are
sustainable) and the ways in which suppliers meet their social

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 responsibilities.

The impact of corporate social responsibility

˃ Responsibilities to consumers The consumer has become a force to be

reckoned with over recent decades and this has been reflected in the
development of consumerism. Increasingly, consumers have been
better informed about products and services and prepared to complain
when businesses let them down. The rise of consumerism has meant
that businesses have been required to behave more responsibly by
looking after the interests of the consumer. Offering high-quality
customer service, supplying high-quality products that are well-
designed and durable at fair and reasonable prices should create
satisfaction and, quite possibly, generate repeat business.
˃ Responsibilities to employees Businesses have a variety of
responsibilities to their employees that are not a legal requirement. For
example, firms should provide their employees with training to develop
their skills as fully as possible and make sure that the rights of employees
in developing countries (where employment legislation may not exist)
are protected fully. This may mean paying higher wages and incurring
additional employment costs.
˃ Responsibilities to the local community Firms can benefit from the
goodwill of the local community. They can encourage this by meeting
their responsibilities to this particular stakeholder group. This may entail
providing secure employment, using local suppliers whenever possible
and ensuring that the business
not damage the local environment.
˃ Responsibilities to suppliers Businesses can promote good relations with
suppliers by paying promptly, placing regular orders and offering long-
term contracts for supply. These are not legal requirements and might

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 result in higher prices for materials and components but may also assist
suppliers to meet their own responsibilities for example, in the
maintenance of employment.

Issues associated with corporate social

responsibility

˃ Engaging in sustainable production: Many manufacturers have

considerable potential to cause damage to the environment. Using
sustainable production processes (sometimes at considerable cost)
can reduce or eliminate many forms of pollution. For many businesses,
the impact of their sources of supply can be considerable. Using
sustainable sources for resources means that future generations will

use any materials that are unsustainable or any components that have
been tested on animals reflects a sense of responsibility to many
relatively poor communities in developing countries and to animals.
˃ Putting employees before profits Maintaining employment, even when
the level of sales is not sufficient to justify this, is an important means of
fulfilling corporate social responsibilities, as is the continuation of
unprofitable factories to avoid creating high levels of localised
unemployment. These types of policies are only really possible in the
short term, unless the business in question is earning handsome profits
elsewhere.
˃ Supporting local communities: This is an important way of fulfilling
social responsibilities which can provide the public with a clear
ern businesses. The US Bankcorp is
one of the largest banks in the USA and provides banking, investment,
mortgage and payment services to millions of individuals and

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 communities in which it trades.
˃ Social auditing:
activities on society as a whole. It is not simply a measure of financial
performance. Many successful businesses recognise that they will only
prosper in the long term if they satisfy the needs of all their stakeholders

largest companies engaged in some form of social auditing. High-profile

examples include Bosch, Walt Disney, BMW, IKEA and Lenovo. Social
audits normally have several elements. Businesses start the process by
designing and implementing policies, setting out how they will manage
the impact of their businesses on society as a whole.

This may include issues such as:

− using sustainable sources of raw materials

− ensuring that suppliers trade ethically, avoiding, for example, the use of
child labour
− operating a thorough health and safety policy above legal requirements,
thereby protecting the well-being of employees
− engaging in a continuous process of environmental management,
monitoring the effects of production on the natural environment
− trading ethically and attempting to take account of the moral dimension
in decision-making.
Social audits can be a valuable exercise for firms to conduct. They may
identify antisocial (or potentially antisocial) behaviour before problems arise.

This helps to promote the corporate image of the business as a caring and

responsible organisation.

However, conducting an audit of this kind is not a guarantee that a firm is

socially responsible. Managers must ensure that social policies are carried out

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effectively at all levels within the organisation and that employees are

committed to them. Sufficient resources must be devoted to ensuring that the

business remains socially responsible, and problems identified in social audits

should be resolved speedily. The danger of a less active approach is that

social audits publicise weaknesses and firms are seen not to respond, with

damaging consequences for their corporate image.

We consider three examples of ways in which businesses might

behave that are not considered socially responsible.

1. Paying incentives for the award of contracts

Some businesses have been accused of paying bribes to other organisations

to win contracts to supply products. This is unethical and means that markets

do not operate efficiently. Without the payment of bribes, it would be expected

that the supplier offering the best value for money would be awarded a

contract. In a fair competition, businesses would consider the cost and the

quality of the product to make a decision on which supplier to use. Payments

by suppliers to win contracts means that this no longer applies. Such actions

can result in companies keeping inaccurate records of their financial affairs,

governments receiving lower tax receipts and consumers buying products

which are not the best that might be available to them under truly free

competition. Unfortunately, there have been a number of examples of large

businesses engaging in paying bribes to win contracts.

2. Accounting practices

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happened and give an accurate picture of the busines

has not always been the case, and businesses have engaged in a range of

accounting practices to present their financial performance in a more

favourable light. Some are illegal, while others are not illegal but are not

ethical.

illegal. In 2001, the managers at Enron, an American commodities and energy

company, hid huge debts that the company owed. When this was revealed,

the company collapsed. Shareholders and investors lost over $74 billion and

thousands of employees lost their jobs. In 2008, Lehman Brothers (a bank) also

hid the extent of its debts, prompting the business to collapse when this

became public.

Other accounting practices may be legal and are often called window

dressing as businesses attempt to make their financial performance look as

positive as possible. These include borrowing short-term at a vital point to

(such as brands) at what might be considered excessive levels to increase the

earlier trading period to increase profitability during that period.

3. Presenting the business or its products inaccurately

It is natural that a business will present itself and its products in the best way

possible. After all, it wants to achieve the highest levels of sales possible.

Businesses may use terms in their advertising which may not be entirely clear.

For example, following concerns about the impact of plastic on the global

environment, many businesses claim to sell products with packaging that is

biodegradable. However, this can be meaningless as most materials do

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biodegrade over time, although some plastics can take hundreds of years to

do so.

A number of stakeholder groups can be affected by these actions. For

buying. People throughout the USA and other countries could also be subject

to higher levels of air pollution as a consequence as well.

Why businesses need to consider the needs of the

community

It is easy to argue that by meeting the needs of the communities in which they

operate, businesses are likely to reduce profitability. Providing workers with

ongoing training, investing in facilities for the local community, trading with

suppliers who do not use cheap child labour and only engaging in non-

polluting production techniques to protect communities will all increase costs.

The outcome for the business will be lower profits and reduced levels of

competitiveness. However, this is a relatively simple view and there are more

subtle arguments in favour of businesses fulfilling their obligations to the

community.

» To project a positive public image Some businesses have a high profile with

regard to issues of social responsibility. For example, many people see oil

companies such as Shell and ExxonMobil as having enormous potential to

pollute. The directors of these companies have recognised this and regard

socially responsible behaviour as an important competitive weapon.

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Pressure Groups

Businesses are also subject to the attentions of pressure groups pursuing a

particular interest. For example, Greenpeace campaigns to protect the

environment and Amnesty International seeks to protect human rights. Both

pressure groups operate globally, and the actions of pressure groups such as

these can highlight any behaviour by businesses which harms the

communities in which they operate.

Pressure groups can generate adverse publicity with the potential to damage

sales. As companies become larger, they often operate globally and

managing these huge enterprises becomes more difficult.

Many multinational companies operate global supply chains in which it is very

difficult to monitor the activities of all suppliers. Pressure groups will publicise

any actions by suppliers which are harmful, such as the use of unsafe

factories, and the impact can be quite damaging for any businesses linked to

these suppliers.

Pressure groups want changes to be made in three important areas:

 businesses to change policies so that, for example, less damage is

caused to the environment
 consumers to change their purchasing habits, so that businesses which
adopt appropriate policies see an increase in sales, but those that
continue to pollute or use unsuitable work practices see sales fall
 governments to change their policies and to pass laws supporting the
aims of the group.
Pressure groups try to achieve these goals in a number of ways:

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Publicity through media coverage:

Effective public relations are vital to successful pressure-group campaigns.

Frequent press releases giving details of undesirable company activity and

coverage of direct-action events, such as meetings, demonstrations and

consumer boycotts, help to keep the campaign in the public eye.

Influencing consumer behaviour:

If the pressure group is so successful that consumers stop buying a

comp

policy becomes much stronger. The successful consumer boycott of Shell

petrol stations following a decision to dump an old oil platform in the sea led

to a change of strategy. Shell is n

Lobbying of government:

This means putting the arguments of the pressure group to government

members and ministers because they have the power to change the law. If

the popularity of the government is damaged by a pressure-group campaign

that demands government action, then the legal changes asked for stand a

greater chance of being introduced.

>>To reduce costs of production Sometimes, behaving in a socially responsible

manner by considering the needs of the community may reduce production

costs.

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Treating employees with respect, providing good training and paying above

the going rate may improve motivation and performance and reduce labour

turnover.

For businesses where labour represents a high proportion of total costs

(banking and insurance, for example), this could represent an important

saving.

business to attract the most talented employees, which can assist in

improving levels of creativity and productivity.

>> To create product differentiation In markets where little product

differentiation occurs, adopting a position where the business is seen to care

for the community may improve sales and profits. This can be important in

making a business stand out from its rivals.

It can help to maintain customer loyalty and to attract new customers.

It can also enable a business to charge higher prices than some competitors

who may not possess the same public image.

Demographic changes

Demographic change covers any change in the population, including average

(or median) age, life expectancy, family structures and migration between

countries. Demographic change can be analysed at global, national or local

levels.

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Local level: examples include an increase in the local population due to a
large settlement of foreign refugees or the building of large new housing

estates.

National level: examples include an increase or a decline in the national

birth rate and an ageing national population.

Global level:
population from almost 8 billion in 2020 to 11 billion by 2100. The world

population has doubled since 1970.

Recent global social and demographic changes include:

 Businesses operate within society. It is of utmost importance that the

manager is aware of the characteristics of the social element of the
environment. The size and age distribution of the population, its standard
of living, facilities for training and education, availability of housing and
health care all affect business operations.
 A growing population is beneficial to firms in increasing the size of the
potential market.
 Trends in the birth rate can affect business especially those in the health
sector and early childhood education.
 Age composition of the population can assist businesses in niche
marketing, that is, concentrating on a particular age group of the market.
 Lifestyles, values and benefits, and religious backgrounds are significant
to businesses because of their impact on labour and the purchasing
behaviour of people in the society.
 Increasing affluence has led to a more health-conscious society. This
has led manufacturers of foods to face the challenge of producing more
nutrition health foods.

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  The population is also affected by migration. The negative impact of this
has been brain drain as professionals like doctors; nurses etc are leaving
the country for greener pastures in neighbouring countries and
overseas.
 The changing role of women, who increasingly seek employment and fill
posts of responsibility in industry.
 Better provision of education facilities and increasing literacy, leading to
more skilled and adaptable workforces.
 Rising divorce rates, creating increasing numbers of single-person
households
 Job insecurity, often caused by globalisation, forcing more employees to
accept temporary and parttime employment, although some workers
prefer this option.

Impact on business of social and demographic change

An ageing population

This means that the average age of the population is rising. It is often

associated with:

 a larger proportion of the population over the age of retirement

 a smaller proportion of the population below 25 years of age
 a larger number of dependants on social benefits, putting a higher tax
burden on the working population.
These changes often result from lower birth rates, more women in work

and longer life expectancy. The impact on business of these changes is

most apparent in two ways:

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 atterns of demand.

Older consumers demand different types of products from those bought by

younger consumers. A construction company might, for example, switch from

building large apartments for families to smaller units with special facilities for

the elderly.

There may be reduced numbers of young employees available. It may be

necessary for workforce planning to include provision for employing older

workers or for keeping existing workers longer than usual.

Younger employees may be more adaptable and easier to train in new

technologies.

Older workers are often said to show more loyalty to a business and will have

years of experience that could improve customer service.

Patterns of employment

The main features of changing employment patterns in many countries are:

 Labour is being replaced by capital equipment such as automated

machines, particularly in the secondary sector of the economy. Output
and efficiency can rise due to increasing productivity, yet total
employment often falls.
 Labour is transferring from old established industries, such as steel, to
new hi-tech industries, such as computer-games design.
 The number of women in employment and in a wider range of
occupations is increasing.
 Part-time employment is increasing.

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  Learner employment on a part-time basis is increasing. Some industries
are substantially staffed by learners and part-
of the other fast-food chains and many supermarkets employ many
such workers.
 Temporary and flexible employment contracts are increasing. These can
be imposed by employers on workers to reduce the fixed costs of full-
time jobs and to allow for flexibility when faced with seasonal demand
or uncertainties caused by increasing globalisation.
 Flexible work patterns are more common. Working from home or flexi-
hours arrangements can benefit both employer and employee.
 An ageing population increases the dependency ratio. In Germany, the
decision to raise the retirement age to 67 for receiving the state pension
increases the working population and reduces the dependency ratio.
 Women are tending to stay in full-time employment for longer families
are smaller, more women do not have children and many women only
have children later in life.
 More women take maternity leave and then return to work.
 Many countries are increasingly multicultural, and this has an effect on
the pattern of women at work.

Corporate social responsibility

Businesses have to care about being socially responsible because their

customers do

by Landor Associates, the branding company, found that 77 per cent of

consumers say it is important for businesses to be socially responsible.

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Acting in a socially responsible manner can also help businesses to access

new markets, and this can be very attractive at a time when globalisation is

increasing competitive pressures.

Companies that can incorporate socially responsible behaviour within their

strategic decision-making may be able to gain access to these markets and

benefit over time from their growth.

Evaluating the impact on business of social and demographic

changes

Possible opportunities of social and demographic change

 Demand is increasing for products aimed at ethnic groups or age

groups.
 Rising population increases the demand for housing and household
products.
 Increasing numbers of high-income, middleclass people increase
consumer spending on luxury products.
 Part-time employment patterns allow for greater flexibility of operations
Possible threats of social and demographic change

 Reduced demand for products aimed at age groups or social groups

that are becoming relatively less important.
 Shortage of labour supply if there is an ageing population.
 Increased taxation to pay for more people dependent on social benefits.
 Need to restructure work patterns to suit more part-time workers.
 Part-time workforce may be more difficult to build into a loyal team.

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Technological influences

In the twenty-first century, the rate of technological progress is increasingly

rapid. The last few years have seen a number of technological advances that

have significant implications for businesses. The internet has probably been

the biggest single technological factor leading to change in business

behaviour, but other sources of technological change, such as biotechnology,

are also having and will continue to have substantial effects on businesses

and their decisions. Technological change impacts on many areas of a

business and requires managers to make decisions in response.

Impact of technological change on business functions

and some possible responses

Marketing

 Impact: Creation of new markets

 Response: Development of new products to meet demand in new
markets
 Impact: New means of communicating with customers
 Response: Businesses adopt new methods of marketing
communications and distributing products
Operations management

 Impact: New methods of internal communication

 Response: Location decisions may change. New technology may be
used to create more efficient communication with other stakeholders,
such as suppliers.
 Impact: Different ways to design and produce products

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  Response: Using new technology to seek competitive edge when
developing new products or processes. Some smaller businesses may
seek to operate in niche markets or engage in merger or takeover
activity.
Human resources

 Impact: Different methods of communication

 Response: May result in more homeworking or closer supervision of
employees to improve productivity.
 Impact: New methods of production
 Response: Adjustments to workforce to reflect changing methods and
maintain competitiveness.

New technology also presents some potential threats to

business:

Organisational change: is usually quite difficult especially when a high

number of people are involved as routines will be modified. It is recommended

to inform employees in advance and keep them up to date encouraging

feedback when making such change.

Costs involved:

due to systems being outdated quite often, but the ones who view this

investment as an opportunity to gain competitive advantage and have a well-

developed strategy attached, could benefit immensely.

Information Security/Contingency Planning: Technology provides a lot of

advantages but we should also take into consideration the responsibilities that

come with it. Businesses should take into account the rise in data breaching

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and various cyber-crime elements and must invest in effective ways of

preventing or combating these factors. Imagine if an important process

becomes unavailable suddenly or a system is hacked. Businesses must have

these contingency plans in place in order to protect their valuable assets.

Management: Some managers do not welcome new technology. Recognizing

the need for change and managing the process of change require good

management skills.

Competition: Rival companies might be even more innovative and adopt

technology more rapidly, leaving a business less competitive than before it

invested in technology.

Providing data for business decision-making

Management information systems use IT to provide managers with huge

amounts of data about business operations. This has the following benefits:

 Managers can obtain data quickly and frequently from all departments
and regional divisions of the business, which aids overall control.
 Computers can be used to analyse and process the data rapidly. This
allows managers to interpret data and take decisions based on it quickly.
 Management information systems accelerate the communication of
decisions to those in the organisation who need to know.

Information gives managers the opportunity to review and control the

operations of the business. Management information systems give central

managers substantial power. Although this could be used to improve business

performance, there are possible drawbacks too:

@standoutwithkamran @Kamranasalam 28
  The ease of transferring data electronically can lead to information
overload. It becomes more difficult to identify the most important
information and the areas of the business most in need of action.
 The power that information brings to central managers could reduce the
authority and empowerment given to work teams and middle
managers. Central control can become oppressive, reducing job
enrichment and motivation levels.

Competitors and suppliers

Competitors frequently play a significant role in determining the success of a

business. Competitors may influence businesses in many ways. The entry of a

new competitor into a market can pose problems for existing businesses, who

may lose market share and profits as a consequence. Equally, they can

provide a stimulus for product or market development and may enhance the

the prices at which it sells its products.

Managing suppliers effectively can help businesses to face the challenges

posed by competitors. However, the process of managing suppliers has

become more difficult as supply chains have become more complex. Many

businesses operate global supply chains, developing relationships with other

firms from numerous countries. Businesses are also increasingly associated

with the actions of their suppliers, and their reputations can be damaged by

suppliers being judged to have behaved unethically. Several multinational

clothing manufacturers have been criticised for using suppliers who have

been accused of paying very low wages and using child labour on production

lines. Such allegations can be very damaging to sales figures.

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The impact of competitors and suppliers

Imposing and avoiding barriers to entry

Barriers to entry make it more costly for other businesses to enter the market

and help to remove or avoid competitive threats. For example, a business may

spend very heavily on promoting its products so that any entrant would face

high costs in raising customer awareness of its products.

Most businesses protect new ideas and products that they have developed to

prevent competitors using them. Protecting intellectual property (IP) though

the use of patent, registered design and copyright laws is important in many

industries, such as computing and software.

Responding to competitors or the impact of substitute products

If a business has few competitors, customers will face more difficulty in finding

alternatives to those products sold by that business. The management team

of a business may seek to lessen the impact of an emerging competitor by

either merging with the business or by taking it over. The latter option is

favored by large businesses that are threatened by smaller innovative

enterprises. However, this is an approach that may need to be taken before

the new business poses too much of a threat, as in the case of Blockbuster

and Netflix.

Managing suppliers

Businesses seek to manage their suppliers so as to enhance their competitive

position. Some businesses seek to have power over their suppliers.

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Having power over a supplier offers a number of benefits to a business:

˃ The business has more control over price, meaning it can demand a low
price, helping it to increase sales.
˃ It may not have to pay quickly for the items (so it can hold the money
and have a stronger cash-flow position).
˃ Suppliers may be more willing to supply slightly different products or
meet earlier deadlines without making additional charges.
Developing a long-term relationship with suppliers can offer a range of

potential benefits to a business:

− Lower costs
− Collaboration
− Innovation

International

The importance and impact of international trading links

International trading links are important for businesses in economies

throughout the world for a number of reasons:

˃ They provide supplies of raw materials and components for businesses

at highly competitive prices. This enables importers to be price
competitive in turn, as costs are lowered below what they would have
been without international trade.
˃ They open up markets for the goods and services that they produce. This
can assist businesses in increasing sales and profitability
˃ Engaging in international trade can increase and stabilize
sales over time. Trading overseas assists businesses to extend the life
cycles of their products.
˃ Exposure to international competition can encourage domestic

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 businesses to improve their efficiency to increase the chances of
survival. It may also result in businesses adopting modern and more
productive methods of production to enhance competitiveness.

The importance of international trading links does vary between countries and

can be judged through trade openness

imports expressed as a percentage of its GDP.

Impact of international trade agreements

When two or more countries enter into a trade agreement, they agree to lower

or remove any trade barriers that may exist between them. These may be in

the form of tariffs (taxes on imports) or quotas (limits on the volume of

imports). They may also agree to some degree of integration between their

rules on international trade

Trade agreements can be classified according to the number of partners or

by level of integration of trade policies.

» Bilateral and multilateral trade agreements

A bilateral trade agreement is simply one that exists between two countries. It

may cover all industries or just a number of specified ones. The USA and

Australia have a bilateral trade agreement which was signed in 2004. This

trade agreement removed tariffs on a range of agricultural and textile exports

and imports between the USA and Australia.

A multilateral trade agreement exists between more than two countries. The

Asia-Pacific Economic Cooperation Group is an agreement between 21

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countries bordering the Pacific Ocean to implement policies to encourage free

trade.

» The level of integration on international trade policies

An international trade agreement might just create free trade between the

nations concerned.

Free trade agreements simply remove barriers to trade, such as tariffs and

quotas. However, some international trade agreements may go further and

involve some level of integration on tariffs to be imposed.

A customs union not only creates a free trade area but also member countries

agree to impose common tariffs on imports from external countries. The

European Union (EU) is an example of a customs union.

Such agreements can have a number of effects on businesses. They can

facilitate trade between businesses that are located within the countries that

reach the agreement. For example, agricultural businesses in both Australia

and the USA have benefited from the removal of tariffs on their exports to

each other.

The benefits of increased international trade are:

 Imports of raw materials can allow a developing economy to increase

its rate of industrialisation.
 Importing products creates competition for domestic industries. This
should encourage them to keep costs and prices down and make well-
designed, high-quality goods.
 Countries can specialise in products they make best and import
products they make less efficiently compared to other countries. This is

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 called comparative advantage.
 Specialisation can lead to economies of scale and further cost and price
benefits.
 Some imported products are cheaper than similar products made
within a country.
 The living standards of all consumers in all countries trading together
should increase.

The role of technology in international trade

Technological advances are transforming international trade by making

processes more efficient. The newest wave of technologies has been driven by

innovations in telecommunications, computing and the development of

global information networks. The twenty-first century will most likely be noted

for the falling cost of trading information. Thanks to fibre-optic cables,

satellites and digital technology, the cost of overseas telecommunications is

approaching zero

Artificial intelligence and machine learning

Artificial intelligence (AI) and machine learning can be used to optimise trade

shipping routes and manage vessel and truck traffic at ports. This can reduce

the time taken to transport goods from one country to another, thereby

reducing costs and encouraging greater volumes of international trade.

Additional cost savings can be made by automating warehousing and

container loading and unloading. AI algorithms combined with advanced

robotics cut storage costs and allow products to be received by the customer

more quickly.

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Machine learning can stimulate international trade in a number of ways,

including the provision of instant translations. E-commerce search queries

from potential buyers overseas can be instantly translated from one language

to another and immediate responses offered.

Blockchain technology

A blockchain is a digital database containing information (such as records of

financial transactions) that is tamperproof. It can be simultaneously used and

shared within a large network of users. Blockchains create a continuously

to each other

information is time-stamped and cannot be modified, so that attempted

changes can easily be detected, and transactions are recorded and shared.

In addition to making movement of goods across national frontiers more

efficient, reliable and secure, blockchains are changing the ways in which

international trade is financed. For example, blockchain is being used to

simplify the time-consuming and costly process of obtaining a Letter of Credit,

a payment mechanism used in international trade.

New digital platforms

These are bringing together service providers educators, web developers,

accountants and others with potential global customers. When these

services had to be delivered face-to-face, the scope for selling to other

countries was minimal. Now these digital platforms are revolutionising the

international trade in services.

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Mobile payments

Apple Pay, M-Pesa and other technologies for making mobile payments are

enabling more people to buy products online. This is particularly true in

developing countries where traditional banking systems have been weak.

Mobile payments are allowing even low-income groups to be global

consumers

Multinational businesses

Businesses which have their operations, factories and assembly plants in more

than one country are known as Multinational Business. They are also known as

transnational businesses.

Advantages of being a Multinational

 Multinational can set up their business operations in countries where

the labour and raw material is cheaper, which can give them cost
advantage in the international market.
 Multinational have access to many markets which spreads the risk of
failure. If any product may not be successful in a particular market, it
might be successful in another.
 MNCs produce in large quantities thus achieving greater economies of
scales.
 A multinational business is less vulnerable to trade barriers. MNCs set up
their local operations in countries where there is potential market for
them and get away with import duties and restrictions.
 MNCs can locate their operations near the potential market which results
in lower transportation cost.

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Disadvantages of being a Multinational

1. Setting up operating plants in foreign countries is riskier than in local

countries
2. Communication links with headquarters may be poor due to long
distance
3. Language, legal and cultural differences with local workers and
government officials could lead to misunderstandings
4. Substantial investment could require for training program as the skill
levels of the local employees will be low

Potential Benefits of MNCs on Host Countries

 Provision of significant employment and training to the labour force in

the host country
 Transfer of skills and expertise, helping to develop the quality of the host
labour force
 MNCs add to the host country GDP through their spending, for example
with local suppliers and through capital investment
 Competition from MNCs acts as an incentive to domestic firms in the
host country to improve their competitiveness, perhaps by raising quality
and/or efficiency
 MNCs extend consumer and business choice in the host country
 Profitable MNCs are a source of significant tax revenues for the host
economy (for example on profits earned as well as payroll and sales-
related taxes)

Potential Drawbacks of MNCs on Host Countries

 Domestic businesses may not be able to compete with MNCs and some
will fail
 MNCs may not feel that they need to meet the host country expectations

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 for acting ethically and/or in a socially-responsible way
 MNCs may be accused of imposing their culture on the host country,
perhaps at the expense of the richness of local culture. Might MNCs
reduce cultural diversity around the world as they continue to expand,
particularly into less developed or developing countries?
 Profits earned by MNCs may be remitted back to the MNC's base country
rather than reinvested in the host economy.
 MNCs may make use of transfer pricing and other tax
avoidance measures to significant reduce the profits on which they pay
tax to the government in the host country

Relationships between multinationals and

governments

A multinational business is more than just an importer or exporter. It has its

headquarters in one country but owns operations in more than one country,

which produce goods and services. The biggest multinationals have annual

The size of multinationals, and the influence they have, can lead to many

problems for governments. Many multinationals have their head offices in

Western European countries or in the USA, yet have many of their operating

bases in less-developed countries with much smaller economies. If the

companies need to save costs by reducing the size of their workforces, often

the last countries to lose jobs are the ones where the head offices are based.

Countries where multinationals operate have to carefully compare the

potential benefits versus disadvantages of these operations.

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Environmental influences on business activity

The media take a great interest in business activities in relation to the

environment. When firms are found to be guilty of some act of pollution,

adverse publicity is likely to follow. Society expects higher standards of

environmental performance than in the past and, thus, environmental factors

are an increasingly important influence on business behaviour

The influence of physical environmental issues

There are many potential causes of damage to the environment. The major

environmental concern identified by most governments is global warming.

This is the rise in global temperatures which, although it occurs naturally over

the course of millennia, is accelerated by the release of a mixture of gases

e emissions are

produced predominantly by the consumption of fossil fuels (for example, the

burning of petrol or diesel in engines, and by the plastic manufacturing

process), much of which is the result of business activity. As greenhouse gas

(principally carbon dioxide) emissions increase, the so-called greenhouse

effect increases, which causes global temperatures to rise and climate

conditions to alter drastically.

Other environmental problems include the pollution of rivers and land and the

dumping of waste, some of which is toxic and harmful to wildlife and humans

alike.

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Businesses contribute in many ways to the creation of environmental

damage, such as:

˃ the emission of gases through production processes

˃ pollution caused by transporting raw materials and products,
particularly using road vehicles which emit noxious gases and create
congestion and noise. Air pollution is a major cause of death and is
estimated to be responsible for 5 million deaths globally each year
˃ pollution of the sea by businesses
The North Sea between the UK and Europe is one of the most polluted
stretches of water in the world
˃ destruction of natural environments as a result of activities such as
logging (cutting down trees for commercial purposes, as in the
Indonesian forests) and the building of homes on greenfield sites (that
is, land that has not been previously built on).

How businesses contribute to environmental issues

Businesses are acutely aware of their private costs (the costs of production

they have to pay themselves), such as expenses for raw materials and wages.

These are easy to calculate and form part of the assessment of profitability.

However, environmental pressure groups and others have pressed for

businesses to acknowledge the costs they create for other groups in society

the external costs of production.

Noise, congestion, air and water pollution all impose costs on other individuals

and groups in society. A firm extracting gravel from a quarry may create a

number of external costs. These could include congestion and deterioration of

local roads caused by its Lorries. This would impose costs in terms of delay

@standoutwithkamran @Kamranasalam 40
and noise pollution on local residents. The destruction of land caused by the

quarrying could create an eyesore for people living nearby and may reduce

the value of their properties. Dust may be discharged into the atmosphere.

However, the quarrying firm will not automatically pay for these costs. It

requires government action to ensure that it pays these external costs as well

as its internal ones.

How environmental issues might influence business

behaviour

» Production Firms face pressure to redesign products to use less packaging

and materials and to make these materials biodegradable or recyclable.

These requirements affect all types of businesses. For example, housebuilders

are under great pressure to build on brownfield sites (land previously used for

building, often in cities and towns) and to protect the countryside by

minimizing the use of greenfield sites. Strict controls on production techniques

are intended to minimise pollution.

» Purchasing Businesses are encouraged to seek sources of supply that are

sustainable and do not damage the environment, or to use recycled

materials. For example, the paper industry uses a great deal of recycled

materials, and it includes this as part of its promotion.

» Marketing

component of their marketing strategy. Adverts will make reference to

environmental protection and even projects to improve the environment.

that caused by single-use plastic. This is particularly important to firms that

@standoutwithkamran @Kamranasalam 41
are seen to have great potential to pollute, including oil companies such as BP

and Sinopec. It is also important to those businesses who use this aspect of

their operations as a USP Body Shop International is an example of the latter.

» Human resources New processes and procedures in manufacturing make

some jobs and skills obsolete, creating a need for redundancies or retraining.

Environmental management has resulted in many businesses needing

employees with new skills, requiring a retraining programme or recruitment.

Environmental managers seek to minimise

activities on the environment and to ensure that the firm meets new legislative

requirements as they emerge.

The implications of environmental protection are profound, especially for the

so-called polluting sector (for example, chemicals, oil extraction and refining).

They require a corporate response from senior managers within a business.

But, as with many external influences, the environment provides opportunities

for businesses as well as constraints.

New markets have been created for businesses supplying training in

environmental management. Firms also offer to supply environmental control

equipment to adapt production processes so that they minimise the

possibility of environmental harm. Equally, a market exists for testing

equipment to monitor emissions or the toxicity of waste products. Finally,

businesses can use environmental policies as a means of obtaining a

competitive advantage.

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Environmental audits

Many businesses conduct environmental audits to assess the impact that

their operations may have on the physical environment. This type of auditing

began in the USA in the 1970s and has spread globally. It is particularly

common in businesses that operate in industries with the potential for

environmental damage, such as airlines and car manufacturing. An

˃ its emissions of gases such as carbon dioxide

˃
environmental impact generally businesses set themselves targets of
using fewer resources
˃ how much waste the business creates and how it disposes of it
˃ the impact of its use of transport on the environment
˃ this could be vital,
for example, for businesses producing or using herbicides to control
weeds in crops
˃
environmentally friendly manner, it can have a substantial effect on the
supply chain can determine

The performance of the business in each of the areas of its activity will

normally be judged against targets set by the business itself and any relevant

regulatory standards imposed by environmental legislation.

A business might take an environmental audit for a number of reasons:

˃ to ensure it meets any necessary legal requirements

˃ to protect or improve its corporate image

@standoutwithkamran @Kamranasalam 43
 ˃ in response to concerns about the environmental impact of its
operations, including previous accidents that have damaged the
environment
˃ to help with a decision on whether or not to invest in new assets, such as
a new factory or production equipment.

Environmental audits are normally conducted by independent organisations

that specialise in this type of work. Prior to the audit, the standards against

which the audit is to be conducted will be discussed and agreed. Once the

audit is complete, the auditing organisation will submit a report detailing its

findings against the relevant standards. If the audit reveals weaknesses, the

business will take any necessary steps to improve its environmental

performance.

How stakeholders may use environmental audits

use environmental audits to report on their pollution and waste

levels, energy and transport use, and recycling rates. The audit compares

these factors with previous years and pre-set targets, and possibly with other

similar businesses.

may set sustainability targets for the coming year, then report

their performance against these targets in the next annual audit.

behaviour. Favourable consumer reaction to an environmental audit could

lead to increased sales. Positive media coverage will give free publicity.

@standoutwithkamran @Kamranasalam 44
 particularly ethical investors, will use these audits to help decide

whether to invest in or lend to the company.

often have pride in a business that has an excellent

environmental record and publicises this through an audit. Working towards a

common aim of reducing harm to the environment could help to bring

employees and managers together as a team. Better-qualified applicants will

want to join a company with a good reputation and a fine team spirit.

Evaluation of environmental audits

 Until environmental audits are compulsory and there is agreement on

what they should include and how the contents will be verified, some
observers will not take them seriously.
 Companies have been accused of using them as a publicity stunt or a
smokescreen to hide their true intentions and potentially damaging
practices.
 They can be very time-consuming and expensive to produce and
publish, and this may limit their value to small businesses or those with
very limited finance.

The impact of sustainability on business and

business decisions

Sustainability can be considered to have three elements: economic, social,

and environmental (also known as the three Ps: profit, people, and planet). The

aim of a sustainable business approach is to meet the current needs without

destroying the chances of future generations meeting their needs.

Sustainability may involve using minimal resources in production, possibly by

@standoutwithkamran @Kamranasalam 45
recycling, allowing employees to work from home to reduce time spent

commuting, and not using resources that cause pollution, such as oil or gas.

For a business to be sustainable, it must focus on long-term strategies for

making a positive impact on the environment and on society. Sustainability is

about considering business decisions in terms of years, or even decades, and

considering many more factors than just short-term financial benefits.

Consumer awareness of the importance of sustainability has increased as

high-profile campaigns (such as the one about plastic waste) highlight the

issues.

Businesses can take a range of decisions to make their operations more

sustainable.

» Reduce waste Some businesses produce large amounts of waste directly or

indirectly. Reusing resources such as water can cut waste during production,

as can making products and packaging recyclable. Some analysts argue that

selling products that are not recyclable will become increasingly difficult in the

future. Equally, compostable packaging is becoming an essential for many

consumers.

» Energy usage This is another high-profile element of sustainable production.

Using fossil fuels creates carbon emissions, which contributes to the rise in

global warming. Many businesses are switching to using renewable forms of

energy for all aspects of their operations, including the use of electric cars.

Consumers increasingly expect and respond positively to such initiatives.

Businesses in the energy industry are also under pressure to adapt their

products to make them sustainable. For e

@standoutwithkamran @Kamranasalam 46
oil companies, is committed to developing clean and renewable sources of

energy over time.

» Change business cultures Senior managers must take strategic, long-term

decisions to make the business more sustainable. However, this is unlikely to

be successful unless people at all levels within the organisation support the

example, it may require managers to develop a more innovative culture to

encourage employees to develop new ideas and approaches to making the

» Marketing

driving businesses to make the changes necessary to make the organisation

susta

maintaining competitiveness. This is a major reason for the Toshiba Group

incurring considerable costs in environmental audits and reporting its findings.

Many companies use their sustainable policies in their promotional activities.

» Investment decisions Businesses are increasingly recognizing the

ons to

become more sustainable. Others are making enormous strategic decisions

to supply products which do not damage the environment. Volkswagen, the

German car manufacturer, has decided to stop producing cars with petrol or

diesel engines and has switched production to electric cars. It believes this

investment will generate good returns in the long term.

@standoutwithkamran @Kamranasalam 47
Chapter 07 : External economic
influences on business activity
How governments might help businesses and
encourage enterprise

Governments benefit from having a strong economy. It provides employment

government is able to use the tax revenues it receives to pursue its objectives,

such as providing education and health services. For these reasons, all

governments intervene in the economy to help businesses and to encourage

enterprise.

How governments help businesses

There are a number of ways in which governments may provide help to

businesses throughout the economy.

Developing an effective infrastructure

operate. Without effective systems of transport, communications and energy

supply, businesses would not be able to engage in production and supply

goods and services. Infrastructure can also help to determine the

communications are provided efficiently and relatively cheaply, it can help to

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reduce the operating costs of businesses and sharpen their price

competitiveness.

Providing advice to businesses

The provision of advice to companies can be a relatively inexpensive means of

supporting businesses and helping them to become more competitive.

Governments can offer advice in a number of areas, including: » raising capital

and managing finance » managing employees effectively; for example,

offering guidance on recruiting, training and keeping employees » trading

overseas governments may offer advice on how to sell products in specific

overseas markets » developing new products and processes of production

Providing services for businesses

Governments can support business activities in other ways apart from offering

advice.

Recruitment and training

It is common for governments to operate systems designed to match

unemployed workers to potential jobs. In this way, they can help to reduce the

costs to businesses of finding suitable new employees.

Helping businesses to raise finance

Governments may provide loans and grants directly to businesses, usually to

invest in new equipment, buildings or other facilities. They may also guarantee

loans provided by banks.

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Supporting businesses trading overseas

It is common for governments to support businesses that are exporting goods

and services overseas. This department helps businesses to acquire the skills

and contacts necessary for exporting and provides advice about exporting to

particular countries.

Government assistance for all businesses

It is also common for governments to intervene in industry in ways that will

support both small and large businesses. These measures could include:

 subsidies to help keep prices down

 subsidies to stop a loss-making business failing and protect
employment
 grants to relocate to particular areas with high unemployment
 financial support for consumers to buy products (e.g. houses) that will
increase national output

How governments deal with market failure

One reason for governments to intervene in the operation of a market is

market failure.

When a market operates correctly, it responds to the signals given by prices

and increases or reduces the resources used by businesses in the market to

supply more or less of the product.

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1. Monopolies and cartels

The existence of monopolies and cartels might mean producers have too

much power, resulting in insufficient output and high prices. As a

consequence, consumers may receive too little of certain products, resulting

in a lower standard of living.

Governments frequently pass laws to encourage competition and to

restrict a wide range of anticompetitive activities. Such laws prohibit the

abuse of monopoly power (for example, by raising prices excessively to

boost profit margins) and the operation of cartels. Such laws protect

consumers from the adverse effects of monopoly power. Offending firms

are normally fined, sometimes very heavily.

2. Damage to the environment (External Cost)

Producers that pollute the environment are not paying the full costs of

production. For example, they might discharge toxic waste into a river rather

than paying for it to be taken away and treated. These costs are imposed on

someone else. It is often governments (and therefore taxpayers) that have to

pay to clean up the pollution. This means that part of the costs of production

are paid by a third party. Costs passed on in this way are called external costs,

and they can result in severe environmental damage and problems for future

generations. This type of market failure creates oversupply of certain products

as producers (and ultimately consumers) do not pay the full cost of

production. Some industries (for example, palm oil producers) have received

criticism for the environmental damage arising from the deforestation that

has accompanied huge increases in the supply of this type of oil.

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Governments tend to control external costs in three main ways. They can

impose indirect taxes (that is, a tax that adds to the selling price of a

product) with the aim of raising the costs of production to account for the

external costs paid by other groups in society. This should lead to higher

prices and lower profit margins, discouraging production and

consumption of the products. Alternatively, governments can levy fines on

businesses that damage the environment and thereby impose costs on

others. Finally, a government may pass laws to ban processes and

products that cause external costs.

3. Poaching of skilled labour

If a business invests heavily in training its workforce to provide job-related

skills, it can expect a consequent increase in productivity as a reward for

devoting resources to training. However, one possible outcome is that highly

skilled employees become attractive to rival businesses, who are able to offer

them higher wages as they have not paid the training costs. Such poaching of

labour can result in too few resources being allocated to training for fear of

poaching. Thus, the market fails.

Overcoming the poaching of labour is difficult for any government. If it has

sufficient funds available, it may provide some training itself and can o ffer

tax benefits to businesses that engage in staff training. However, such

approaches can be very costly to have any significant effect

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All governments set targets for the whole economy and these are referred to

ro-

 economic growth
level of output (known as gross domestic product or GDP)
 low price inflation the rate at which consumer prices, on average,
increase each year
 low rate of unemployment
 a long-term balance of payments between the value of goods and
services bought from other countries (imports) and the value of the
goods and services the country sells to other countries (exports)
 exchange rate stability the government will try to prevent wild swings
in the external value of the currency in terms of its price compared with
other currencies
 wealth and income transfers to reduce inequalities. Some governments
but not necessarily all attempt to reduce extreme inequalities of
personal income and wealth, usually by using the tax system.

Economic Growth

This term refers to a real growth (i.e. accounting for the effects of inflation) in

the income per capita (or income per head) of the population over a given

period of time.

It is normally measured by reference to Gross Domestic Product

(G.D.P) and Gross National Product (G.N.P).

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Gross Domestic Product is the total value of a country's output over a period of

time (usually 12 months).

Gross National Product is calculated by adding G.D.P. to the net income from

abroad (i.e. the income earned on overseas investments by UK citizens and

businesses, minus the income earned by foreigners investing in the UK).

Economic growth is likely to lead to an increase in the amount of investment in

the economy, as well as an increase in the number of new businesses starting

up, leading to increases in output, expenditure and income.

Main Benefits of Economic Growth

 Higher living standards i.e. Real GNI per capita helps to lift people out
of extreme poverty and improve development outcomes (e.g. rising HDI)
 Employment effects sustained growth stimulates jobs and contributes
to lower unemployment rates which is turn helps to reduce income
inequality.
 Fiscal dividend higher economic growth will raise tax revenues and
reduce government spending on unemployment & poverty related
welfare benefits
 Accelerator effect - rising growth stimulates new investment e.g. in low-
carbon technologies. Better growth may attract foreign direct
investment projects

Main Costs of Economic Growth

Rapid rates of GDP growth can bring about undesirable economic and social

costs much depends on the nature/causes of growth.

Factors Leading To Economic Growth

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Natural Resources

The discovery of more natural resources like oil, or mineral deposits may boost

Curve. Other resources include land, water, forests and natural gas.

Human Capital

An increase in investment in human capital can improve the quality of the

labor force. This increase in quality would result in an improvement of skills,

abilities, and training. A skilled labor force has a significant effect on growth

since skilled workers are more productive.

Technology

Another influential factor is the improvement of technology. The technology

could increase productivity with the same levels of labor, thus accelerating

growth and development. This increment means factories can be more

productive at lower costs. Technology is most likely to lead to sustained long-

run growth.

Business Cycle:

Economic growth is rarely achieved at a

steady, constant rate every year. Instead,

economies tend to grow at very different

rates over time. This leads to the business

cycle

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The four stages of the business cycle are:

1. Boom: This is a period of very rapid economic growth with rising incomes
and profits. Inflation increases due to very high demand for goods and
services. Shortages of key skilled workers lead to substantial wage

Business confidence eventually falls as profits are hit by higher costs.

Interest rates are usually increased to reduce inflation. A downturn often
results from this.
2. Downturn or recession: Falling demand and higher interest rates start to
take effect. Real GDP growth slows and may even start to fall. This is
technically called a recession. Incomes and consumer demand fall, and
profits are reduced. Some businesses make record losses and others fail
completely.
3. Slump: A very serious and prolonged recession can lead to a slump,
where real GDP falls substantially and product and asset prices fall. This
is much more likely to occur if the government fails to take corrective
economic action.
4. Recovery and growth: All downturns eventually lead to a recovery when
real GDP starts to increase again. This is because corrective government
action starts to take effect. Also, one effect of lower product prices is to

them starts to increase.

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Type of Producer Period of Economic Growth Period of recession

Produce of luxury goods  Increase the range of  May not reduce

and services e.g. curs goods and services prices for fear of
 Raise prices to damaging long-
increase profit term image.
margins  Credit terms to
 Promote exclusivity improve
and style affordability
 Increase output  Offer promotions
 Widen product
range with lower
priced models
Produces of normal goods  Add extra value to  Lower prices
and services-e.g. tinned product better  Promotions
food ingredients / improved  Do nothing sales
packaging brand not much affected
image may attract anyway.
exclusive tag.
 Do nothing-sales not
much affected
anyway.
Producers of inferior goods  Attempt to move  Promote good
and services-e.g. very product upmarket. value and low
cheap clothing  Add extra value to the prices.
product e.g. higher  Free consumer
quality. tests.
 Extend the product  Increase range of
range to include more distributions
exclusive or better outlets.
designed products.

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Inflation

Inflation - A persistent increase in the level of consumer prices or a

persistent decline in the purchasing power of money caused by an increase in

available currency and credit beyond the proportion of available goods and

services.

Over the long term, inflation erodes the purchasing power of your income and

wealth.

That means that even as you save and invest, your accumulated wealth buys

less and less.

Causes of Inflation

Inflation results when the macro economy has too much demand for

available production.

Demand-Pull Inflation: This inflation occurs when the government /

consumers / business try to purchase more output than the economy is

capable of producing.

Major drivers of demand pull inflation

 Unnecessary printing of more note and coins by the central bank

 Excessive government expenditure
 Supply shortages

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Policies to designed to solve demand pull inflation

 Reduce government expenditure and increase taxation (fiscal policy)

 The central bank must raise interest rates and reduce the supply of notes
and coins in the economy (monetary policy)
 The government to work on supply bottlenecks

Reducing demand pull inflation and the impact on businesses

 High interest rates will discourage investments

 Aggregate demand will fall and the firms may decide to relocate to other
countries
 Businesses may begin to offer less expensive goods

Cost-Push Inflation: Cost-push inflation is inflation due to decreases in

supply, primarily due to increases in production cost

Major drivers of cost-push inflation

 Increase in wages
 Increase in the world price of imported raw materials
 Lower exchange rate pushing up prices of imported raw materials
 Increase in the cost of production

Policies to designed to solve cost-push inflation

 High exchange rate policy (revaluation of domestic currency)

 Discourage high wages by limiting trade union powers
 Come up with cheaper local resources
 Reduce indirect taxation
 Provide subsidies to firms

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Reducing cost -push inflation and the impact on businesses

 High interest rates will discourage foreign direct investments

 High exchange rate will make exports less competitive on the world
markets
 Workers become less productive when the wages are reduced

Inflation and Business

 Inflation may lead to a decrease in sales for businesses

 When there is high inflation it is hard for business to remain competitive
especially with overseas firms

Inflation and Government Policy

Governments try and control inflation using the following tools:

 An increase in interest rates

 Legislation reducing trade union power
 Reduced expectations of inflation allowing businesses more confidence
when setting prices

IMPACT OF INFLATION ON BUSINESSES

 Increased cost can be passed to customers

 Real value of debts fall
 Value of fixed assets of balance sheet, Increase
 Stocks purchased earlier can be sold at high prices

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Business strategies in period of inflation

 Try to reduce labour costs

 Avoid excessive borrowing
 Sale goods on cash basis
 Reduce the credit period to customers
 Avoid unnecessary expansion programs
 Sale goods on credit basis

EXCHANGE RATE

An exchange rate is the value of one currency expressed in terms of another.

A currency that is getting stronger or appreciating is a currency that is going

up in value against another. So £1:$1.5 moving to £1:$1.8 means the pound is

getting stronger

EFFECTS

 Imported raw materials becomes cheaper

 Demand may shift from local goods to foreign produced goods
 Can lead to balance of payments (BOP) surplus ( exports become
expensive and imports cheaper)

A currency that is becoming weaker or depreciating is a currency that is going

down in value against another. So £1:$1.8 moving to £1:$1.5 means the pound is

getting weaker

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EFFECTS

 Imports become cheaper and exports dearer

 Can lead to BOP deficit. A situation where imports exceeds exports
 External debt of the country will increase
 Local goods becomes less competitive in the domestic economy

Exchange rates create uncertainty because:

 If a deal is agreed in foreign currency firms may receive more or less

than expected due to changes in exchange rates
 Changes to exchange rates can affect prices and sales overseas
 Competitors can respond in unexpected ways to exchange rate
changes

Unemployment

Refers to a situation where people who are able and willing to work cannot

find a job. It only caters for people in the working population who are willing

and able to work.

Formula:

Unemployment rate = unemployed / labour force x 100/1

Labour force/ economically active group = 15 years to 64 years

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Structural unemployment

 Occurs when the economy changes and industries die out e.g important
industries like the mining and secondary industries
 It also due to changes in the consumer tastes and expenditure patterns
 Structural unemployment can affect businesses in the local area

Solutions

 Training is needed to give the unemployed workers new skills

 The government to invest in declining industries

Cyclical unemployment

 Caused by the business cycle

 Unemployment which result from low demand for goods and services in
the economy during a period of slow growth or recession
 Cyclical unemployment can lead to a decrease in sales meaning
businesses need to look for new markets
Solutions

 Increase government expenditure and reduce taxation (fiscal policy)

 Increase the supply of notes and coins and reduce interest rates
(monetary policy)
 Maintain a competitive exchange rate so that the demand for exports
does not fall (exchange rate policy)

Frictional unemployment

Caused when people are temporarily out of work as they are changing jobs.

What it means is that the jobs are available somewhere in the country but it

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takes time for unemployed to for the unemployed to apply for the jobs, to

attend interviews and to relocate to those areas. Frictional unemployment is

not a problematic type of unemployment.

Solutions

 Improve the flow of information by setting up job centres or employment

agencies
 Reduce the unemployment benefits

Effects of high unemployment

 Decrease in the output of goods and services in the economy

 Lower living standards for the unemployed
 Increase in social problems e.g crime and other social ills
 The government has to give the jobless people unemployment benefits
 The skills of the unemployed people become increasingly out dated

The governments key economic policy objective is to achieve high and stable

levels of growth and employment

The government uses a range of policies to attempt to achieve their

objectives

Fiscal Policy

Fiscal policy is the use of government spending and taxation to influence the

economy. When the government decides on the goods and services it

purchases, the transfer payments it distributes, or the taxes it collects, it is

engaging in fiscal policy. The primary economic impact of any change in the

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government budget is felt by particular groups i.e A tax cut for families with

children, for example, raises their disposable income. Discussions of fiscal

policy, however, generally focus on the effect of changes in the government

budget on the overall economy.

Contractionary fiscal policy

This is done when the government reduces spending or increases taxes higher

They try to increase their PSBR( public sector borrowing requirement) to fund

the tax drops they also do this to reduce its surplus on its budget for the fiscal

year.

Expansionary fiscal policy

This is when the government cut taxing or increase government spending.

They will increase the amount the government borrows to fund the

expenditure.

Direct and indirect Taxes

Direct taxes are taxes of income and expenditure e.g. income tax, corporation

tax (levied on company profits).

Indirect taxes are taxes such as VAT (value added tax), changes in this type of

tax has a rapid effect on the level of economical activity.

E.g. an increase in VAT will cut consumer spending and in turn lower levels of

economic activity

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Government Expenditure

Governments spend in two ways:

1. Transfer payments money spent on unemployment benefits, pensions etc

2. The infrastructure this includes spending on houses, roads, education etc

Impact of Fiscal Policy on businesses

 me. Disposable
income refers to income after tax
 Direct taxes also affect company profits
 Indirect taxes will increase retail prices of goods and the impact on either
consumers or businesses will depend on the elasticity demand for each
product
 Reduced government spending will affect businesses that provide
goods and services directly to the government i.e firms that used to
benefit from government tenders

Monetary Policy

This looks at controlling the amount of money in circulation and therefore

spending and economic activity

Monetary policy covers:

 Changing interest rates (the most commonly used tool by recent UK

governments)
 Controlling the money supply
 Manipulating the exchange rate

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Loose or Expansionary Monetary Policy

It occurs the government through its central bank increases the supply of

notes and coins and lower the level of interest rate to increase the level of

aggregate demand in the economy. An increase in money supply will

decrease interest rates and investment is promoted. A rise in investments will

increase aggregate demand in the economy hence national output and

employment will increase.

Expansionary monetary policy is used when the economy is in a recession

Tight or Contractionary Monetary Policy

It occurs the government through its central bank decreases the supply of

notes and coins and raises the level of interest rate to decrease the level of

aggregate demand in the economy. A decrease in money supply will increase

interest rates and investment is discouraged. A fall in investments will

decrease aggregate demand in the economy hence inflationary pressure is

reduced.

Tight monetary policy is used in a boom where the inflation rate is very

high.

Impact of Monetary Policy on Businesses

 Interest rates affect the cost of borrowing to the businesses which then
affect its profitability
 Interest rates affects consumer borrowing and this may lead to fall in
demand for goods and services
 Changes in interest rates may affect the exchange rate which then

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 affect the ability of firms to buy raw materials from outside.

Changes to Interest Rates

If interest rates increase it is likely that consumer spending will decrease

reducing the level of economic growth which can lead to falling sales for

businesses as demand may be reduced

If interest rates decrease then demand is likely to increase leading to an

increase in economic growth which leads to an increase in sales for

businesses

Impact of changes to interest rates Small firms are most vulnerable to

changes in rates especially if they have a high level of borrowing

Firms with lots of overseas trade may also be heavily affected as a rise in

interest rates tends to increase exchange rates

Supply-side policies

Government policies that aim to increase industrial competitiveness are often

referred to as supply-side policies. Their aim is to improve the supply efficiency

competitive in global markets.

The following policies could have this effect:

Reducing rates of income tax

If workers and managers are forced to pay high rates of tax on any increase in

income, the motivation to work hard and to gain promotion is lost. High rates

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of income tax discourage entrepreneurs from setting up new businesses. They

will consider that the rewards after tax do not justify the risks involved.

Reducing rates of income tax is a supply-side policy. Low tax rates can

encourage enterprise and increase incentives to work.

Reducing the rate of corporation tax (profit tax)

This is a tax on the profits of limited companies. High rates of profit tax leave

less internal finance for reinvestment in businesses. This discourages new

investments in projects. A fall in business investment reduces business

competitiveness. Many governments have steadily reduced the rates of

corporation tax in recent years, especially for smaller companies. In the

Republic of Ireland and Poland, this tax has been reduced to just 10%. Low rates

of profit tax increase retained earnings and encourage investment.

Increasing labour market flexibility and labour productivity

Labour is a key economic resource. Most governments use policies that

workers with a strong work incentive. Policies that governments use to achieve

these aims include:

 subsidies for worker training and increasing state provision at colleges

for skills training
 increased funding of higher education to allow more workers to enter
employment with degrees and other high-level qualifications
 low rates of income tax to encourage workers to set up their own
businesses and to encourage work incentives
 encouraging the immigration of skilled workers who can fill job
vacancies and help to increase total industrial output

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  restricting welfare benefits to those in genuine need; healthy and
potentially productive workers are not encouraged to stay at home and
live off the state.
Spending on infrastructure projects

Government spending on dams and irrigation projects increases agricultural

productivity. New roads and railways improve the efficiency of transport

systems and allow exporters to get products to port more quickly. Faster and

more reliable internet provision encourages e-commerce and web

entrepreneurs.

Making it easier to start businesses

Reducing the form filling and time needed to set up new businesses

encourages new enterprises. These create new jobs and increase competition

for existing businesses, forcing them to become more efficient. According to

Zealand can set up a business more easily and rapidly than in any other

country. Somalia is bottom of this index it can take 70 days to register a new

business in this country and the process costs twice the average annual

income.

businesses?

Reductions in the rate of interest

Businesses may invest more in new production facilities as the cost of

borrowing is reduced, and consumers may increase spending as loans are

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cheaper and saving is less worthwhile due to lower interest rates. The level of

economic activity should rise.

Cuts in direct and indirect taxes

May encourage higher levels of production as it becomes more profitable, and

consumers may also increase spending as their net pay (after tax) rises or as

the price of goods falls. Once again, the level of economic activity should

increase.

Increases in government spending (e.g. on infrastructure or

welfare benefits)

Lower-income consumers in receipt of rising benefits are likely to increase

spending on a range of basic products (as saving of such rises in benefits

occurs rarely). Businesses in construction and engineering sectors may

receive orders from government for infrastructure projects, directly increasing

output.

pay of many associated workers, increasing spending and therefore

production. These effects will increase the level of economic activity.

Helping unemployed back into work through policies such as

training and improving information on job vacancies

These supply-side actions should increase the level of economic activity by

increasing the number of people who are in employment and have the right

skills to carry out a job efficiently. This can enable businesses to increase

production and to do so in a cost-effective manner because they employ

suitably skilled workers.

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business activity?

Increases in the rate of interest

By making borrowing more expensive, this is likely to dissuade businesses and

consumers from borrowing for investment or to buy expensive products such

as homes, cars and electrical products. It may also encourage saving,

reducing consumption and investment further.

Increases in direct and indirect taxes

This reduces the take-home pay of employees and/or increases the prices of

and services and reduce the level of economic activity. Simultaneously,

businesses may have reduced profits available to invest (and to encourage

future investment).

Reductions in government expenditure

Reductions in transfer payments, such as pensions, directly affect the ability of

less well-off consumers to purchase goods and services. At the same time, the

government may reduce orders placed with a range of domestic businesses.

The effects of both types of cuts will be to reduce economic activity.

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Implementing health advice policies (e.g. on the dangers of

tobacco or alcohol)

because they can be harmful and many consumers are unaware of this. As a

consequence, consumers are discouraged from consuming them through

advertising and other policies. This can (and does) result in reduced sales,

leading to lower levels of production and decreased levels of economic

activity.

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Chapter 08 : Business Strategy

Business strategy

A business strategy is the long-term plan of a business that is developed to

help it achieve its objectives. For example, to achieve growth, a business may

decide to target emerging economies, such as Brazil and China, as its

strategy.

A strategic decision:

 is long-term often strategies are planned to last for several years

 involves high levels of resources, such as finance
 is high risk, due to the resources involved. There is also a risk that the
overall plan could be wrong (no matter how well-implemented)
 is difficult to reverse. If resources have been committed, it will not be easy
to reallocate them.
Strategic decisions will be made by senior managers within the organisation.

They are difficult decisions to make, not just because so much is at stake but

also because they are not decisions that are taken very often.

Purpose

The purpose of the strategy is to identity clearly how the business is going to

achieve its objectives.

The strategy may set out which markets it is going to compete in, what its

product range will be and where the product will fit in the market relative to

competitors.

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Having a clear plan makes it easier for everyone in the business to operate: it

will help managers to decide on priorities and where to allocate time and

funds.

The strategy will help co-ordinate the actions of everyone in the organisation,

as they can consider how their actions contribute to the overall plan.

Tactics

The strategy is put into effect through a series of shorter-term actions, known

as tactics. For example, if the strategy was to expand overseas, the business

would need to decide which foreign market to enter first, which products to

offer and whether to enter an alliance with a local business.

Strategic management is the process of developing and implementing a

strategy.

It has three stages: analysis, choice and implementation.

Strategic analysis involves an assessment of the current position of the

business and its environment, plus a forecast of the opportunities and threats

which might emerge in the future. A business will want to assess how good or

bad its own internal activities are; for example, how efficient is it? How much

capacity does it have? How strong is its brand? How well trained are its staff?

What is its financial position? It will also want to assess the business

environment; for example, how intense is the level of competition? What is the

economic climate like? What technological changes are occurring in the

industry? By analysing the internal and external aspects of the business,

managers can identify the strengths and weaknesses of the business and the

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opportunities and dangers it faces. Some of the tools managers use to

analyse their business, such as SWOT analysis, are examined below.

Strategic choice occurs when managers decide on the strategy they want
to pursue based on their analysis. These decisions may focus on what

customers the business wants to cater for; for example, should it concentrate

on its existing customers or aim at a new group? Which products should it

offer should it focus on existing products or develop new ones? Some

businesses choose to concentrate on gaining more market share with their

existing products in existing markets; others may choose a different strategy,

such as developing new products for new customers. The different strategic

choices open to a business are analysed later using models such as the

Ansoff Matrix.

Strategic implementation. Choosing a strategy may be quite a complex

decision but, to make sure it is successful, it has to be implemented effectively.

This is often a challenge. Successful implementation involves planning what

has to be done when, by whom, to what standard and using what resources.

Successful implementation involves making sure the right things happen at

the right time in the right way. It involves co-ordinating and managing

resources and trying to prevent things from overrunning, costing more than

expected or not working. This requires effective leadership and includes plans

for how the business will respond if something goes wrong.

@standoutwithkamran @Kamranasalam 76
Approaches to developing business strategy

Blue Ocean planning

This occurs when a business combines a strategy of differentiation and low

costs to create a new space in the market and new demand. This approach

seeks to create and capture uncontested market space, which thereby makes

the competition irrelevant. The blue ocean view is that you can redefine

industries and markets.

In Blue Ocean Strategy, Chan Kim and Renée Mauborgne introduced the terms

today this represents the known market space. In red oceans, the industry

boundaries are defined and accepted, and the competitive rules of the game

are known. In this situation, companies try to outperform their rivals to grab a

greater share of existing demand. As the market space gets more crowded,

profits and growth are reduced. Products become commodities, leading to

Red ocean strategy involves: (focus on existing customers)

 Competing in the existing market space

 Attempting to fight and beat the competition
 Fighting for existing demand
 Focusing on differentiation or low cost

By comparison, blue oceans represent all the industries not in existence today

the unknown market space, where there is no competition. In blue oceans,

demand is created instead of being fought for. This creates opportunities for

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growth that are both profitable and rapid. An example of blue ocean thinking

led to the change made by the French Groupe SEB. SEB moved out of the

highly competitive market for conventional French-fry makers by creating a fry

maker that operated without needing large quantities of oil to be heated. The

Acti-Fry made healthier French fries with only one tablespoon of oil. This

transformed the market for French-fry makers.

Blue ocean strategy involves: (focus on potential customers)

 Creating an uncontested market space

 Aiming to make the competition irrelevant
 Creating new demand

To help identify a blue ocean, Kim and Mauborgne recommend that

businesses consider what they call the Four Actions Framework. The framework

asks four important questions:

 Raise: What factors, such as quality or customer service, could be raised

 Reduce: What factors, such as costly competitive advertising, were a

result of competing against other businesses, and which of these can be
reduced?
 Eliminate: Which factors that the business has used to compete against
rivals could be eliminated altogether?
 Create : Which factors should be created that the industry has never
offered before?

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Scenario planning

This is another technique to help managers plan ahead. In this approach,

managers try to imagine three or four possible scenarios that might develop

in the future in their industry. Scenario planning does not assume the future will

be like the past; it asks managers and experts to think of what the world might

look like in the future. This could be very different from the past (as we saw with

the rapid collapse of financial markets in 2007 and 2008 across the world). This

technique has been used widely by Shell, where managers work with experts

to create possible visions of what the world might look like in the future.

For example, one scenario might include a stable political position in the

Middle East, high levels of oil production and a low oil price. Another might

focus on high levels of intervention by the government to reduce car usage,

leading to high taxes and low levels of demand. Managers then work on how

these scenarios might affect their business and the implications for their

adapt to changing aspects of our present environment. They form a method

for articulating the different pathways that might exist for you tomorrow, and

Benefits of scenario planning

 It forces managers to consider the main risks and uncertainties that

affect their business.
 Managers have to develop a range of strategies to deal with different
scenarios.

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  It makes managers adopt a flexible approach as different scenarios will
require different strategies.

Limitations of scenario planning

 Managers try to consider too many uncertainties and become confused

by the range of possible scenarios.
 In contrast, some managers might only focus on one possible future
scenario and be unprepared for others.
 It will be less effective if only short-term risks are considered. Looking far
into the future can lead to more creative strategies

SWOT Analysis

A SWOT analysis is an incredibly simple, yet powerful tool to help you develop

company.

SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.

Strengths and weaknesses are internal to your company things that you

have some control over and can change. Examples include who is on your

team, your patents and intellectual property, and your location.

Opportunities and threats are external things that are going on outside your

company, in the larger market. You can take advantage of opportunities and

competitors, prices of raw materials, and customer shopping trends.

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Strengths

Strengths are internal, positive attributes of your company. These are things

that are within your control.

 What business processes are successful?

 What assets do you have in your team, such as knowledge, education,
network, skills, and reputation?
 What physical assets do you have, such as customers, equipment,
technology, cash, and patents?
 What competitive advantages do you have over your competition?

Weaknesses

Weaknesses are negative factors that detract from your strengths. These are

things that you might need to improve on to be competitive.

 Are there things that your business needs to be competitive?

 What business processes need improvement?
 Are there tangible assets that your company needs, such as money or
equipment?
 Are there gaps on your team?
 Is your location ideal for your success?

Opportunities

Opportunities are external factors in your business environment that are likely

to contribute to your success.

 Is your market growing and are there trends that will encourage people
to buy more of what you are selling?

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  Are there upcoming events that your company may be able to take
advantage of to grow the business?
 Are there upcoming changes to regulations that might impact your
company positively?
 If your business is up and running, do customers think highly of you?

Threats

Threats are external factors that you have no control over. You may want to

consider putting in place contingency plans for dealing them if they occur.

 Do you have potential competitors who may enter your market?

 Will suppliers always be able to supply the raw materials you need at the
prices you need?
 Could future developments in technology change how you do business?
 Is consumer behavior changing in a way that could negatively impact
your business?
 Are there market trends that could become a threat?

Evaluation:

 Subjectivity is often a limitation of a SWOT analysis as no two managers

would necessarily arrive at the same assessment of the company they
work for.
 It is not a quantitative form of assessment so the cost of correcting a
weakness cannot be compared with the potential profit from pursuing
an opportunity.
 SWOT should be used as a management guide for future strategies, not
a prescription.
 Part of the value of the process of SWOT analysis is the clarification and
mutual understanding that senior managers gain by the focus that
SWOT analysis provides.

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PEST Analysis

A PEST analysis is a strategic business tool used by organizations to discover,

evaluate, organize, and track macro-economic factors which can impact on

their business now and in the future. The framework examines opportunities

and threats due to Political, Economic, Social, and Technological forces.

Political

Political or politically motivated factors that could impact the organization.

Examples include:

Government policy, political stability or instability, bureaucracy, corruption,

competition regulation, foreign trade policy, tax policy, trade restrictions,

labor/environmental/copyright/consumer protection laws, funding grants &

initiatives, etc.

Questions to ask:

 What government policies or political groups could be beneficial or

detrimental to our success?
 Is the political environment stable or likely to change?

Economic

Overall economic forces that could impact on your success.

Examples include:

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Economic trends, growth rates, industry growth, seasonal factors, international

exchange rates, International trade, labor costs, consumer disposable income,

unemployment rates, taxation, inflation, interest rates, availability of credit,

monetary policies, raw material costs, etc.

Questions to ask:

 What economic factors will affect us moving forward?

How does the performance of the economy affect us at the moment?
 How are our pricing, revenues, and costs impacted by each economic
factor?

Social

Social attitudes, behaviors, and trends that impact on your organization and

target market.

Examples include:

Attitudes and shared beliefs about a range of factors including money,

customer service, imports, religion, cultural taboos, health, work, leisure, the

environment; population growth and demographics, immigration/emigration,

family size/structure, lifestyle trends, etc.

Questions to ask


 How do cultural trends and human behavior play a role in our business?

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Technological

Technology that can affect the way you make, distribute, and market your

products and services.

Examples include:

Technology and communications infrastructure, legislation around

technology, consumer access to technology, competitor technology and

development, emerging technologies, automation, research and innovation,

intellectual property regulation, technology incentives, etc.

Questions to ask:

 What technological advancements and innovations are available or on

the horizon?
 How will this technology impact on our operations?

Evaluation:

 Any significant new business strategy should be preceded by a detailed

analysis of the wider environment in which the strategy has to operate
and be successful.
 The use of PEST analysis formalises this process and the results of the
analysis should be an important part of strategic decision-making. Once
completed, PEST analysis cannot just stop.
 It may need to be constantly updated and reviewed, especially in a
rapidly changing wider environment. For multinational businesses or
for a firm considering foreign expansion for the first time it will be
important to undertake PEST analysis for each country being operated
in.

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The tool was created by Harvard Business School professor Michael Porter, to

analyze an industry's attractiveness and likely profitability.

Porter recognized that organizations likely keep a close watch on their rivals,

but he encouraged them to look beyond the actions of their competitors and

examine what other factors could impact the business environment. He

identified five forces that make up the competitive environment, and which

can erode your profitability. These are:

Competitive Rivalry. This looks at the number and strength of your

competitors. How many rivals do you have? Who are they, and how does the

quality of their products and services compare with yours?

Where rivalry is intense, companies can attract customers with aggressive

price cuts and high-impact marketing campaigns. Also, in markets with lots of

rivals, your suppliers and buyers can go elsewhere if they feel that they're not

getting a good deal from you.

On the other hand, where competitive rivalry is minimal, and no one else is

doing what you do, then you'll likely have tremendous strength and healthy

profits.

Supplier Power. This is determined by how easy it is for your suppliers to

increase their prices. How many potential suppliers do you have? How unique

is the product or service that they provide, and how expensive would it be to

switch from one supplier to another?

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The more you have to choose from, the easier it will be to switch to a cheaper

alternative. But the fewer suppliers there are, and the more you need their

help, the stronger their position and their ability to charge you more. That can

impact your profit.

Buyer Power. Here, you ask yourself how easy it is for buyers to drive your
prices down. How many buyers are there, and how big are their orders? How

much would it cost them to switch from your products and services to those of

a rival? Are your buyers strong enough to dictate terms to you?

When you deal with only a few savvy customers, they have more power, but

your power increases if you have many customers.

Threat of Substitution. This refers to the likelihood of your customers

finding a different way of doing what you do. For example, if you supply a

unique software product that automates an important process, people may

substitute it by doing the process manually or by outsourcing it. A substitution

that is easy and cheap to make can weaken your position and threaten your

profitability.

Threat of New Entry. Your position can be affected by people's ability to

enter your market. So, think about how easily this could be done. How easy is it

to get a foothold in your industry or market? How much would it cost, and how

tightly is your sector regulated?

If it takes little money and effort to enter your market and compete effectively,

or if you have little protection for your key technologies, then rivals can quickly

enter your market and weaken your position. If you have strong and durable

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barriers to entry, then you can preserve a favorable position and take fair

advantage of it.

Example of Porter's Five Forces in Action

Martin Johnson is deciding whether to switch career and become a farmer

he's always loved the countryside, and he wants a job where he can be his

own boss. He creates the following Five Forces analysis to help him to decide:

Porter's Five Forces Example: Buying a Farm

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His findings worry him:

 The threat of new entry is quite high. If anyone looks as if they're making
a sustained profit, new competitors can come into the industry easily,
reducing profits.
 Competitive rivalry is extremely high. If someone raises prices, he or she
will be quickly undercut. Intense competition puts strong downward
pressure on prices.
 Buyer Power is strong, again implying a strong downward pressure on
prices.
 There is some threat of substitution.

Unless Martin is able to find some way of changing this situation, this looks like

a very tough industry to survive in. Maybe he'll need to specialize in a sector of

the market that's protected from some of these forces, or find a related

business that's in a stronger position.

Evaluation:

think about the current competitive structure of their industry in a structured

and logical way. It is usually regarded as a good starting point for further

analysis.

However, it is sometimes criticised because:

 it analyses an industry at just one moment in time static analysis and

many industries are changing very rapidly due to, for example,
globalisation and technological changes
 the model can become very complex when trying to use it to analyse
many modern industries with joint ventures, multiple product groups and

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 different market segments within the same industry which have their
own competitive forces.

Core competencies framework

Working with CK Prahalad, Gary Hamel, an American management consultant,

developed the concept of core competencies in relation to strategic

organisation, especially how to co-ordinate diverse production skills and

int

In summary, core competencies are the things that an organisation does

things. Prahalad and Hamel identified three factors in their framework to

identify the core competences of a business. Core competences should:

1. Provide access to a wide variety of markets A business may be

particularly good at new product development and could extend into many

different product categories. Or it may be good at developing technology to

link people who want to offer a service to those who want to use that service,

such as house rental, car rental, bike rental or food delivery

2. Deliver a significant customer benefit Businesses need to consider

what it is that makes customers choose one business over another is it the

ability of the producer to produce the same product more consistently than

other? Or more quickly? Or better designed?

3. be difficult for competitors to copy There is little point having a

competence that others can provide as well. This is because it means the

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requires a particular technology, location, culture or system that others

struggle to imitate. For example, a business may have patented technology

that others cannot use without permission Hamel and Prahalad argued that if

an organisation is not good at something, it should consider outsourcing it to

others that have competencies in these areas. Businesses should concentrate

on what they are good at and build on this. For example, a business might

make smartphones but its actual competence is in its assembly skills, which

could be adapted to other products.

Hamel saw strategic planning not as a series of logical steps but as moments

from challenging the existing situation.

Businesses need to think about their purpose, seek out ideas from the fringes

and, in particular, embrace the democratising power of the internet. They

need to think of their competencies and build their strategies based on this.

Ansoff Matrix

Ansoff's Matrix is a marketing planning model that helps a business determine

its product and market growth strategy.

grow depend on whether it markets new or existing products in new or existing

markets. The output from the Ansoff product/market matrix is a series of

suggested growth strategies which set the direction for the business strategy.

These are described below:

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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 for example by introducing loyalty

schemes

ts 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.

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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: for example

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.

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

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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.

Evaluation:

Clearly, the risks involved in these four strategies differ substantially.

towards one particular future strategy. However, by identifying the different

strategic areas in which a business could expand, the matrix allows managers

to analyse the degree of risk associated with each one. Managers can then

apply decision-making techniques to assess the costs, potential gains and

risks associated with all options. In practice, it is common for large businesses,

options, it has limitations too.

It only considers two main facto

options it is important to consider SWOT and PEST analysis too in order to

give a more complete picture.

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Recommendations based purely on Ansoff would tend to lack depth and hard

environmental evidence. Management judgment, especially based on

experience of the risks and returns from the four options, may be just as

important as any one analytical tool for making the final choice.

The matrix does not suggest and to be fair to Ansoff, it was never intended to

actual detailed marketing options. For instance, market development may

seem to be the best option but which market/country and with which of the

existing products produced by the business? Further research and analysis will

be needed to supply answers to these questions.

Force Field Analysis

Force Field Analysis was developed by Kurt Lewin (1951) and is widely used to

inform decision making, particularly in planning and implementing change

management programmes in organisations. It is a powerful method of

gaining a comprehensive overview of the different forces acting on a potential

organisational change issue, and for assessing their source and strength.

Detailed description of the process

Force field analysis is best carried out in small group of about six to eight

people using flipchart paper or overhead transparencies so that everyone can

see what is going on. The first step is to agree the area of change to be

discussed. This might be written as a desired policy goal or objective. All the

forces in support of the change are then listed in a column to the left (driving

the change forward), whereas all forces working against the change are listed

in a column to the right (holding it back). The driving and restraining forces

should be sorted around common themes and then be scored according to

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their 'magnitude', ranging from one (weak) to five (strong). The score may well

not balance on either side. The resulting table might look like the example

above.

Throughout the process, rich discussion, debate and dialogue should emerge.

This is an important part of the exercise and key issues should be allowed time.

Findings and ideas may well come up to do with concerns, problems,

symptoms and solutions. It is useful to record these and review where there is

consensus on an action or a way forward. In policy influencing, the aim is to

find ways to reduce the restraining forces and to capitalise on the driving

forces.

Evaluation:

has two main limitations as a strategic-choice method:

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Unskilled or inexperienced managers could fail to identify all of the relevant

forces involved in the change process.

The allocation of numerical values to the driving and constraining forces is

rather subjective two managers independently undertaking the same force-

field analysis could arrive at rather different values for the forces and,

consequently, propose very different decisions based on their assessments.

Decision trees

In order to make the right decisions, managers may use different approaches

to help them organise their information and think through the various

problems. These include decision-tree analysis. Decision-tree analysis tries to

estimate the possible outcomes of different courses of action and work out

the likelihood of these occurring. A decision tree is a mathematical model

which can be used by managers to help them make the right decision. By

combining possible outcomes with the probability of them happening,

managers can compare the likely financial consequences of different

decisions.

accurately estimate the options and their likelihood, but it does stress the key

issues of risk and rewards.

Using the decision-tree model

A decision tree sets out the options to managers. Given the problem facing

them, managers will identify possible courses of action.

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In Figure 6.50, the square highlights that a decision has to be made. The lines

coming out from this are the different options; in this case there are three,

including doing nothing. Managers have to estimate the different outcomes

from each course of action; this is shown on the lines coming from the circle.

For each of these possible outcomes:

The result is measured in financial terms so the outcomes can be compared.

The probability of each outcome is estimated. The probabilities of all the

outcomes must add up to 1 (or 100 per cent) this means there is a 100 per

cent chance that something will happen.

In Figure 6.50, three options are identified:

a) Modify the existing product This is expected to cost $0.2 million. The

likelihood of success is 0.8, so the managers are 80 per cent confident of

success perhaps because it is modifying a product they know well. The result

of success would be $1 million. The probability of failure is 0.2 (20 per cent).

(Note: Only two outcomes are given and one of these must happen, so the

probability of success or failure must add up to 1.)

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b) Enter a new market This is more expensive. The cost is estimated to be $1

million. The probability of success is estimated at 0.6 and is expected to

generate returns of $4 million. The probability of failure is estimated at 0.4 and

this is expected to lead to losses of $2 million.

c) Do nothing This is expected to lead to losses of $0.5 million.

Faced with a choice between these options, a manager will consider the likely

outcomes, the probability of these outcomes and the initial investment.

Using the data on the outcome, the manager can calculate what is known as

the expected monetary value (EMV) of each decision. This is the average

return expected from a decision, taking account of the different financial

outcomes and their probability. It shows what you would expect to gain (or

lose) on average if you made this decision many times. The EMV is calculated

by multiplying the probability of each outcome by its financial value and

adding these together; it is a weighted average of the outcomes.

The usefulness of decision trees

Decision trees are very useful because:

 They make managers think about the different options. This discussion
can create new solutions which may not have been thought of if they
had not gone through this process.
 It makes them consider the possible outcomes, both good and bad. This
may make them realise some of the difficulties or attractions they might
not have realised without thinking it through in this structured way.
 It makes them quantify the possible outcomes. They have to discuss and
research to find out how likely an outcome is and what it would lead to

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 financially. This, again, can be very revealing.
 It means that they make a decision based on logic rather than emotions.
If needs be, this can be demonstrated to others to explain why a decision
was made and help to gain support.

Evaluation

Limitations of Decision Tree:

 The value of a decision tree will depend on the options included. If

managers fail to think of a good solution, the decision made will be
relatively poor.
 The values for the probabilities are estimates and therefore may not be
accurate particularly if the decision has not been made before. Also,
managers may suffer bias and over-estimate the possibility of success
if they like the idea of a project.
 The outcomes are assessed in financial terms, but some outcomes may
not be easy to value; for example, the potential impact on a brand image
of a poor product or the social impact of a decision.
 The trees do not take account of what might or might not fit with the
ethics of the business. A decision may be profitable but unacceptable to
the business; for example, it may be profitable to launch a new brand of
cigarette in a country, but a company may not want to associate with
this type of product.
 The EMV is calculated as a weighted average it shows what would
happen on average if the decision was made many times. However,
decision trees are most likely to be used for big strategic decisions that
will only happen once; in this case the EMV is of limited value because
you will actually receive only one of the outcomes, not an average of
them. The implications of this are shown below.

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Chapter 09 : Corporate Planning &
Implementation

Corporate planning

A corporate plan sets out where the business wants to go and how it intends

to get there. It sets out what its objectives are. The plan shows the detail of

what needs to be done to get where the business wants to be. Each

department will produce its own plan linked to the overall plan for the

business.

Corporate plans what do they contain?

A typical corporate plan will include:

1. The overall objectives of the organisation within a given time frame

perhaps three to four years. These could be:

 profit target
 sales growth
 market share target

2. The strategy or strategies to be used to attempt to meet these objectives.

For instance, to achieve sales growth the business could consider the choices

 increase sales of existing products market penetration

 develop new markets for existing products market development
 research and develop new products for existing markets product

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 development
 Diversify new products for new markets.

3. The main objectives for the key departments of the business derived from

the overall objective.

 Mission
 Objectives
 Situation analysis
 Strategy choice
 Implementation
 Control

Corporate plans what are they for?

Potential benefits

 The value of corporate planning for several years ahead is that senior
managers have a clear focus and sense of purpose for what they are
trying to achieve
 Communicate this sense of purpose and focus to all managers and staff
below them in the organisation and this is an important requirement
for corporate plans to be effective.


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Potential limitations

 Plans are great if nothing else changes.

 The best-laid plans of any business can be made obsolete by rapid and
unexpected internal or external changes.
 However, the planning process and the plans that result from it should
be as adaptable and flexible as possible to allow plans to continue to be
relevant and useful during periods of change.

The value of corporate plans

The plan is not just for senior management consumption, it will be essential to

share the contents of such a document with:

 potential investors when a share sale is considered

 major lenders to the organisation
 other stakeholder groups, e.g. the government if requesting
development grants for expanding into an area of high unemployment
 all staff in the form of specific and tangible objectives for all
departments, sections and individuals that will be based on the original
objectives and strategies contained in the corporate plan.

The main influences on a corporate plan

Internal

 Financial resources can the new proposed strategies be afforded?

 Operating capacity will this be sufficient if expansion plans are
approved by directors?
 Managerial skills and experience this may be a major constraint on the

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  Staff numbers and skills workforce planning is a key factor in the
success of any corporate plan.
 Culture of the organisation this is discussed in detail below.

External

 Macro-economic conditions expansion may have to be put on hold

during a recession.
 Central bank and government economic policy changes.
 Likely technological changes these could make even the best-laid
plans appear very outdated quite rapidly.
 the competitive nature of the market .

Corporate culture what is meant by this?

A commonly used definition of corporate culture

world and how they respond to it in trying to achieve certain goals.

It is widely understood that different organisations have distinctive cultures.

This is very true of businesses as well as other organisations, such as schools

and colleges. The culture of a steel company will be very different from that of

a nursing home.

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The main types of corporate culture

Many management writers have used different ways to identify and classify

different types of organizational culture. These are the most widely used

culture types.

Power culture

This type of culture is most common in relatively small, owner-run businesses.

There is one dominant person (or a few key people) who makes all the major

decisions and all employees refer to them if they want to know what to do. The

ts success

depends very much on them. This can be very positive because it can lead to

decisive leadership, quick decision-making and a consistent approach.

However, if the business starts to grow, the person or people at the centre may

become overloaded and unable to cope with the number of decisions that

need to be made. This can bring decision-making to a halt as employees wait

to get a response. It also encourages employees to become reliant on the

boss and not learn how to make decisions for themselves.

Role culture

This is very common in businesses as they grow and tend to adopt a more

formal structure and culture. The importance of someone begins to be

defined by their position in the hierarchy and their job title. This type of culture

relies quite heavily on rules and procedures. To do well you need to follow the

systems that are in place and do what is expected of you, rather than using

your initiative to define your own job boundaries. Communication is via

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established channels of communication rather than through, say, informal

conversation. This leads to very predictable outcomes in terms of

performance. Senior managers know what is going to happen because

employees do what they have been told to do. This has the value of certainty.

However, the danger is that the organisation is inflexible to change and is not

prepared for unexpected challenges.

Task culture

This is relatively common in businesses such as design agencies or

management consultancies, where the value of an individual to a project

depends on their expertise rather than any formal title. In this approach, teams

are formed for particular projects and individuals brought into these as and

when they can contribute. Your value depends on what you can add to the

team rather than your age or how long you have been working there. This

approach can bring together expert teams to help solve different problems;

however, co-ordinating this approach can be difficult.

Person culture

This is not very common, but it occurs in an organisation or part of an

organisation where there are groups of well-qualified individuals who respect

practice, for example. Each individual is fairly self-reliant and can make

decisions for themselves. They collaborate with each other and share their

expertise and skills when needed, but they operate independently. This works

well if the business can function with relatively independent units, but the

danger is that the approach lacks consistency and may overlap (for example,

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university lecturers designing their own courses independent of each other

and the students finding that elements of these courses overlap).

Unfortunately, sometimes the individuals will resist if a more centralised

approach is needed, because they are used to their independence.

Entrepreneurial culture

Success is rewarded in an organisation with this culture, but failure is not

necessarily criticised as it is considered an inevitable consequence of showing

enterprise and risk-taking.

Changing Corporate culture possible reasons for

change

Many businesses have turned themselves around, converting potential

bankruptcy into commercial success. Very oft en this transformation has been

achieved by changing the culture of the business. The existing culture of a

business can become a real problem when it seems to stand in the way of

growth, development and success. Here are some examples of situations

when changing culture would seem to be essential:

 A traditional family firm, which has favoured members of the family for
promotion into senior posts, converts to a public limited company. New
investors demand more transparency and recognition of natural talent
from recruited employees.
 A product-led business needs to respond to changing market conditions
by encouraging more staff involvement.
 A team- or task-based culture may need to be adopted.
 A recently privatised business formerly run on bureaucratic principles

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 needs to become more profit-oriented and customer-focused. An
entrepreneurial culture may need to be introduced for the first time.
 A merger or takeover may result in one of the businesses involved having
to adapt its culture to ensure consistency within the newly created larger
business unit.
 Declining profits and market share may be the consequences of poorly
motivated staff and a lack of interest in quality and customer service. A
person-based culture might help to transform the prospects of this
business.

The problems of changing organizational Culture

Changing the value system of a business and attitudes of all staff who work

for it is never going to be an easy task. The process could take several years

the way people think and react to problem situations. It can mean directly

challenging the way things have been done for years. It can also involve

substantial changes of personnel, job descriptions, communication methods

and working practices.

Much work has been done on analysi

approaches are:

 Concentrate on the positive aspects of the business and how it currently

operates, and enlarge on these
 Obtain the full commitment of people at the top of the business and all
key personnel. If they cannot or will not change, it might be easier to
replace them altogether.

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  Establish new objectives and a mission statement that accurately reflect
the new values and attitudes that are to be adopted and these need
to be communicated to all staff .
 -
problems or when devising new solutions.
 Train staff in new procedures and new ways of working to reflect the
changed value system of the business.


encouraged receives recognition.

Corporate culture and business decision-making

How does a corpo

implementation?

One way is to consider how different organisations with different cultures

would introduce important changes.

In contrast, businesses that operate with task- or people-based cultures are

more likely to encourage active participation in implementing major strategic

change. Consultation and participation through two-way communication

could lead to staff willingly accepting change and contributing to a

successful change process.

The other link between culture and decision-making occurs when the culture

is either strong or weak. Strong culture promotes and facilitates successful

strategic decision-making, while weak culture does not. Strong culture means

that there is very widespread sharing of common beliefs, practices and norms

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within the business. Everyone in the business has accepted what the business

people-focused and based on listening to customers and empowering

workers, then this helps the implementation of a strategy that leads to an

improvement in customer service.

In businesses with weak cultures, employees may have no agreed set of

beliefs and there is no pride in ownership of work. People may form their own

groups within this type of organisation. These groups are based around

cultures that conflict with the weakly held business culture. Such situations

provide little or no assistance to strategic decision-making or implementation.

The importance of corporate culture

The culture of a business or a part of a business matters because it

determines how employees will behave in any given situation. This can work in

recognises and rewards creative talent and technological skills. Bright

computer programmers will go far in this organisation regardless of their age

and, to some extent, regardless of their formal qualifications; if they can do it

and prove they can do it, they will probably be promoted. This encourages

ideas and new thinking which helps keep Google ahead of its rivals. A culture

of accuracy and attention to detail, by comparison, may ensure your firm of

accountants does not make any mistakes.

organisations, the customer seems an unwelcome visitor! Customers are not

truly valued and employees do not make the effort to provide good customer

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service. This will lose the business money over time. In other organisations, the

unwillingness to take risks may mean market opportunities are missed. For

example, imagine that a re

wrong products were ordered and the wrong approach to displays was

chosen, no one would dare to speak up. The culture did not encourage a

questioning approach, which meant that even though staff may have seen

the iceberg ahead, they would not shout out the dangers because they simply

followed the course the captain set for them.

The importance of culture in terms of the success (or failure) of a strategy

should not be underestimated. Is the business full of ideas, encouraging

initiative, stressing the value of working hard and working effectively? Are new

projects met with open arms? Do individuals take care to get it right and show

commitment to a project? All these issues depend on the culture of a

business. It determines what people do, how they work together, how much

effort they make, what they strive for and, basically, determines how the

in, whatever ideas you have, the

culture of the business will influence whether they are implemented, how they

are implemented and the level of commitment to them by employees.

Transformational leadership

Transformational leadership is a style of leadership that was described by

James Burns in his book Leadership and later developed by Bernard Bass. It is

an approach in which leaders work with others to agree what needs to be

changed and develop the appropriate steps to be taken. However, it sets out

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to transform the rest of the team so that they become leaders themselves.

This can be a powerful way of bringing about change because those involved

are the leaders of it.

Bass identified four elements that make up a transformational leader, known

» Idealised influence (II) This means that the leader acts as a role model and

wins the respect of their team. They encourage a shared vision so the team

sets out to achieve the overall objectives of the business.

» Intellectual stimulation (IS) These leaders encourage others to innovate and

to form new ideas for the organisation and themselves. They push others to

challenge their own beliefs and values, as well as those of the company, in the

belief that this leads to innovation.

» Inspirational motivation (IM) Transformational leaders work to increase team

morale through motivational techniques and acting as inspiration for their

followers. They set high expectations to individual followers and motivate them

to gain their commitment to a shared organisational or team belief.

» Individualised consideration (IC) Transformational leaders create a diverse

and supportive environment, where individual differences are respected and

celebrated. They will know each of their followers individually, and listen to any

concerns or needs that their team members may have.

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The importance of transformational leadership

 Transformational leadership increases the chances of successful

change within a business. Change that is supported by employees and
benefits from their input is likely to lead to continued business success.
 It increases the flexibility and adaptability of a business to cope with
frequent change. The business world is becoming more dynamic and
one change may be followed by the need for further flexibility in future.
 It focuses on leading change, not forcing it on employees with an
autocratic style. That encourages workers to accept change and work
towards making it a success.
 It improves employee motivation and performance. Encouraging
workers to achieve above the normally expected level will benefit both
the business and the worker.

Managing and controlling strategic change

Managers need to control the change process, not be controlled by it.

Managing change involves the following steps.

1. Understand what change means

Change is the continuous adoption of business strategies and structures in

response to changing internal pressures or external forces. Change happens

whether we encourage and welcome it or not.

Today, change in business is not the exception but the rule it has become an

accelerating and ongoing process.

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Change management requires firms to be able to cope with dramatic one-off

changes as well as more gradual evolutionary change:

Evolutionary or incremental change occurs quite slowly over time, e.g. the

swing towards more fuel-efficient cars has been happening for several years.

These changes can be anticipated or unexpected

Dramatic or revolutionary change, especially if unanticipated, causes many

more problems. Civil conflict in Egypt in 2011 forced many holiday companies

to reestablish themselves in other countries or markets. In extreme cases,

these dramatic changes might lead to totally rethinking the operation of an

re-

engineering.

2. Recognise the major causes of change

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3. Understand the stages of the change process

Here is a checklist of essential points that managers should consider before

attempting to introduce significant changes in an organisation:

 Where are we now and why is change necessary?

 New vision and objectives:
 Ensure resources are in place to enable change to happen:
 Give maximum warning of the change:
 Involve staff in the plan for change and its Implementation
 Communicate:
 Introduce initial changes that bring quick results:
 Focus on training:
 Sell the benefits:
 Always remember the effects on individuals:
 Check on how individuals are coping and remember to support them:

4. Lead change, not just manage it

All strategic change must be managed. This means that:

 new objectives need to be established that recognise the need for

change
 resources finance and staff need to be made available for the
change to be implemented
 appropriate action needs to be taken and checked on to ensure that
the planned changes are introduced.
Managing change effectively is important to successful implementation.

Change leadership involves having a much greater vision than just making

sure the right resources are available to deal with change. Leading change

means:

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  dynamic leaders who will shake an organisation out of its complacency
and away from resi
 motivation of staff at all levels of the organisation so that change is

motivation will lead to significant changes in the behaviour of workers

 ensuring that acceptance of change is part of the culture of the
organisation
 visible support of all senior managers who will help the change process
to be accepted at all levels and within all departments of the business.

5. Project champions

A project champion is often appointed by senior management to help drive a

programme of change though a business. change, the best way to promote it

in any organisation is to adopt the following eight-stage process:

1. establish a sense of urgency

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

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Project groups or teams

Problem-solving through team building and using the power of project groups

is a structured way of making a breakthrough in a difficult change situation.

Project groups should work with the manager responsible for introducing the

change. A team meeting of experts should discuss and decide on an

appropriate action plan being developed and agreed. The responsibility for

carrying the plan out still lies with the original manager. Now, however, they will

be better equipped to solve the problem that was preventing change from

being effectively implemented.

Promoting change

Gaining acceptance of change by both the workforce and other stakeholders

is more likely to lead to a positive outcome than imposing change on unwilling

people. According to John Kotter, a leading writer on organisational change,

the best way to promote change in any organisation is to adopt the following

eight-stage process:

1. establish a sense of urgency

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

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Resistance to strategic change

The managers and workforce of a business may resent and resist strategic

change for any of the following reasons:

 Fear of the unknown:

 Fear of failure:
 Losing something of value:
 False beliefs about the need for change:
 Lack of trust:
 Inertia

Contingency planning and crisis management

This is also known as disaster recovery planning, which perhaps gives a better

idea of its purpose. Unplanned events can have a devastating effect on

businesses of any size. Crises such as fire, floods, damage to inventory, illness

of key emplo

premises or involving its vehicles could all make it difficult or impossible to

carry out normal everyday activities. At worst, important customers could be

lost or the business could cease operating completely.

Effective contingency planning allows a business to take steps to minimise the

potential impact of a disaster and ideally prevent it from happening in the first

place. If unexpected emergencies do occur, they require effective crisis

management.

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1. Identify the potential disasters that could affect the business

Some of these are common to all businesses, but others will be specific to

certain industries. For example, the oil industry must plan for oil tankers sinking,

explosions at refineries and leakages in oil and gas pipelines. Failure to do this

can have serious consequences. One of the costliest disasters in recent years

was the oil leak from the BP Deepwater Horizon oil rig. Compensation and fines

cost the company $65 billion.

2. Assess the likelihood of these occurring

Some incidents are more likely to occur than others and the degree of impact

on business operations also varies. It seems obvious to plan for the most

common disasters, but the most unlikely occurrences can have the greatest

carefully when choosing which disaster events to prepare for most thoroughly.

3. Minimise the potential impact of crises

Effective planning can sometimes cut out a potential risk altogether. When this

is not possible, the key is to minimise the damage a disaster can do. This does

reputation and public goodwill. This is often best done by the publicity

department telling the truth and explaining the causes, if known. It should also

give full details of how to contact the business and the actions being taken to

minimise the impact on the public. Employee training and practice drills with

mock incidents are often the most effective ways of preparing to minimise any

negative impact.

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4. Plan for continued operations of the business

Continuity planning is a key part of preparing for contingencies. As prior

planning can help a business find alternative accommodation and save IT

data. The sooner the business can begin trading again, the smaller the impact

on customer relationships.

Benefits and limitations of contingency planning

Benefits

 It reassures employees, customers and local residents that concerns for

safety are a priority.
 It minimises the negative impact on customers and suppliers in the
event of a major disaster.
 The public relations response is much more likely to be speedy and
appropriate, with senior managers explaining what the company
intends to do, by when and how.

Limitations

 It is costly and time-consuming, including the need to train employees

and have practice runs of what to do in the event of a fire, IT failure,
terrorist attack, an accident involving company vehicles, and so on.
 It needs to be constantly updated as the number and range of potential
disasters can change over time.
 Employee training needs to increase if labour turnover is high.
 Avoiding disasters is still better than planning for what to do if they occur.

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