FOR THE IB DIPLOMA Business Management Study and Revision Guide Paul Hoang d> HODDER(Bibs DIPLOMA Business Management Study and Revision Guide \ Paul Hoang Gy HODDER ) EDUCATIONDedication “This book is dicated to Mrs Smith, my werdertul primary schoolteacher who taught at Fenthl Junior School, Bris, UK Acknowledgements My deepest thanks and love to Kin, Jak and Luke for always being there for ma My hearfel thank to So-Shon Au, my Publisher and flow Arsenal fan for ber deation, Support and gudancetneughout the mony projects wa have worked on Finally my sincere grade also goes to Arson Mi and Joyce Tong, outstanding students ‘who provided me with invaaabe lodback rom te perapecbve of Bi learners “The Publehers woul lke to thank the lowing for permision to reproduce copyright mate Photo credits {110 Sean Galup/Gstty images p.24 © YurhinkstockitockiGety Imager B.2b@ cinham Okey Sol tote; p44 © Mitiey Sunes: Fok SS 6 Monkey Susines ~ ato p64 Photo From Puabey com, CCD Pubic omaiy 73 6 Global ntagration Ld (at gla integration cory, pL7S © PACITICA/Almy $tock Photo p.76 8 Carsten Reger tly p85 6 Steve Reset Steckphota com, 11346 larandaev ~fotohs com; p.1St © Imaperata Media John Fas P.167 6 istckphotoslkvayrain, p72 8 Alisandr Kurganow - Fotolia Text credits 1.87, p.89 From Businoss Management Guide © Internationa Beccalaureate Btganzaton 206; p.38 termens Revi Febrinry 2013, © PrilpAlan Publisher 2013 ‘This work has been developed independently rom and is nat endorsed by the International Baccalaureate (8). All brand names are protected by their respective twadematks and are acknowledged Every effort hae been made to race all capytight holders, but any have been inadvertently overlooked, the Publishers will be pleased to make the necessary arrangements at the fst opportunity Although every aforthas been made to ensure that website addresses are correct at time of Going to press, Hodder Education cannot be hald responsible for the cute of any wobsite reiioned in this book. tis sometimes possible to find a relocated web page by typing inthe address ofthe home page fora websitein the URL window of yout browser Hachette UK's policy isto use papers that are natural, renewable and recyclable products ard ‘rade from wood grown in sustainable forests The logging and manufacturing processes are fexpected to conform tothe erwronmental regulations ef the country of rig (Orders: please contact Bookpoint Iz, 130 Park Drive, Mion Park, Abingdon, Oxon, OX14 ASF. Telephone: (a) 01235 827720. Fx: (44) 01235 40044. Email education@bookpoint co.uk Lines are open from 9 a.m. t0 5 pam. Monday to Saturday, with 2 24-hour message answering sorvee. Yeu can ako order though Gur webste: wras.hoddereducaton.com © Paul Hoang 2016 First published in 2016 by Hodder Education, ‘An Hachetta UK Company Carmelite House 50 Victoria Embankment London ECAY 002 ‘woewhoddereducation com Impression number 10987654321 Year 2019 2018 2017 2016 All ightsesened. Apart fom any ise permitted under UK copyright lw no part of hie pubetion ny eroded varies ay farm Bay mea elena Mechanseainciing photocopying srl recording, or held within ay formation storage Shed retrevalsyste, without persion inwrtng from the publsha o unde ence fom ‘he Conyaht Licensing Ageney ited Further det of such ences (or recopraphic teprodyton may be obtained for he Copyright Licensing Agency Umited, Sefton House, ENO Ky Snes London ECIN BTS Cover photo © Pavina/steckphata.com Mustations by Aptara “Typeset in GoudyStd, 10/2 pts by Aptara Inc Printed in Spain A catalogue record for thistle ic available from the British Libray ISN: 978 147 196842 9Contents How to use this study and revision guide Getting to know the exam Assessment objectives and command terms Countdown to the exams Unit 1 Business organization and environment LI Introduction to business management 12 Types of organization 13 Organisational objectives 14 Stakeholders 15 External environment 16 Growth and evolution 17 Organizational planning tools (HL only) Unit 2 Human resource management 2.1 Functions and evolution of human resource management 2.2 Organizational structure M23 Leadership and management 24 Motivation 25 Organizational (corporate) culture (HL onl) 26 Industrialfemployee relations (HL only) Unit 3 Finance and accounts 31 Sources of nance 3.2. Costsand revenues 33 Break-even analysis 3.4 inal accounts (some HL only) 3.5 Profitability and liquidity ratio analysis 36 Bifciency ratio analysis (HL only) 37 Cash flow 38 Investment appraisal (some HL on) 39 Budgets (HL only) vi vi vill R 18 2 25 31 36 45 52 56 65 67 m4 79 82 86 92 94 97 101 105iv Contents Unit 4 Marketing 41. The role of marketing 42. Marketing planning (including introduction to the 4 Ps) 43. Sales forecasting (HL onb) 44 Market research 45a The 4 Ps: Product 45b The 4 Ps: Price 45 The 4 Ps: Promotion 45d The 4 Px: Place 46. Theextended marketing mix (7 P3) (HL onl) 47 International marketing (HL only) 48 E-commerce Unit 5 Operations management 5. The role of operations management M52 Production methods 53 Lean production and quality management (HL on) 54 Location 55 Production planning (HL on) 56 Research and development (HL onl) 57 Crisis management and contingency planning (Honk) G lossary 108 4 119 122 130 135 138 143, 146 148 152 157 160 162 167 169 174 176 179How to use this study and revision guide ‘Welcome to the Business Management for te IB Diploma Revision andl Study Guide! Thi book will help you plan your revision and work through it in a methodological way. The guide follows the Business Management syllabus topic by topic, with revision and exam practice questions to help you check your understanding, ® Features to help you succeed, Uo aes Erie These provide you with actiites fram practice is given for both These tips give advice that will help and essay questions to help prepare Papers and for the type of you boost your final grade. ‘you for the Paper 2 Section C questions you might get ~ short component ofthe final examination data questions, defnitons, and Have a goat these to consolidate rmathernatical calculations, and Keyword definitions ‘your understanding and application extended response questions, with Fnittonact omental aera cele ert” | The dentonf nena ay Business Management - change, ‘these to consolidate your revision wh mr The ‘page culture ethics, elobalzation, and to practise your exam sk. es ther appa. Thessane innovation and strategy. words that you can be expected to define in exams. ‘You can keep track of your revision by ticking off each topic heading in the book. Usea checklist to record progress as you revise. Tick each box when you haves = revised and understood a topic: 1 used the Exam practice questions and gone online to check your answers Use this book as the cornerstone of your revision. Dont hesitate to write in it and personalize your notes. Use a highlighter to identify areas that need further work. ‘You may find ithelpful to add your own notes as you work through each topic. Good luck!vi How to use this study and revision guide Getting to know the exam Exam paper__Duration Format Topics ‘Total marks Papert (SL) ‘hour 15 mins Pre-release case study all 0 Paper? (U) 1 hour 45 mins Structured questions all 50 Paper 1 (Hl) 2 hours 15 mins Pre-release case study all 5 60 Paper 2 (Hl) 2 hours 15 mins Structured questions All 40 70 Ac the endl of your Business Management course you will sitewo papers — Paper 1 and Paper 2. The external exams (Paper Land Paper 2) account for 75% of the final marks. The other assessed part of the course (25%) is the Internal Assessment (1A) which is marked by your teacher, bur externally moderated by an examinet. “Here is some general advice for the exams: Make sure you have learnt the command terms (eg evaluate, explain, outline, cere) there isa tendency to focus on the content in the question racher than, the command term, but if you do not address what the command term is, asking of you, then you will not be awarded full marks Command terms are covered helow. Ifyou cun out of room on the pag, use contindation sheets and indicate clearly that you have done this on the cover sheet. ‘The fact that the question continues on another sheet of paper needs to be clearly indicated in the text box provided. Plan your time carefully before the exams Assessment objectives and command terms To successfully complete the course, you have to achieve certain assessment “objectives. The following table shows all of the command terms, with an indication of the depth required from your written answers. “Define ___ADT_—_—_ Setting upa business involves obstacles and opportunites that employees would net atherwise face if they work for someone else ‘© Some people are motivated by and thrive on personal challenges. They enjoy gaining knowledge and developing new skills ‘Some people have a deste to follow a personal interest and pursue this as a business opportunity Ding something you are passionate about every day is a key eason forthe motivation af entrepreneurs ‘The aim isnot always primarily to make a profit ‘Some people identify business opportunities or gaps in the market so start their own business, eg. Stelios Ha-toannou (easylet) and Tony Ryan (Ryanair) saw huge business opportunites inthe low-budget European ailine industry Recognizing a niche in the market helps the business to gain a fist mover advantage Family traition ‘© Being entrepreneurial is often a family trait, e.g the Trump family (Trump Organization), the Walton family (Walmart) and the ton family (Hilton Hotels) Flexibility autonomy) ‘© Setting up and running your own business means the owners can set thelr own deailines and get things done in thelr own way ‘Money "©The key diver for starting up a business or an enterprise i the potential to earn alt of money through bard work and sheer determination Interest and enjoyment Niche market opportunities Common steps in the process of starting up a business or an enterprise (A02) ‘Table 1.2 Steps to starting up a business Have an idea Entrepreneurs idently and develop market opportunities. Many new businesses start rom the innovative and creative ideas of entrepreneurs, such as Red Bul, Alibaba.com and the Walt Disney Company CConductrelevant This helps to determine the likelihood of success, eg. size ofthe potential marke, set-up costs, cash flow forecasts, research barriers to entry and a competitor analysis. sultable busines location also needs tobe determined Produce a ‘business plan is created, outining the firm's mission, goals, resources, personnel, finances and budgets, marketing business plan plans and overall business strategy. A business plans important ifthe frm wishes to seek externa finance from banks and investors Determine The owner(s) need to decide on the legal structure ofthe business, e.g. sole trader, partnership or limited liablity a business company (see Unit 1.2). The owner's) should also decide on an appropriate business name structure ‘Meet legal Business registration is important to get formal certification, permits and licenses to trade. The owner(s) must make requirements __necessary payment to solicitors for legal fees. Insurance needs to be sorted out for employees and the busines itself ‘Once these steps have been completed, the business can setup its premises ‘onder to trade. The business will need to be managed effectively in terms of human resources, operations management, marketing and finance.1 Introduction to business managemen' Problems that a new business or enterprise may face (A02) Table 1.3 Problems that a newb ss may face Planning oor market esearch can result inthe business idea being flawed asthe product falls to meet the needs and wants of customers. The set-up procedures can be time-consuming, especially wth complicated legal aspects to deal with Finance Inability to raise sufficient start-up finance orto maintain liquidity in the business (see Unit 3.7) can cause financial problems. Start-up businesses often struggle to secure extemal sources of finance from banks and other lenders to fund ‘heir operations In some cases, setup costs can prove to be unaffordable ‘Marketing ‘Start-ups have a limited budget available for promation and advertising. The product might lck differentiation or Alistinctve seling point, so fasta gain tecogeition and market shate. A small eustamer base i Ikely to cause quity Issues Human resources New, unestablised businesses may struggle to recruit suitable and experienced employees Operations management ‘New businestes lack an established relationship with suppliers, which can cause delivery and distribution problems. ‘They lack necessary finance to fund research and development, so are ata disadvantage against established businesses Strategic thinking Entrepreneurs may lack the necessary experience in strategic decision making, causing major problems forthe start-up business. Their business plans are often not convincing or detalled enough to secure the necessary finance to get the business started The elements of a business plan (Ao2) Table 1.4 Elements of a business plan Emcee often ces and sae Ieee iaywuad Seino Business Description ofthe business, legal satus and ownership, and te goals | business plan is a formal description and objectives. It may also include the firm's mission or vision statement | osument that details how an (Gee Unit 1.3). For larger firms, the plan might also include details ofthe ‘organisation intends to meet its arene wars objectives. It adds substance to REIT Desa the arnt SY ELSES) WORLD STOTT COTS ST Stace esa IGE environment leaders or marketshare data, Ths section is likly to include a SWOT pomeaic talnringand decision: analysis (Gee Unit 1.3) ora STEEPLE analysis bee Unit 1.5) making Product Detals ofthe product offering (goods andar services) to prospective description customers. The plan should idetiy what makes the product unique or tingushable fom others that might be avallabl onthe market Marketing Thissection details the state of the market, including projected sales figures and marketing opportunites. I may incude information about market research, branding, prices, distribution channels, promotions and advertising, and online processes Thispart outlines the finances af the organization, Including ts balance sheet and income statement (see Unit 3.4), thus defining the financal status ofthe firm. Business plans are often used to attract funds from banks, venture capitalists or other investors Production processes and operational costs appear inthis secon ft may SUES IE (OSLISET ES Operations Hunan indude sections on quality assurance, stock control ventory management), Faei Oromieaion ctroul ‘supply-chain management (ee Unit 5.5) and supple networks chacarenlan Law tie corcpts ‘Thissection contain information about staffing and may inelude an ‘of change and innovation have ‘organizational chart impacted on its business start-up. 5Unit 1_ Business organization and environment 1.2 Types of organization —— Distinction between the private and the public sectors (A02) = The private sector is the commercial sector of the economy, mainly owned and run by private individuals and organizations that typically strive for a profit. 1 Examples of private sector businesses include: sole traders, partnerships, limited liability companies, franchises (ee Unit 1.6) and multinational corporations (Gee Unit 1.6) = Organizations in the public sector ate controlled by regional andjor national governments, 1 The public sector provides goods and services deemed to be essential and of benefit to its citizens, eg transport and communications networks, healthcare services, education and national defence. The main features of the following types of for-profit (commercial) organizations (Ao3) © Sole traders = A.sole trader (or sole proprietorship) isa commercial business owned by a — single person (known asthe soe taker. Sf con employ as many pecple as | Keyword definition required, but remains the only owner of the business ‘Unlimited liability means that the ‘owner of a business is personally & essninasan unineme eines other solo pation Garner fa bane socal between the owner and the busines itself Hence a sole trader has unlimited | 3. ie yay need to pay for liability and is responsible (liable) for any debe of the business which may be the debts by selling ff there paid from the sole trader's personal assets = Binance co run the business is provided by the owner. personal assets 1 Legally, asole trader and the business are considered as one, Le. the owner is not a separate legal entity ftom the owner. = The individual owner accepts ll the risks of running the busines, including possible losses or busines failure, but receives all profits if the business succeeds Table 1.5 Advantages and disadvantages of sole traders Advantages of sole traders Disadvantages of sole traders ‘© Assole trader is quick to create, without long and expensive e ‘The sole trader bears all risks and has unlimited lability as the setup procedures; itis the easiest form of business organization _ firm's finances are not separate from the owner's to setup ‘© Finances limited as the main source is provided by the owner; ‘© The owner has complete control and is free to make decisions access to extemal finance is ffcut asthe firm represents high risk, without any consultation with others soexpansion is difficult ‘© Decision making is therefore quick ‘© There is no one else to share ideas, burdens or responsibilities, ‘©The owner enjoys tax advantages as a small business. [iting the ect to wehich sole raters can benafit roca ‘© The owner enjoys privacy asthe business does not need to speciation ani etton of |sbour publish ts financial accounts to the general public only thetax © Added workload and tres from having to run the business as & authorities need to see these) sole owner, often having to work long hours ‘© Fexiblity a the sole trader can intraduce new trading activities © The lack of continuity if the owner is sick or wishes to go on ‘or change what the business does with relative ease holiday as the business will struggle to continue ‘© Motivational as ovmers have a sense of achievement from © Inability to exploit economies of scale which means that a sole running their ovm business ‘uader struggles to gain cost advantages so has to charge higher prices forthe products1.2 Types of organization 7 = Partnerships = A partnership isa commercial business organization owned by two or more people. In an ordinary partnership, there are usually between 2 to 20 owners (depending on the country’s laws on partnerships). These owners are called partners. Asan unincorporated business, at least one partner will have unlimited liability, although i is usual for all the parmersto share responsibility for any losses made by the partnership. 1 Itispossible for some businesses, such as law firms and health clinics, to operate with more than 20 partners. & Toprevent potential misunderstandings and conflict, most partnerships draw ‘upa legal contract hetween the partners, known as a deed of partnership, stating their responsibilities, voting rights, and how profits are to be shared between the owner. s= Partnerships are usually found in professional services (such as doctors, solicitors dentists and accountants) an! n family-run businesses Table 1.6 Advantages and disadvantages of partnerships ‘Advantages of partnerships jsadvantages of partnerships ‘© With upto 20 oviners (depending on the country), partners are © As there ismore than one owner, there might be disagreements abl to raise more finance than sole traders and confit between the panes, whch cen undoubtedly harm ‘© The partners can benefit from having more ideas and expertise, the running ofthe frm slong with shared workioads and eesponsiltes, «© Any profits made must be shared between all the partners ‘© They can also benefit fom specialization andthe dvsionoflabour The death or departure ofa partner can cause the organization © Busines affairs are kept confidential, so only the tax authorities Cease unti anew partnership agreements legally created need to know about the financial postion ofthe partnership» In most cases, partner ave unlimited bit (seeping «Theres improved continuity as the partnership can remain in parines are exem) busines ifaparterisill or goes on holiday © Linited ability to rise capital compared with ited ity “6 Sier.partners (or deepng partner) can prove addtional capital Companies; acces to finance i constrained by the number of vist having anacve ein the runing ofthe business partners = Companies/corporations = Companies (or corporations) are commercial businesses with limited liability and owned by their shareholders. Hence, any profits must be distributed among shareholders & Asincorporated businesses, there is divorce of ownership and control (a legal difference between the owners of @ company and the business itself), 50 shareholders have the benefit of limited liability. '= Limited lability protects shareholders who, in the event of the company going bankrupt, cannot lose more than the amount they invested in the company. © Typically, toset upa limited liability company, the owners must submit two important documents The Memorandum of Association — a relatively short document that records the name of the company, its repstered business address, the amount of share capital and an outline of the company’s operations (wat itcdoes). The Articles of Association — a longer document that contains information about: — The details and duties ofthe directors of the company Shareholders voting rights ‘The transferability of shares Details and procedures for the Annual General Meeting — How profits are to he distributed (dividend policy) ~ Procedures for winding up (closing) the company.Unit 1_ Business organization and environment = Once the authorities are satisfied with the paperwork, a Certificate of Incorporation is issued to the limited company so that it can begin trading. The shareholders elect a Board of Directors (BOD) to take charge of the strategic direction of the company en behalf ofits owners. = There are two types of limited companies: private limited companies and public limited companies (see Table 17) Table 1.7 Features of private ited companies and public limited companies Features of private limited companies Features of public limited companies ‘© Usually smaller businesses than publi limited companies "© Shares in public imited company can be bought by and sold to any member ofthe public orinsttution © Shares can only be transfered (bought or sold) e-_The first time that shares in a public ited company are sold via a stock privately, and all shareholders must agree on the saleftransfer © Typically, shares are owned by family, relatives and close fiends viaa stock exchange © Examples include Mars and IKEA exchange is called an inital public offer (IPO) © There is no legal maximum numberof shareholders; the company can have as many shareholders as its share capital can accommodate ‘6 Public limited companies tend tobe the largest type of business organizations ‘¢ _ The shares cannot be advertised for sale orsold They are strictly regulated and are required by law to publish their complete financial accounts (see Unit 3.4) on a yearly basis © Examples include Google, Toyota and Samsung Table 1.8 Advantages and disadvantages of private limited companies ‘Advantages of private limited compar Disadvantages of private limited companies ‘© Control ofthe company cannot be lost as shares cannot be bought ‘© Shares cannot be sold to the general public, restricting ‘without the agreement of existing shareholders finance compared with a public limited company ‘© More finance can be raised compared witha sole trader or apartnership = Legal fees and auditing fees mean itis mare expensive ‘© Private limited companies tend to have more privacy than public limited companies © There is continuity inthe event ofthe death of one of the main shareholders © Owners have limited ibility so can only lose up tothe sum of ther irwestment Table 1.9 Advantages and disadvantages of public imited compar ‘Advantages of public limited Disadvantages of public limited to set up compared toa sole trader or partnership, ‘©The company can become vulnerable toa takeever by 2 larger company © There slack of privacy as financial accounts must be companies companies ‘© Itiseasierto obtain finance for growth and evolution (see Unit 1.6) by selling ‘additional share capital (© Itisalso easier for large public imited ‘companies to secure external sources of finance from banks and other investors orfinancers © They can enjoy the benefits of being large, e.g, economies of scale, mattet power and market dominance ‘© Owners enjoy limited liilty 5 ‘As with private limited companies, there 's continuity, even if one of the principal shareholders dies The financial information becomes public as people have acces tothe final ‘accounts ofa public lited company They are the most administratively siffcut, time consuming and expensive ‘ype of commercial business to set up ‘There are high costs of complying with the rules ofthe stock exchange ‘There's the potential threat of a takeover bya rival company ‘There's the possiblity that the fim becomes too large to manage efficiently 0 suffers from diseconomies of sale le. higher average costs of production made avalable upon request Keyword definition A stock exchange (or stock ‘market) is the markerplace where people and businesses buy and sell seconcthand company stocks and shares, eg. the New York Stock Exchange,1.2 Types. of ‘organization Types of for-profit social enterprises (Ao3) = A social enterprise is.an organization that uses commercial business practices {eo improve communities, the environment and human well-being rather than focusing on profits for external shareholders. ‘= Some social enterprises are run for profit (eg. cooperatives, microfinance providers and public-private partnerships), whilst others are run as non-profit Drganizations (eg. non-governmental organizations and charities) = Non-profit organizations can earn a surplus from selling goods and services but reinwest this hack into the business and/or local community. = Cooperatives 1 Cooperatives are for-profit social enterprises owned and run by their members, such as employees, managers and customers, Cooperatives strive to provide a service and! to create value for their members, rather than a financial return for their member-enners 1 Like a limited liability company, a cooperative is a separate legal entity Shareholders, directors, managers and employees have limited liability so are ‘not personally liable for any debts incurred by the business. © All: members have equal voting rights irrespective oftheir position in the ‘organization or their level of investment. All shareholders are expected to help run the business. They promote a democratic style of managing the organization, with a culture of promoting the concepts of sharing resources and delegation to increase competitiveness advantages of coopers Table 1.10 Advantages and ‘Advantages of cooperatives Disadvantages of cooperatives "© [tis usualy straightforward andinexpensve to setup a ‘© Itcanbe diffcutto attract potential membersbharcholders as cooperative «cooperatives are no formed to generate a financial etun on ‘© All members and shareholders must be active stakeholders of investment the cooperative, making it more key to sucezed ‘© Limited resources asthe nancial strength of cooperatives ‘© Shareholders have equal voting rights (ll embers are equaly depends onthe capital contributed byits members (membership Important forthe cooperative), making the organization more ‘fees are limited so they are unable to raise large amounts of ‘democratic and harmonious finance Members have limited Kabilty ‘© Employes and managers may nt be highly motivated due to Members own and control the business rather than being the absence of financial rewards and benefits ‘govermed by external investors ‘© As cooperatives are managed by their members only, employees Any spin spent otha ins f heternborva may not have any managerial sil so inefficiencies can hinder portion is kept for reserues as an internal source of finance ‘andes of te Eustis ‘© Although some members have more responsible, they sil ‘© Governments often provide special financial assistance to ae lore ehchren bedened nant help cooperatives © Microfinance providers Microfinance providers are a type of banking service provided to unemployed or low-income earners who woukl otherwise strugele to gain external finance, 3. savings, insurance, loans and remittance transfers. 1 Microfinance gives these people, women in particular, the opportunity ro become self.sutficent by providing small loans, savings and other basic financial services. |= Microfinance providers charge inrerest on loans, although the rates are generally lower than those offered by commercial banks. 910 Unit 1_Business organization and environment Table 1.11 Advantages and disadvantages of microfinance providers Disadvantages of microfinance providers tics of microfinance condemn the system for earning Advantages of microfinance providers Helps those ivng in poverty to become financially independent © Empowers entrepreneurs (specially females) of smell businesses profs fom the poor, sis egardd a being unethical © As around half ofthe words population survives on les than $29 ® Microfinance is small scale, sos insufficient to transform day, microfinance provides poverty relief communities and societies ‘© They generate socal benefits, e.g. health, education, clean water, and ® Microcredit loans can prove to be too expensive for some job cation borowers as itis dificult or them earn enough prof © Helps to build and encourage a culture of economic responsibility 1 rast the lone repavmienis © Public_private partnerships (PPPs) = Public_private parmerships (PPPs) are organizations jointly established by the goverment and at least one private sector organization, e, the Hong Kong government owns 51% of the stake in Hong Kong Disneyland whilst rhe Wale Disney Company owns the other 49% stake. PPPs have been used for a wide range of projects that benefit local communities and society, eg. schools, hospitals and health care services, bridges, roads, public transportation networks prisons, parks and convention centres, They are suitable when the capital to finance a public project from public funy sufficient oF not available, eg. a government inight be heavily indebted but collaborates with a peivate sector firm in exchange for receiving seme of the operating profits from the project (Once the project is built or complete, i is usually maintained by the private sector contractor on a medium to long tert basis (up 0 30 yeas) after which time there is the option to renew the partnership or the asset returns to public ownership. ‘Acconding to the World Bank, more than half the ccuntries around the world now use PPPs Find more about PPPs on the World Bank website (httpi//goo.gl/fm62u3), which includes an introductory video on Vimesx htps://vimeo,comi47015729 Table 1.12 Advantages and disadvantages of public-private partnerships (PPPs) Advantages of PPPs Disadvantages of PPPs Both private and public sectors contribute Financial resources towards the project and share some of the risks ‘They are run more efficiently than traditional bureaucratic public sector organizations They provide a solution to the funding shortfall of many governments Similary, government funding can help private firms to reduce the amount of money they need for investment projets Private sector management skills and financial support help to create better value for money for taxpayers (who help to fund the FPP) ‘© _PPPshave positive impacts on employment and econamic growth ‘© There is eimays an opportunity cost of public sector inences and resources; by engaging in a PPP, the government forgoes (urns down) other projects or areas of expenditure ‘As PPPs tend tobe large projects and imvohe vastsums of money and high operational costs fora lang peri of time, they are high risk investments ‘There is the potential danger af confit of interests between stakeholder ofthe PPP, e.g private sector managers need to ‘actin the intrest oftheir shareholders whilst the government has alternative priorities Private investors might be put off due tothe difficulty in estimating financial outeomes ofthe PPP over such longtime petiods Types of non-profit social enterprises (Ao3) 1 Social enterprises are organizations that generate revenue but, act with, community cbjectives (forthe wellbeing f others) atthe core ef their operations . profits fo ts owners or sharchoklers, hut instead uses the su mmission ot vision ‘A non-profit organization acts in a business-like way but does not distribute plus to pursue its Examples of non-profit social enterprises include non-government organizations and charities, such as UNICEF, Human Rights Watch, Greenpeace, Ronald McDonald House Charities, and World Wildlife Fund.1.2 Types of organization 11 Figure 1.1 Greenpeace is anon- profit social enterprise Table 1.13 Advantages and disadvantages of non-profit social enterprises Advantages of non-profit social enterprises __Disadvantages of non-profit social enterprises ‘© Theyare exempt from paying income taxes and ‘© Inorder to protect the general publi there are strict restrictions corporate taxes ‘and guidelines that must be followed, including the types of trading ‘© They qual for government grant and subsides activites alowed ‘© They exist for the benefit of local communities and © Eamings of workers are often lower as it would be regarded as unethical Societe, which com asstfundaing and donations WOrkErs Wer pald similar wages fo these infor prot fms eAspartefgovermentincentnes to encourage donors, © They ae often ella on donations and external support in rdet to romprofisodal enterprises qualify fortax reductions Sure ‘on thelr donations ‘© Costandfnancal conte may notbe stringent as there sno expectation tocar a profit © Non-governmental organizations (NGOs) = A non-governmental organization (NGO) isa type of non-profit social enterprise that is neither part of a government nova traditional forprofit business but run by voluntary groups. = They may be funded by governments, international organizations, charities, commercial businesses or private individuals. = NGOs can operate ata local, national ce inteenational level but are not usually affiliated with any government. ‘= The majority of NGOs are run to promote a social cause, eg, human rights, ‘animal rights, environmental protection, disaster relief, and development assistance, = Examples include: Oxfam, the Wikimedia Foundation, Amnesty International, Doctors Without Borders and World Vision International, = They exert pressure and influence on government polices to support their cause andjor a wide range of global isues. © Charities 1 Charities are notforprofit organizations that operate in an altruistic way with the objectives of promoting a worthwhile cause, eg. child protection or anti-whaling. Be sure to know the difference m= They predominantly operate in the private sector. Ceres canter me Nee Whilst ‘ate non-profit organiztions = As with all non profc socal enterprises, charities ae run forthe benefiof __ @UFOS), nt al NFOS are charts: To others in society bea chery, the organtzation must be Chane ert nance toma itd ngeoFcces eg danstons, (easiest he especie Chany fund raising events and selling goods ‘ean be charities in some counties ‘Whilst they do not always necessarily sell goods, they operate topromote and (Such as Oxfam and VSO in the UK) " Ghemney fries ey opens premet yet be NGOs in other countries.12 Unit 1 Business organization and environment 1.3 Organizational objectives Vision statement and mission statement (A02) ‘Keyword definitions A vision statement is an optimistic and inspiring declaration that defines the ‘Purpose and values of an organisation and where it wants to be in the future ‘A mission statement isa clear and concise declaration of an organisation's fundamental purpose, ic. a succinet description of what the organisation does, in onder to become what it wants to be. jan and mission statements Table 1.14 Not all businesses have separate vision Vision stotement Mission statement sion statement ___Missionstaterert______ xd mision stetements For example © Absractsetenertbatouies atthe = Aconeteandpracaltatenent ——fulatesy Yorbegs te eonend Cisne tat ono beards nent ste the pupae and aude ogee he cere ge ‘© Concentrates on the future direction of ‘the actions of an organization power to share and make the world the oranzton Adelson ofan creation’ more open and connected. Arazon's «sou ofrsprain vn force) = GnfEretee, a utes son and miion statement are for intemal stakeholders ‘© Symbolizes an organization's also combined as ‘To be: oe hilosophies, goals and ambitions: Sisters: centie company, i um © Astatement ofthe pupose ofthe EAosophies goals rambo aplace where people can come to Grgaiation,intemsofitscre Enables thecgaiaton's stakeolis fing and dscover nyting they might Vales ordeal unertnd the desired le ee ‘© Provides guiding beliefs about how performance ‘Nngshaudbe done inthe «corporates naif and ‘organization measurable criteria, ¢.g. expectations CUEGIS CONCEPTS forehand rf ‘© Informs strategic planning, ie. where grows Ny. | Espareneoneaae ces theergniaton wan tobe Describes how an organizatin wll eee ies © Does not change, even as business ‘exrate is vision, i. the tactics that mission statements have impacted models adapt overtime spake ba vison a raity (on its organizational cuture and Broad statements (© Narrow and specific statements strategy. Aims, objectives, strategies and tactics, and their relationships (403) © Aims © Aims are long-term goals ofan organization, formulated by the senior ‘management team. © Theaims ofa business are often found in its mission starement. © Objectives © Objectives are the targets an organization is trying to achieve, eto maximize shareholder value. = Objectives can be strategic (long term), tactical (medium term) or operational (shore term) Eton 1 They are often set as SMART goals (Specific, measureable, achievable, realistic Objectives are vial for any business and time constrained), e.g. to achieve sales growth of $250m by 2023, or pe eee padiet sl Lape irene mark sha by 39% within fve yeas ne nines a gg ora 1 They can givea sense of direction to employees, managers, departments and Objectives give departments and the whole organization. ‘the organizetion a sense of common purpose, making it easier to create 1 Objectives ean define both the purpose and the aims of an organization. Peale rine to = They can be communicated chrough the organization's mission statement. buses1.3 Organizational objectives 13 © Strategies = Strategies are how an organisation intends co achieve i ims and strategic = They are usualy long-term, overall corporate decisions made by seniot management, 1s Examples of strategic decisions include decisions to expand overseas orto change location or product lines in onde to develop competitive advantages. © Tactics = Tactics are shorc-term, smaller-scale or routine decisions about how an organization intends to achieve its aims and objectives ton a day-to-day basis. The responsibilty of making these decisions is usually delegated to employees lower down in the iaadiy wo mceinmeal emptn eaker, ==] = Tactics are concerned with reaching more limited and rae ee “Tata ccs psa a tu ag = satay ase ce ete the Haire besa Figure 1.2 The relationship between aims, objectives, t= They are set to facilitate the strategies ofthe organization. strategies and tactics The need for organizations to change objectives and innovate in response to changes in internal and external environments (403) nternal factors are those within the conttol of an organization, 18 Corporate culsure ~the traditions are! norms within an organization. Businesses that have a dynamic and adaptable corporate culture (such as, Google or Apple) are likely to have changing and innovative objectives. © Growth and size ofthe organization — New businesses tend to aim for breakeven ana survival, whereas established businesses might aim for greater market share, Inorganic groweh through mergers and acquisitions (see Unit L6) is likely to crete a change in corporate objectives. 15 A change in senior management — Individuals have the capacity to change the corporate culture of an organization (see Unit 2.5}. Hence, a change in leadership can result in changing business objectives. An ambitious leader is impr likely to strive for imnovative practices. 1 Chisismanagement— A. business that experiences an internal crisis (see Unit 57) such as working capital issues (ee Unit 3.7) or a majer product recall (exe Units 57 and 53) will need to focus on maintaining its market position and corporate image. “External factors are those beyond the control of an organization. 15 Business cycle~ Onganizational objectives change depending on the business cycle Gee Unit 1.5), eg duringa recession (when consumer spending is low and unemployment is high), there are few opportunities. Change and innovation become vital for business survival t= Laws and regulations — Changes in the legal system (see Unit 1.5) can constrain business activity, eg. complying with employment laws and ethical coves of practice can lead to higher costs '= Social rends —Environmental pressure groups (see Unit 14) can cause businesses to change their objectives and practices, such as being socially responsible to their stakeholder. 1 Technological changes — Technological progress and innovations can lead to many new opportunities, thereby changing the firm's corporate objectives, eg, internet technologies have led to the growing popularity of e-commerce (see Unit 48).14 Unit 1_Business organization and environment Ethical objectives and corporate social responsibility (CSR) (ao1) = Corporate social responsibility (CSR) refers tothe concern and obligation of a business in committing to behaving ethically and responsibly towards its Z various stakeholders (see Unit 14). Rerepalldeftakion Corporate social responsibility = Examples include improving the quality of work life for the employees, (CSR) refers to an organization's adopting green practices to protect the natural environment, and using duties to its internal and external socially responsible marketing strategies (see Unit 41). stakeholders by behaving in a way = CSR involves voluntary actions a business can take, over and ahove hat pobttvely gpcasectet ya compliance with minimum legal requirements in order to address competitive | @ whole. interests and the interests of wider society. f= Icisbased on what is deemed to be morally correct according to societal norms and values. The reasons why organizations set ethical objectives and the impact of implementing them (403) 1 Organizations are increasingly setting ethical objectives as they are more aware of their corporate social responsibilities (CSR). Rey = Setting and pursuing ethical objectives can increase employee motivation and productivity, Businesses might also find it easier to recruit and retain employees. = Tecan reduce negative publicity from news media and pressure groups. 1 The growing use of social media makes it easier for the general public ro demand transparency and ethical business behavior. = Having @ good corporate image with customers and a good corporate reputation with the government enables the organization to gain competitive advantages. Hence, CSR can be profitable (the ultimate aim of for-profit organizations) = Pursuing ethical objectives isa form of self-discipline which avoids government intervention, However, chere can be negative impacts of implementing ethical objective, such as © The compliance costs of acting in a socially responsible way and the extra It is incorrect to assume or state ‘management time required to execute ethical business practices places the ‘that enl non-profit organizations organization at a competitive disadvantage. (POs) set ethical objectives such as 2 Thiscan mca lenrer profits being available to be distributed bo sharcholders. | Sefpevale socal responsiniity NEOs PIT ‘may have different objectives (as they in the form of dividends. This might therefore crete some resentment with re not profit seekingh but it can Sexes be for humanitarian and altuistic 1s arthermore, as competitors are in pursuit of similar echical objectives and ‘reasons that for-profit organizations, practices, any unique selling point (USP) might not be sustainable, ‘Set ethical business objectives. The evolving role and nature of CSR (Ao3) 1m Asa business hecomes more established and grows, the scale of is operations enlarges. For example, more workers are needed, As a result, organizational objectives and peiorties may change. © Forexample, the opportunity cost for a large multinational company that doesn't act ethically is potentially huge, especially when compared to 2 small sole trader operating in a remote town.1.3 Organizational objectives 15 = Modern business practice in many countzies has shown that CSR has an {important role in determining the market postion (see Unit 42) of an fears meat oe rate of CE fr complicated when organizations 1 Attitudes towards CSR can change over time. What was previously ‘operate in overseas markets. What is considered socially acceptable, such as smoking in public areas, may no considered socially acceptable in one longer be the case. Environmental protection was not a major corporate country might not be in others. For priority until the 1980s. example, Australia and the UK have very strict laws on tobacco achertsing, 18 Hence, changes in societal norms, expectations and values mean that sohient Sepa afed Greer are far ganizations may need to review their CSR policies and practices occasionally. more relaxed about this. 1 Media exposure, pressure group action and educational awareness have ensured that an increasing number of businesses are actively implementing ethical objectives, SWOT analysis of a given organization (A03, A04) A SWOT analysis isa management tool to asess where a business is at the present time and how itis affected by the external business environment. iis sexnetimes refered ro as situational analysis ast examines the position of an ‘onganization at one point in time, SWOT stands for: 1 Strengths — Internal factors that reveal what the organization does well compared to its rivals, eg; high market share, = Weaknesses — Internal factors that reveal what the organization does not do so well compared to its rivals 8 poor customer service or low empleyee motivation. = Opportunities — External factors that may enable the organization to develop and prosper, eg, an economic boom (see Unit 15). = Threats —External factors that may hinder the organization’ ability to achieve its aims, eg, higher interest rates (see Unit 1.5) or increasing competition in the industry. Table 1.15 Example of SWOT analysis Sa Strengths ‘Weaknesses SSE Aare © Dedeatedand poductiewerorce © Highlabourtumover(lemotiated staf) yuna. miaht be vewet) as strength igh marketshare © low pot margins regarded as a weakness for others Brand loylyorand reputation High wastage ate Wit sirgrat so wer a‘ Cudkme ina oy ea cakeereweta answets inthe context of the business 2 Setomerioyety 8 Fomrastonerseniee andthe industry in which it operates. Opportunities Threats nee technologies Higher ew material costs New overseas markets f° Eonoric recession © Thecollapse olamajorcompetior «Protest om pressure groups Deragraphe changes Demographic changes WSIS Investigate how change and Table 1.16 Advantages and disadvantages of SWOT analysis poe enone ey ‘Advantages of SWOT analysis __ Disadvantages of SWOT analysis ‘portunities and threats for © Asef vu molto asst managers © tisonlya snapshot he cent 2 multinbonal corporation of inthe planning process shuaton forthe orgelzaton yourchoce. ‘© Adecision-making tool which can give Itmayneed to be revised regularly, teomaerwremeae © Lamotte ‘actual poston inthe market and external business environment pipes fortheraser ‘© Itencouroges an examination of strategic © Its subject somebiasas the analysis examination (pre-eleased case ‘opportunities for an organization, eg Isbased on opinions, not only fats and stud), construct a fll SWOT analysis ‘growth (expansion) oF relcation figures for the organization.16 Unit 1_Business organization and environment Ansoff Matrix for different growth strategies of a given organization (403, Ao4) f= The Ansoff Matrix isa management growth too, first published in an article titled ‘Strategies for Diversification featured in the Harvard Business Review (1957). 1 Ie isused by businesses to identify and decide their product and market growth strategies Gee Figure 13). Exating products Naw products Figure 1.3 The Ansoff Matrix Existing markets New markets © Market penetration 1 Market penetration focuses on existing matkets and existing products ie. the firm focuses on what it knows and does well. ss Ie isa low-isk strategy so requires litle, if any, investment in new marker research as the organization aims to increase revenues by focusing on its existing products fo existing customers. © The strategy concentrates on increasing the organization’ sales revenue or market share ofits existing products, eg. by using comporitive pricing strategies, introducing customer loyalty schemes, widening distribution channels or using a more effective promotional campaign. © Market development 1 Marker development is the growth strategy where a business sell its existing products into new markets, ie. the product remains the same, but it issold to a new group of customers. = An example would be car manufacturers that export their cars to overseas markets or have proxhiction plants in various countries. = There isan element of isk with market development because customer tastes may vary in different regions and countries, There is also the added cost of marker research. In the case of foreign direct investment, market development presents even higher financial risks f= Nevertheless, the business knows their products well so should be familiar ‘with customer needs. This helps to minimize some of the risks involved with. market development.1.3 Organizational objectives 17 = Product development f= Proxhuct development isa growth strategy where a business introduces new products into existing markets, ie. it targets new products at existing customers 1 Ieis commen for businesses, such as carmakers, to develop and innovate new products to replace their existing ones. These new products are then marketed. tjwexisting customers. m= Anexample is Apple's introduction of the iPhone, iPad and iPad Mini, and Apple Watch. = Product development often involves a business developing modified products as part ofits product extension strategy. = Iris mediumsrsk strategy as product development often involves significant investment in research and development (R&D). © Diversification 1 Diversification involves businesses marketing completely new products to new customers It is a high-tisk growth strategy as the business enters markets in which it has litle or no experience. = Related diversification means that organizations remain in a market (industry) that they are familiar with. Unrelated diversification involves, businesses entering new industries, ie. in which they have no previous market experience, = For example, Honda launched its Hondalet (aircraft) division in 2015. Lenovo introduced smartphones, watches and sports shoes in 2015, Table 1.17 Examples of diversific Company Original business Company __Original business ‘American Express Postal services Peugeot Toolmaker Shell Collectable shells Nintendo Playing cards Nol Rubber and paper Lamborghi Tractors Wigley’ Soap and baking powder Mitsubishi Shipping Table 1.18 Summary of the Ansoff Matrix Market Product Market penetration __ development _development _Diversification Same products for New products for Nev/customers for New products for existing customers existing customers existing products _new customers Famillar markets Productextension Famllar products Spreading of visks strategies and product development imal rick ‘Moderate isk Moderate sk hk Seek to maintain or Innovation ta replace Entering overseas Spreading of risks raise marketshare existing products markets Intense competition Product Newdisvibuton Use of subsidiaries ([siemtceaboeel improvements channels and strateaic ‘The needs of customers change business units overtime. Investigate how the Changing Brand extension Changing Less focus on ‘Ansoff Matrixis connected to the marketing mix strategies marketing mix core markets and ‘concepts of change and innovation competencies for an organization of your choice.18 Unit 1 Business organization and environment 1.4 Stakeholders The interests of internal stakeholders (A02) 7 Keyword definitions Stakeholders are individuals, organizations or groups with a direct interest in the operations and performance of a particular business or organization. They have varying degrees of influence on the organization. Internal stakeholders are members ofthe organization, such as employees, ‘managers, directors and shareholders (rhe owners af the business) 1= Employees are the people who work within an organization. They can have Shareholders can be classified as both significant influence on the organization, such as their level of motivation internal and external stakeholders. ‘and productivity. Employees seek to improve the terms and conditions For example, employees and directors of employment, ¢g. competitive levels of pay, jab security, ood working ‘may hold shares in the company so conditions and opportunities for professional advancement. are intemal stakeholders. However, ‘the general public and other = Managers and directors are people hired to be in charge of certain cerganizations may also own shares in departments or operations within an organization. They may aim to maximize the company but these stakeholders profits, improve operational efficiency and enhance customer relations. They _are external tothe business. also strive to improve their own conditions of employment and financial rewards, such as bonuses, share ownership schemes, performance-related pay, and finge benefits (see Unit 24), Do not confuse the terms 1 Shareholders are individuals or organisations char buy shares ina company, ‘shareholders’ with ‘stakeholders thereby owning. part ofthe business. As partowners ofthe company, they __The latter s a mtch broader term hhave rights to a share of any profits earned uch payments are known as and includes more than shareholders dividends), and voring rights ar the company’s Annial General Meeting All shareholders of @ business are (AGM) to decide who serves on the company’s Board of Directors. They also stakeholders, but not all stakeholders expect the company to earn an acceptable return on their investment, are shareholders. The interests of external stakeholders (Ao2) = Customers are the clients of a business. They want overall value for money, {e. prices char reflec the quality of the goods and services received, prdtcts laid Mana ior aie eu eee fc fr ta uepene geal custaner cae eed the pooriaaa Peseta eee ee ieeibenosers Eateenal stakeholders ae not members ofa business ot 1 Suppliers provide the goods and support services fr other businesses, eg Capantzrion, yethave a direc: Coca Cola supplies supermarkets with soft drinks and McKeys supplies seake (interest) in is operations MeDonald’s restaurants in Hong Kong and Souther China with itsChicken | and performance. Examples MeNuggets. Supplies are important stakeholders as they can decide what inclide customers, suppliers, credit terms or discounts (if any) are offered to the business. They are competitors, che local ommunity, interested in securing reasonable prices for their goods and services reular | pressure grou, finances and the orders and prompt payineot from thei business lent. government = Competitors are the rivals ofa particular business, As external stakeholders, they are interested in the business operating in a fair and honest way. Competitors set their own targets and strategies hased on the actions of other firms in the industry. = The local community is interested in businesses acting in a socially responsible ay, such as creating job opportunities, protecting the environment, and supporting local residents and events such as sponsorship of public events fm Pressure groups are organizations or groups of people who have a common. interest. They try to influence governments and public opinion in favour of their cause, such as environmental protection, fair trade or human rights ‘Therefore, these special interest groups pur pressure an businesses to work in 2 socially responsible and ethical way (see Unit 1.3).Stakeholders 19 1 Financiees are banks and other creditors that provide soustces of finance for businesses (see Unit 31). They are external stakeholders interested in the financial well-being of a business to asses its ability to repay debts such as bank loans and mortgages using quantitative factors such as liquidity (see Unit 3.7) and investment appraisal (see Unit 38). © The government isa key external stakeholder of ll businesses Itis keen to see that firmsoperate legally and in a socially responsible way. The government affects businesses direct by its policies, such as tax rates, employment legislation, consumer protection rights and environmental protection laws, Possible areas of mutual benefit and conflict between stakeholders’ interests (403) As outlined in the sections above, each stakeholder group has different interests in the various activities of a business. In practice, it is difficult to satisfy all stakeholder groups all ofthe time. There may be areas of mutual benefits, but there may also be disagreements or differences in opinions with others. For ‘example, business growth can create jobs, thus creating positive impacts cn the local community, such as creating more choice for consumers. However, business ‘expansion in the local community migh¢ create trafic congestion and cause more pollution which defies the interest of pressure groups. Other examples of possible ‘conflict between stakeholders interests include: = Owners of the business may be reluctant to pay higher wages to employees as they sek to use the surplus to distribute profits instead. = Directors may want lange bonuses bur this may conflict with the desire of shareholders to have higher dividend pay outs. 1m In general, customers may want lower prices, but shareholders may prefer higher prices as this would generate greater profit margins. ss In the pursuit of efficiency and productivity gains, employers may invest in ‘new machinery but this may result in redundancies (job loses) for employees (Gee Unit 2.1) = Shareholders may demand a greater proportion of profits to be discributed as dividends, yet this leaves less funds for management to use on marketing, product development or to improve working conditions for their employees. 1m Pressure groups might deem the corporate profits of some large multinational in ‘sit 7 companies to be too high, although the management team woul ange the ali pretis are necesary to remain competitive. wt Acting ina sctly responsible way, sich as reducing and reycling vase, may help to please the local community but could upset directors and shareholders & ddue to the high costs of compliance and implementation. z ‘Tosome extent, stakeholder conflicts always likely to exist, 60 the varying 3] ee interests of scakeholders must always he carefully managed. In order to deal with potential stakeholder conflict, businesses often use stakeholder mapping (see Figure L4) asa management tool to determine the key stakeholders. Stakeholder Figure 7.4 Stakeholder mapping mapping (cr stakeholder analysis) involves organizing the various stakeholders of the business into'a matrix, based on theie degree of power (influence) and their level of interest in the business. Keyword definition “The stakeholder groups with a high degree of power and interest are known Se lente asthe key stakeholders. Successful businesses strive to fulfil as many of the Pee eno aas todetetmine the key stakeholders of needs and interests of various stakeholder groups as possible, but give priority mroppnimon bard ontheveving ‘satisfying the needs and interests oftheir key stakeholders. Due tothe ofan cal iam cl complexities of operating large businesses, managing stakeholder interests in. degrees of power . e smaller businesses tends to be simpler. yesiona stalchckiee rows20 Unit 1_Business organization and environment Potential solutions in handling stakeholder conflicts include the following: = Use conciliation service (s2e Unit 2.6) to align the conflicting interests of different stakeholder groups. = Use an arbitrator to assess the conflicting interests, with the stakeholder groups agreeing to accept the jukgment of the independent arbitrator (see Unit 2.6). ‘= Hiring public elations (PR) consultants (or use an internal PR team) to communicate with the local community and to keep other stakeholders informed of the positive aspects of the organization's operations or planned changes. = Improved communications with the various stakeholder groups, ie. keeping stakeholders informed of new developments and communicating the rationale for change. = The use of financial rewards linked to employee productivity gains. This helps to motivate workers to perform more effectively, thereby enabling the business to eam more profits Sharehokers woukl also be content as higher profits should lead to higher dividends payments and increased share prices 1 Ensuring wider representation of stakeholders in the decision-making process, eg the involvement of a trade union representative in strategic decision making or including an employee representative at @ Board of Directors’ meeting. In resolving conflict, the outcome of negotiations is largely influenced by the relative bargaining power of the various stakeholder groups. For example, ‘employees who are backed by powerful abour unions may be in a better position to secure improved rerms and conditions of employment. International pressure groups, sich as Greenpeace and Friends of the Earth, can exert huge pressure on. businesses, because they have greater backing ofthe general public and media, “However its possible to have mutual benefits between stakeholders’ interests Se rather than conflict. For example, offering competitive financial rewards and eeaniertnt cere endl nee food terms and conditions of employment fr all workers can resul na highly comme ctikehddesbecng Girlie motivated, loyal and productive workforce, This leads to lower staff turnover {roups, €.9. managers are employees {G¢e Unit 2.1) and greater output. Ie can also result in an improved corporate of the organization and might also be ‘mage, chereby helping with the firm's marketing and is recruitment. By contrast, shareholders in the company. Hence, conflict between management and the workforce can lead to industrial action stakeholder analysis is a dificult sch as strikes (se Unit 26). Ultimately, resolving the potential conflict between Balancing act of tying to meet the stakeholders leads to improved efficiency and higher profits. interests of most stakeholder groups. Bae 1 In 2015, HSBC announced 25000 jobs losses around the world, including the sale ofits troubled businesses in Turkey and Bra (where itreportes losses in 2014 of $232 milion and $377 milion respectively). The cats vould allow the UEGIS CONCEPTS banking giant to save $4.5-5 bilion per year Analysts suggested the news Trediets ta the vaeux ‘would reduce the return on investment for shareholders, atleast in the short run alaholeer grates ina 12 dentify two internal stakeholders of HSBC 21 organization of your choice have 1b Explain two conticts following HSBC's decision to reduce its global influenced corporate culture and workforce (4) business strategy.1.5 External environment STEEPLE analysis of a given organization (AO2, A04) = Asa brainstorming framework, STEEPLE analysis is quite simple to construct and interpret. = Tecan help managers be mote objective, proactive and comprehensive in their analysis of external opportunities and threats forthe business. © Hence, the tool enables managers to be more informed and better prepared to deal with changes in the external business environment 1 The STEFPLE factors in the section below can provide both opportunities and threats for businesses. © Social factors Demographic changes are classified as a soctal factor. Changes in fashions and ‘trends are also social factors affecting businesses, Other examples are shown below, which may not necessarily apply toall countries or regions of the world, © An increasing number of people now live in single-person households. = In many parts of the world such as France, the UK and Japan, there has been. fan increase in the retirement age. = An ageing population is common in many economically developed ccuntries, \hich has affected recruitment practices in these nations. Similadly,chere isan increasing number of older and retired people living in these countries. = Women in modern societies are choosing to have chikiren at a later age due to the higher costs of raising children and due to the desire to advance their = A.common trend is che increasing mevement of young workers to cities away, from rural areas, © Technological factors 1 The increasing use of mobile devices and internet technologies provides huge opportunities for businesses engaged in e-commerce. = The increasing number of businesses that strive to have a greater online presence by developing their e-commerce stratezes = Advances in automation and industrial technologies that improve efficiency ‘and productivity in the manufacturing proces. = Unemployment in certain induseries due to the we of astomation ane! more capitabintensive methods of production. 1 The increasing ability to communicate with customers all around the world, using social networks and social media. @ Economic factors = The level of consumer confidence influences the level of demand in an economy. 1 Higher costs of production will tend to force prices to go up. Higher prices will also tend to damage a country’s international competitiveness. A currency appreciation reduces the competitiveness of an exporters prices, ean appreciation of the US dollar against the yen will rend to lead toa fall in US exports to Japan, Keyword definition A STEEPLE analysis examines ‘the influences in the external environment in which 2 business ‘operates, ie, social, technological, ‘economic, ethical, political, legal, and environmental factors.'= Am increase in interest rates makes borrewing more expensive, thus discourages investment expenditure. In addition, firms with existing loans have larger repayments. An economic boom is assciated with an expanding economy, ie. high levels of consumption, income and investment, creating many opportunities foe businesses (ee Figure L5). output (GDP) Time Figure 1.5 The business cycle f= By contrast, an economic recession occurs when the level of economic activity contracts for at least two consecutive quarters (half a year), caused by lower levels of consumption and investment expenditure in the economy. Table 1.19 Phases in the business ch Expansion Contraction Trough (Slump) (Recovery) Peak (Boom) (Recession) ‘Consumer and Very low confidence Increasing levels of ‘Very high (optimistic) Low and falling business confidence _(pesimisic) confidence confidence levels Consumer spending Verylow Increasing Hh Faling Economic growth Negative GDP growth Rising levels of GDP Positive growth, high GDP begins to fall oP Unemployment Veryhish Fallin low Rising Inflation Low or negative Rising prices High price levels: Price levels begin to fall (deflation) Number of firms High Falling low ising failing Business investment _Verylow if any Rising High Feling Beara 2. Bristol Cars, a specialist British car maker, sels its sports cars at an average price of £120000 to customers in America, Calculate the change in the price paid by American customers ifthe US dollar depreciates from, £1 =$16 £1 = S18. a © Environmental factors 1 The depletion of renewable resources raises conoerns about the sustainability of business activity (see Unit 5.) = Inclement weather and climate change are environmental factors that ean, cause major threats to businesses, eg. severe flooding, droughts, typhoons, tsunamis and snowstorms, © An increasing number of businesses use green technologies as part of their ‘operations in oxder to conserve the planet, eg renewable energy sousces or cradle to cradle design and manufacturing (see Unit 5:3) = Firms also have to consider their ecological footprint, i. the impact of their business activities such as waste production on the natural environment. Firms that rakean active approach can benefit from having a postive corporate image, whilst those that da not may face financial penalties.1.5 External environment 23 © Political factors = Political instability de to regional conflict can be a major threat to business activity. 1 The government might use the rate of income tax to manage the economy, eg, countries such as Babrain, Brunei, Kuwait and the Bahamas have a zeco rate of income tax to attract a migration of workers. = Lawssuch as censorship or bans on the production or sale of certain goods andl services ean be a threat to business operations, Some governments use trade protectionist measures to safeguard domestic businesses and jobs, eg, a tariff on imported cars protects the domestic car industry = Similarly, governments may impose quotas (quantitative limits) on the number of foreign producrs sold in the country, eg, Hollywood movies released in Hong Kong to protect the local film industry. = Governments also provide subsidies asa form of protection for certain, domestic industries, eg. the French government for farmers and the Chinese government for the film (movie) industry. © The government itself isa large consumer with its various forms of expenditure, eg education and health care services, and thus provides huge opportunities for some businesses Legal factors f= Businesses must meet certain legal standards that help to reduce any adverse effects from a company’s operations, corporate image and profit, = Many countries have data protection laws asa form of consumer protection. '= Businesses must operate within the constraints of employment laws, eg National Minimum Wage, laws on maximum woeking hours, health and safety regulations, and antisliscrimination employment legislation. ‘= Smoking bans in restaurants, shopping malls and public parks can have a significant impact on businesses = Envitonmental protection legislation can impact on the production and investment decisions of businesses @ Ethical factors ss Businesses need to consider the impact of thele act environment. les on society and the 1 Ethical factors consider doing what is right or morally correct. sino are fen presented wth ethical lemmas, eg, determining how tmuch ofthe firm’ profits to keep for investment purposes orto distibute t9 tis not always easy to dassity shareholdes. extemal factors nto the STEEPLE 1 Bribery, fa, embezlement and thefcare examples ef unethical nd illegal Ayres Fok rare, an merease ractices regarded asa potical, legal or ‘economic factor. What matters is = Businosses choose to adopt environmental practices and to meet their ero teat corporate social responsibilities.24 Unit 1_Business organization and environment Consequences of a change in any of the STEEPLE factors for a business's objectives and strategy (Ao3) = Oil peices around the world increased by 110% between 2007 and 2008. f The global financial cris of 2008 cased many counties tog no Teesen for several years, Countries were hit by anceher round of financial turmoil in The contextualized nature of the late 2015 when Chinese, US and European stock markets crashed. Business Management course “hat you wil need t0 be = In 2009, China overtook the USA as the world’s largest car market by sales. Hetea ne hewcenat “This has significant impact on the marketing strategies of all ear makers ary combination ofthe STEEPLE around the word factors impacts on the objectives and 1 Severe ording in Kaohsung, Taiwan (September 201) cost the economy _SEataes ofa garter bas, Sere Salm. investigate further are outined in = The devastating 20-magnitude earthquake followed by the tsunami that hit _‘this section, Japan on I March 201 was the worst in Japanese history 1 Indonesian authorities outlawed Lady Gaga's Born This Way Ball concert tour in Jakarta (May 2012), following concerns from Islamists and local community leaders about her inappropriate image, dress code and use of language. More than 50000 tickets had been sold = The Twitter feeds of several high profile companies were hacked into in February 2015, including Burger King and Jeep. In February 2013, frozen meat prociucer Findus had all its beef lasagne products withdeawn from UK supermarkets after horsemeat was found in some products UEGIS CONCEP’ Investigate how changes in the STEEPLE factors have affected the objectives and strategy for an ‘organization af your choice. = CAR WASH AREA } a Figure 1.6 Car wash firms struggle on a snowy day1.6 Growth and evolution 25 1.6 Growth and evolution Economies and diseconomies of scale (Ao2) = Economies of seale are the costsaving benefits of operating on 2 large scale, ive the reduction in unit costs of production as an organization grows. = By contrast, diseconomies of scale arise when unit costs increase due to the organization heing too large and inefficient, eg problems with communication and coordination. '= Internal economies of scale are generated ancl enjoyed within the organization when it operates on a larger scale. Examples include: D Financial economies — larger firms can obtain finance easier and at better lending rates due to their relatively lower risk. Managerial economies — larger enganizations can afford greater numbers of specialized managers, thereby hoosting productivity and ourput. 1. Producto ecomomies — fixed costs of preduction are spread out over a lager ‘volume of output, thereby reducing average fixed costs of production. 1 Marker economies — marketing costs pet unit fll when sales volume ‘rows as the larger firm can market its entire product range. Purchasing economies — bulk purchase and delivery of raw materials, ‘components and stock reduces average costs of production, '= External economies of scale arise from having specialized backup services available ina particular region where firmsare located, eg, Silicon Valley in California is home to many ofthe bestlmown technology companies. 1 Diseconomies of scale occur when an organization becomes too large 10 ‘manage effectively so its unit costs begin to increase, eg. a firm increases its factor inputs by 50% but the subsequent output only increases by 20%. '& Internal diseconomies of sale are caused by problems of coordination, centro ‘and communication within a fitm. For example: (OAs firms get larger, managers find it more diffi to coordinate, control ‘and communicate with a larger workforce, resulting in higher unit costs 13 Italso occurs when fixed casts increase such as the purchase of additional ‘premises as a frm grows but this substantially increases its average costs of production, sm External diseconomies of scale (those that affect all firms in an inclustry) include: 5 Traffic congestion causing costs to increase 1D Higher rent costs due to the high demand for firms locating in a particular area. 5 Lahour shortages in a certain area, thus leading to increased labour costs EXAM PRACTICE 3. Asmstrong’s Candles has monthly fixed costs of $4800 and average variable costs of $1.50. Demand for its candies is 4000 units each month. The average unit price is $4. ‘2 Distinguish between intemal and external economies of scale, BI b Calculate the average costs for Armstrong's Candies each month. [2] Calculate the profit made by Armstrong's Candies each month. D2. Keyword definitions Internal economies of scale refers to the fall in unit costs of production for a single ‘organieation as it experiences growth, e. managerial and financial economies of scale. External economies of scale refers to the fall in unit costs of production for all organizations as the industry experiences growth, costs (8) ‘Quantity (units) Figure 1.7 Economies and diseconomies of scale Students often state that casts of production wil alas a firm increases ‘the scale ofits operations, This i not ‘quite correct ~ dearly it cheaper 10 produce 1000 cans of Coca-Cola than itis to produce 500000 cans. However, it s cheaper to produce each can of Coca-Cola on a larger scale, ie. economies of scale reduce the average costs of production. Candidates need to demonstrate they clearly understand the distinction between internal economies of scale (which relate to a specific firm) and external economies of scale (which relate to the whole industry)26 Unit 1_Business organization and environment The merits of small versus large organizations (Ao3) cS Table 1.20 Merits of small versus Merits of small organizations Merits of large organizations (© Small businesses are easier toset up © Greater access to financial resources; and at amuch lover cost hhaving more capital than their rivals Fs Ovinaef ured bil near esi means large fms have scope for independence indecen making ie the uther growth ‘freedom to operate independently from © They can attract better skilled staff as demands of directors and shareholders _they canofferbetter career development © Greater control and ownership of the ‘and remuneration packages business “© Customers tend to be attracted to © Greateressein introducing ew goods lage, wellknown rand names 25 they recognize and trust these names more iis andlor services quickly, and typically ‘more flexible inresponding to changes © Large firms are lesslikely to falso Students are not expected to give @ in the marketplace represent lower risk for owners, investors definitive verdict about small versus «© They can serve specialized riche matkets and financiers small firms ae more large organizations. Both large and that are potentialy highly profitable ‘vulnerable during an economic recession (isabecobreatind en tee ‘© Small businesses tend to havea closer * Lge fis af Seige ont eA inecttical aa in the context ‘lanai wath the customers szale so maybe set oflerlover ces othe rgantzation, Thee are oher ‘© Financial accounts can be kept private; FHP factors to consider, e.g. ize might only the tax authoritesneed access © Theseadvartages can give largerfirms not matter as much as the firm's toh competitive edge over smaller tvals vision and the organizational culture. The difference between internal and external growth (ao2) f= Internal growth (also known as organic growth) occurs when an organization expands using its own resoxtees, without involving otber organizations, e.g using Ansoff’s Matrix strategies such as market penetration and product development (see Unit 1.) s= External growth (also known as inorganic growth) cccurs when a business relies on third party organizations for growth, eg, mergers, acquisitions, andl franchising. = Key indicators of growth include an inerease in an organization's sales revenue, its market share (see Unit 4.1), and the number of employees hired. Table 1.21 Differences between internal and external growth External growth Internal growth ‘External growth is usually the quickest form oF growth "Brand identy and carporate culture can be maintained © Ordinarily requires extemal sources of nance (see Unit 3.1), “© Less sky, especially financed by using retained © Often results inthe dilution of ownership profits (ee Unit 3.1) ‘© Far more bureaucratic, espectaly with mergers and acquisitions (M&As) © Often involves expanding the range of products and/or “© lnvolves grater inancal sk locations Inthe case of M&As, external growth reduces or eliminates competition Methods of external growth (A03) Methods of external grewith include: mergers and acquisitions (M&As) takeovers, joint ventures, strategic alliances, and franchising, © Mergers and acquisitions (M&As) and takeovers 1 A takeover is form of external growth that occurs when one company buys a controlling interest in another company, ie. ic purchases enovgh shatesin the company 10 own a majority stake 1 Forexample, n July 2015 British publishing giant Pentson sold the Financial Times to Japanese media firm Nikkei for £844 million ($1.27 billion) in cash, Interestingly, the FT was founded through @ merger in 1888.1.6 Growth and evolution 27 = Takeovers are often hostile, e. the target company does not wish to he bought cout by the purchasing company. = Takeovers (also called acquisitions) often result in redundancies (job loses) of| the target firm due to cost savings desired by the purchasing company. Table 1.22 Advantages and disadvantages of M&As ‘Advantages of M&As Disadvantages of MBAs ‘© Arange of econamies of scale gained through external growth «Resistance from employees, trade unions, managers and ‘© Enables the larger fim to spread costs, expertise and sks shareholders (ho are urwiling to sel thei shares) ‘© Quick way forthe firm to enter new industries and geographic ° M&As are not always successful, especially when firms pursue a ee Sea Gertaton saegy «© Instantaneous growth as MBAs are quicker than methods of © M&AS ate generally very expensive, especially if there are delays ‘organic growth inthe proces; in some cases the purchase price ends up being ©The cutting f costs and synergies from M&As allow the unaftrdatte - business to eatn higher profits andor galn madket share “© Corporate culture clashes, suchas contrasting management styles and organizational structures, cause huge problems for Maas ‘© Diseconomies of scale may occur due to a firm's loss of cost control and the loss of focus ofits core activities ‘The newiy formed business gains market power to influence prices and output inthe industry ‘Armerger or takeover could be the only way that a business can survive due to its poor cashflow or financial difficulties ‘There is technically no difference between an acquisition and a takeover; the tis not necessary for the purchasing ‘terms are often used interchangeably. ‘M&As’ is used to describe a mutual ‘company to buy 51% of the shares agreement to form a new company. be it through @ merger or acquisition in the target company to take full "Takeover'is often used to refer to a hostile acquisition of another company, ‘management control — purchasing at against the wishes of the firm being bought out. least 50% and one additional share ives ita majority stake © Joint ventures ‘= A joint venture (JV) is an arrangement between two or more separate parties {© pool their resources together to form a new legal entity. = An example is Hong Kong Disneyland, a joint venture between the Hong Kong government (which owns 51% of the JV) and the Walr Disney Company (vith a 49% stake). = The companies engaged in a JV seek profit, sharing resources (financial, capital and human), such as personnel, assets, costs and revenues. Table 1.23 Advantages and disadvantages of joint ventures Advantages of joint ventures Disadvantages of joint ventures ‘© The firms combine their resources, such as technology and ‘© Possible conficts and disagreements due to different corporate capital, creating synercies and strengthening their position in cultures and management styles of the partner firms hema ‘© Compromises are often made with JVs and this can lead to ‘© Financial risks ofthe project are shared between the partner suboptimal outcomes for both parent companies companies . ies strategy is more decisive with acquisitions ‘© Local firms can enable the partner to overcome cultural slffcuties that a foreign company may encounter ‘© _Diseconomies of scale may occur due to operations on a larger ‘© Ns enable companies to become larger and thus benefit from scale, eg. extra meetings and administrative processes, and ‘economies of scale ‘communication problems ‘© Thepartner firms enjoy the advantages of growth without losing © JVs are generally more difficult to terminate due to the lawfully their identities binding obligations ofthe newly created legal entity ‘© Firms in the JV avoid high legal and administrative costs associated with M&AS28 Unit 1_Business organization and environment © Strategic alliances © Strategic alliances (SA9 are formed when 00 or more businesses joi forces to benefit from growth without any fundamental changes to their own long-term, strategies = Unlike joint ventures, the formation of strategic alliance does not create a ‘new organization. = Examples include the SA between Starbucks and Barnes & Noble (coffee shop chain and bookscore) which started in 1993. Apple has partnered with Sony, Motorola, Phillips, and ATSVT. The Star Alliance consists of 27 airlines, forming the work’ largest global SA in the airline industry. Table 1.24 Advantages and disadvantages of strategic alliances ‘Advantages of strategic alliances Di sdvantages of strategic alliances ‘© ike Ns, fms in a strategic alliance can benefit by sharing ® expertise and resources with other firms in the SA ‘© Businesses in the SA remain separate legal entitles, without the relatively high costs of forming a new company ies and economies of scale can be gained by the partner Unlike joint ventures, strategic alliances are easier to enter and ‘exit so can be less stable ‘© Strategic alliances are sometimes only short term, temporary agreements ‘© Itcan make @ business vulnerable to mistakes or malpractice made by partner firms inthe SA = Franchising = Franchising refers ro an agreement between a business (the franchisor) giving the legal rights to other organizations (the franchisees) to sell products under the franchisor’ brand name. © Examples of multinational companies that use franchising include: McDonald's, Subway, Starbucks, Pizza Hut, KFC and Holiday Inn, Figure 1.8 McDonald's is a multinational company that uses franchising Table 1.25 Advantages and disadvantages of fran ‘Advantages of franchising ising "© The franchisor can expand the business without the need to raise finance and invest thelr own funds to make the business grow {as the franchisee pays forthe expansion); hence itis a cheaper ‘method of expansion than organic growth ‘©The franchisor receives royalties based on a predetermined percentage of te franchisee’ sales revenues © ItIsa relatively fast method of external growth wich can sttengthen the brand name quickly ‘© The franchisor does not need to closely monitor or control the day-to-day operations ofthe franchisee (whereas monitoring and control must take place with directly-owned stores) “© The franchising model is usually tried and tested one, so the success rate Is high; hence, there can be large profits made forthe franchisee and franchisor ‘© Feonamies of scale such as purchasing econemies of scale, can be calned and passed onte franchisees when buying products tobe sald © The franchisee reeves ongoing support from the franchisor, e. marketing, market research, staff raining, and disribution networks Disadvantages of franchising ‘© Notall businesses have the expertise to properly manage the ‘ranching model in terms of quality contol and marketing activites ‘© Tecan be very expensive forthe franchisee in terms of startup costs and running costsas it has to pay a percentage ofits sales revenues to the franchisor (© The franchisee I also usually charged an annual fee by the ‘franchisor, so this can substantially cut the franchise's profit margin ©The franchisee lacks feiblty in decision making as it needs ‘follow the corporate rules and policies of the fanchisor, Including what it can and cannot sel, and the marketing used te promote the fan's goods and services ‘© Diceconomies of scale can arise, even with franchises, expecially if the franchise over expands in too short atime scale ‘© Incompetent, substandard ot dishonest franchisees can easly damage the corporate image and reputation of the franchisors brandGrowth and evolution 29 Buying a franchise is not an easy thing to do. Franchisors use a thorough vetiing [process to assess the limited number of franchisees granted a licence each ‘year. For the franchisor, their brand name and reputation are at ask, and legally Ttemoving an incompetent franchisee is cifficult and costy The role and impact of globalization on the growth and evolution of businesses (403) [= Globalization is the growing degree of integration and intenlependence of the world’s economies, Decisions and actions taken in one partof the world have a direct impact on those in other parts ofthe works = A major contributing factor to globalization is the growth and expansion of multinational companies (MNCo). There is increasing pressure for MNCs to market their brands toa worldwide audience. = Caltural exports, such as Hollywood movies or American fastfood, have led to increased globalization. This creates business opportunities for firms looking to grow and evolve. © Globalization has both positive and negative effects on businesses, eit stimulates competition as there are more foreign firms and products competing in the domestic market. =A lack of international business etiquette can cause offence to others, Habits, fashions and tastes may differ in overseas countries so different customs may need to be considered. = The deregulation of trade restrictions around the world has allowed ckmestic businesses to enter overseas markets, thereby enabling these firms to benefit from economies of scale and a larger customer base. '= Internet technologies have also contributed to globalization, with social media making i increasingly easier for people and businesses around the world to connect. E-commerce (see Unit 48) has improved consumer access to a huge range of markets 1 Advocates of globalization argue that it has increased job opportunities around the worl, so has significantly reduced the number of peopl living in poverty. Reasons for the growth of multinational companies (MNCs) (Ao3) Reasons for the growth of MNCs include: = MNCS benefit rom access to langer markets in foreign countries. Keyword definition A multinational company (MNC) isan organization that operates, wm They spread risks by operating in other markets, not just within their own ‘owns, of controls production and] country. cor service facilities in two or more counties = They usually benefit from economies of scale. MNCS often operace on a large, global seale with powerfil brane names, = MNCs expand overseas as.a market development strtagy (see Ansoff's Matrix, Unit 1.3), when other markets are saturated. Lis MNCS ae not without ther m= They can exploit the potential growth opportunities in certain overseas coripater tnd trl alert are markets that are still untapped. for example, exposed to additonal risks 1 Costsaving benefits of operating in overseas countries, eg cheaper labour, ier SPmrmng in veeess mater ower tax rates, access to cheaper raw materials and components, or being Pract, egal ferences, poteal close to global customers. Foks and volty with fucting foreign exchange rates30 Unit 1 Business organization and environment The impact of MNCs on the host countries (ao3) sitive impacts of MNCs on the host countries Jude the following: MNCs provide a significant number of employment opportunities, helping to raise the quality of the labour force in the host country. m= MNCs are likely to buy local raw materials and components, thus providing extra revenue for local suppliers and supporting local industries (auch as packaging and distribution) = Consumers in the host country do not have to rely only on local supplies as they have more choice from MNCs, thus helping to raise standards of living = Similarly, increased competition from MNCs can foree local firms to improve their operational efficiency, quality, customer care and prices. = The transfer of technical knowladge and benchmarking practices (ce Unit 53) from MNCs can also benefit local firms, © Profitable MNCs will be taxed by the host government, thus provi tax revenue fo benefir the host economy. waded ‘Negative impacts of MNCs on the host countries include the follwing: 1= Local businesses may lose customers, market share and profit to foreign MNCs. © Foreign companies may not be socially responsible, especially if rules and regulations are more relaxed in overseas markets, which might resale in employees being exploited, scarce resources being depleted or increasing pollution levels. 1m The existence of large and powerful MNCs can destroy local competitors as US ERSe Sars they do not have the resources to compete. Investigate how globalization has impacted on the growth and. ‘evolution for a business of your choice, = Not al local people and! businesses will welcome the presence of foreign companies, especially if it results in a cultural shift in the way of if, and may result in social tension. Ba 4 12015 Kraft Foods Group Inc, merged with H.J. Heinz Co. to form the ‘world’s fifth-largest food and beverage company. Heinz is a global brand, famous far ts tomato ketchup, sauces, soups, beans, pasta and infant foods. Kraft is one of North America’s largest consumer packaged food and beverage companies, with annual sales revenues of mere than $18 bilfon and over 22000 employees in the USA, 2 Define the term merger. a b Examine the possible reasons for the merger between Kraft and Heinz (6)1.7 Organizational planning tools (Ht only) 31 1.7 Organizational planning tools (HL only) a | Planning tools (ao2, Ao4) and their value to an organization (A03) Planning isan esential element of business management. There are a number of planning tools available to help managers in the process. Strategic planning isabout the direction ofthe business and is fundamental to the setting of goals, targets and objectives (Gee Unit 1.3) = Fishbone diagram © The fishbone diagram (also known as the Cause and Effect mode!) isa visual decision-making tool devised by the Japanese guru on quality, Profesor Kaoru Ishikawa. f= It is used to identify the toot causes (shown as bones) of a problem or issue (shown as the ‘hea of the fish), = A .busines: might face a problem, for example, of high labour turnover (ie. the proportion ofits workfowce that leaves the organization during the year). An example is shown in Figure L9, career advancement Remuneration ited ‘opportunities Few traning opportunities Lack of challange Lack of support Lack of recagniton Poor relationships Nodirection Long hours Stressful work Job Itself Management: Figure 1.9 Fishbone: Table 1.26 Advantages and disadvant: ‘Advantages of the fishbone diagram Disadvantages of the flahbone diagram ‘© Itshows a variety of probable causes ofagiven problem ina © Causes and effets are not alvays interrelated, making the succinct way construction ofthe fshbone mare difficult and les meaningful ‘© Asavisual tool, itis easy to follow in order to determine the Asa qualitative decision-making too, itdoes not inde any root causes and consequences ofa problem or issue quantifiable data soit s ifiulto ascertain how much each factor © organizes the causes of a problem by themes, such as actually contributes tothe problem ‘communication issues or motivation problems, thus aiding the Simla, it does not show which decisions or actons need to be decision-making process rortized © Decision trees = A decision tree is a quantitative and systematic decision-making tool that allows managers to visualize possible options and their probable outcomes. © Inadecision tree, a circle represents a chance node. A square represents a choice or decision.32 Unit 1_Business organization and environment 15 Probabilities of the various outcomes are shown, e.g, 0.35 means there is a 35% chance (likelihood) of the outcome actually materializing, Probabilities for each chance node must add up to LD, Le. 100% likelihood. 8 Figure 1.10 illustrates the decision of a firm to pursue either Project Chicago (hich costs $$5m) of Project Delhi (which costs $51 m). The following can beseen from the decision tree: There isa 65% chance of success ifthe firm chooses Project Chicago, which wou] gain the firm $70m in sales revenue. Thus, che likely outcome is $10m x 065 = $45.5m, 5 There isa 35% chance of failure for Project Chicago, with expected revenies of only $45m. Hence, the probable outcome is $45m x 035 = $1575m, G Therefore, the combined outcome for Project Chicago is $45.5m + $1575m = $61.25m. After the costs of the project are accounted for, the likely yield (return) of Project Chiengo is $61.25m— 655m = $6.25m. © For Project Delhi, there is a 55% chance of success in earning $80m. Hence, the likely outcome is $80m x 0.55 = $4m, [Ifthe project fils, the likely outcome of earning $35m in sales revenue is $35m x 045 = §1575m, Hence, the combined likely outcome is $44 m+ $15.75 m_ likely profits therefore $59.75 m ~$51 m = $8.5 m. ‘= Two parallel lines that cross through a branch represent the options that are rejected based on quantitative grounds. = Examining the decision tr in Figure 110 shows that Project Delhi should be pursued. Despite the relatively higher rsk of flute, the investment cost is lower and the likely yiel isan extra §2.5 m ($8.75 m return for Project Delhi compared to $6.25 m for Project Chicago) Suceess (470m) = MSSm 5 $$61.25m—$55m = $6.25 $15.75m Project Follure ($45) Success (580m) $5ire O55 me Remember when constructing a $59.75m—$5im=$8.75m decision tree that squares are used Failure $350) 45 759m for decisions whilst circles are chance 0.05 ‘nodes for which probabilities are assigned, Figure 1.10 Example of a decision tree Table 1.27 Advantages and disadvantages of decision trees ‘Advantages of decision trees Disadvantages of decision trees Formalizes the decision-making process and makes it more» Qualitative factors affecting decision making are Ignored, e.g, Impartial as outcomes can be compared objectively business objectives and stakeholder views “© Offers visual and logical representation of various ‘© Data on ikely outcomes ae ont forecasts so actual outcomes can be decisions with quantifiable eutcomes, thus making things quite different easier 0 follow ‘© Data can become out of date by the time a decision is actualy taken ‘© Management is forced to consider the risks of diferent 4 External factors and non-financial information are ignored in the options diagram1.7 Organizational planning tools (HL only) 33 Eas 5 Kingmans Educational Resources (KER) is considering expanding into one Of three locations. The expected costs and revenues are showin in the table bbelow. KER only has the resources to pursue one of these growth options. Using the data in the table, construct a decision tree showing which [project is best on financial grounds. Show all your workines and inciude ‘an appropriate key in your diagram. 6) oa ne oo Ashtown, 100 Success 50 25 jie 50 80 Brigcity 80 Sees —~SOSSSC~<“S=*~s‘—S*~*~*~SOS Failure 35 B Centrapolis| 90 ‘Success 60 75 Failure 40 90 © Force field analysis 1 Force field analysis (FFA) was devised by German-American psychologist Kurt Lewin asa planning and decision-making framework for examining the factors for and against change. 18 The factors (0 forces) that support change towards a goal are called driving forces, whereas those that block or hinder change are called restraining forces, = These forces are numerically weighted in order to calculate the relative strengths of driving and restraining forces, thereby aiding decision making in. ‘an objective and quantifiable way. = In Figure LLL, the weights range from 1 to 5, with 5 being of most significance tw the business. In the example, asthe driving forces outweigh the restraining forces, the objective decision is to relocate the business. Driving forces Restraining forces (Forces for change) Forces against change) Resistance from staff = 3 Cheaper rent =4 Saft training cost (new ——_—— location) =3 Improved <_< ‘cronies Staff redundonces (curent —_- location) =3 Access te overseas ~ markets 4 Cultural ajustments = 2 Total 12 Toul 11 Figure 1.11 Force field analysis for overseas relocation34 Unit 1_Business organization and environment Table 1.28 Advantages and disadvantages of force field analysis Advantages of FFA sdvantages of FFA ‘> Asa quantitative planning tool, it makes the decision-making» Qualitative factors affecting decision making ate ignored andlor process more objective and logical dificult to quantity ‘© Iofersa simple visual representation ofthe forces for and The omission of certain driving or restraining forces can alter the against change ‘outcome quite drastically ‘© Weighting (numerical values the forces makes managers ‘© The weighting of the forces is subjective, leaving room for consider the relative importance of factors affecting the decision _ potential bias Eto HL students who choose to use force field analysis in their Internal Assessment are reminded to consult the management of the organization to weight the diving and restraining forces. There is no sigificance in students assigning the ‘weights as this adds no value to management. © Gantt chart AGantt chart, devised by American engineer Henry L. Gantt, isa visual planning tool that illustrates the sequencing and schedule of a particular project. 1 Links established between dependent tasks allow managers to sequence the various activities (tasks) of a particular proect, i. it shows what must he completed before the next task(s) can begin. 1 The required time and resources can then be linked to each of the tasks in the Project. = Ultimately, a Gantt chart helps project managers to determine how long a project shoul take to complete. |= Anexample of a Gantt chart using the data in Table 1.29 is shown in Figure 1.12 Duration (days) A 3 8 - 3 c 3 D a 2 E B 4 F c 3 6 D.EandF 7 Gantt chart for Project x (days) t2s4se7somn wn Figure 1.12 Example of a Gantt chart1.7 Organizational planning tools (HL only) 35 Table 1.30 Advantages and disadvantages of Gantt charts ‘Advantages of Gantt charts ‘Show the dependencies between diferent actties in order to» The length of time (each bar) does not necescaly correlate with sdvantages of Gantt charts minimize the time needed to complete a project the amount of work or resources involved for each acthty ‘© There are wide applications, e4. scheduling production ‘2 Need to be manitored and may need regular updating Processes, employee work rosters, and holiday schedules ‘© Complex projects may be difficult to display on a one-page ‘© Help managers o set realistic deadlines forthe various activities Gantt chart of a project ‘© Its simplicity means that a Gantt chart may not provide enough ‘© Simple to interpret and understand detail or information for complex projects «© Allow managers to moritor progress and take corrective measures _¢ Based on and relanton the estimates ofthe timings of ech task Expert tip HL students can produce a Gantt chart for the Action Plan of their Internal Assessment, Not only can this provide a neat and succinct visual ofthe intended activities forthe IA, italso helps with the 500-word limit for the Research Proposal and Action Plan. Eee {Construct a Gantt chart from the date given in the table below for Project A CM expert ‘Whilse quantitative techniques such as force field analysis, decision trees and Gantt charts provide quantifiable answers to complex decisions, it is important to remember that ‘managers also consider qualitative factors in the process, e.g. the impact, cof decisions on the workforce and ‘whether the decision is in bine with ‘organizational objectives A B c > E EHuman resource management 2.1 Functions and evolution of human resource management Human resource planning (workforce planning) (Ao1) © Workforce planning involves analysing and forecasting the numbers of workers and the skills of those workers that will he needed by the cxganization, eg. new recruits are needed asa business expands or because current employees leave. ‘= Human resource (HR) planning aims for the effective management of an organization's workforce in oder to achieve its objectives. = Human resource planning functions include recruitment, induction (of new staff), retention, dismissal, redundancies, training and performance appraisal. It also involves monitoring and maintaining professional relations between. employees and employers. = Workforce planning involves an analysis of historical data relating to the size of the workforce, the workload and mobility (flexibility) of employees, labour ‘umover rates, andl demegraphhie trends in society. = HR planning isalso needed to deal with instances of absenteeism. This refers to the numberof staff away frem work as a percentage ofthe firm's total workforce, per time period, Successful workforce planning helps a fim to develop a compesitive advantage by matching human resource needs to the organization’ strategic direction, It enables workers to be properly trained and highly motivated so that they perform at their best. Labour turnover (Ao2) Keyword definition ‘Human resource planning is the management process of anticipating and meeting an ‘organieation’s current and future staffing needs. = Labour turnover is calculated using the formula: ‘Number of staf leaving per year “Average number of start = Ieisinevitable in an organization as some employees leave for personal or professional reasons, eg. to have a baby or spend more time with their young Chikiren, to retire or to pursue a promotional post in another organization. = Retaining staff in the erganication is important as there are significant costs to recruiting new staf, training them and getting them acclimatized to the organizational culture. = Causes of high labour turnover include: 15 etter pay and working conditions offered by rival firms. 5 Anunhappy and discontented workforce. 5 Staff being inadequately trained so feel incompetent and demotivaced. f= Businesses try to avoid having a high labour turnover rare because his would lead to higher costs of recruitment (and retention). It also uses up a large amount of management time. © Having a large number of new workers also means there is greater downtime hen employees are less productive simply hecause they have yet to acclimatize to their new working environment, policies, procedures and processes. 1 High labour tumover also raises concerns about stability and continuity in the business, 100 Keyword definition Labour turnover measures the rate of change of human resources within an organization, per period oftime. Bway aies 1. Duffy & Wong Lie hire 86 people. Thirteen of the ‘employees resign within the year. Calculate the firm's labour tumover rate. a2.1 Functions and evolution of human resource management 37 Internal and external factors that influence human resource planning (403) l= Demographic change = Demographic change refers to developments and trends in the population that influence workforce planning, eg, the average age ofthe population, gender distribution, educational attainment levels and average household income. = In some countries, such as France and Britain, the official retirement age has been raised due to the longer lif expectancy of workers. '= The combination of fower birth rates falling death rates and increase life expectancy in many economically developed countries has led to an ageing, population (an increase in the average age of the population). This has several {implications on workforce planning: 1B reduced labour mobility lower labour productivity levels [3 changing consumption patterns. = In many countries, there has been an increased number of women in the workforce, More females are chocsing to have children at a later stage in their lives, opting instead to participate in the workforce and pursue their professional aspirations. lm Change in labour mobility = Occupational mobility refers to the ease and flexibility of workers in me from one job to another due to their ability and willingness to switch. ie = By contrast, occupational immobility isthe inability of workers to move from cone job to another, due to a lack of skills, expertise or qualifications. = Geographical mobility refers tothe extent to which workers are able and willing to relocate to another area for employment purposes '= Geographical immobility isthe reluctance of workers to move to ancther location. This might be due to personal reasons (such as family ties) or financial factors (such as relocation costs, property prices, or the higher costs of living in new locations). ‘= International labour mobility is even more difficult to achieve. Expatriate workers are often highly remunerated as an incentive for them to relocate = Labour mobility can he improved by the business offering training and development programmes to its employees. l= New communications technologies = New communications technologies make it easier for lager businesses to recruit globally through their websites and video-conferencing facilites, resulting in reduced costs of online advertising, recruitment and interviews, = Improved computer and mobile technologies also mean that flexitime, homeworking and teleworking hecome more attractive and accessible to workers 1 The technologies make it possible to rain and develop employees in a more efficient manner, eg, online training courses or webinars. A large number of employees can be trained very quickly atthe same time. = The use of computerized testing programs helps firms ro assess the understanding and progress of trainees, = New communications technologies reduce the costs of business meetings and seminars due to the growing use of high-quality video-conferencing.38 Unit 2 Human resource management Common steps in the process of recruitment (Ao2) 1& Job analysis isthe process of identifying what a particular job entails, eg. the tasks, roles, responsibilities and skills required. From the analysis, the job description and person specification can be created. 1 A job description isa document that provides details ofa particular job, e the job title, roles duties and responstilties. = The person specification is a document that gives the profile of the ideal candidate fora job, eg. a description of the qualifications, skills, experience, knowledge and other attributes. This is used as part of the selection process for shortlisting candidates for interview. t= Job advertisements are typically released after the job analysis has been Completed andthe job description and person specification proxkiced. © Candidates usually have to complete an application form for the job. They may also need to include a cursiculum vitae (or résumé) — a document which outlines the applicant's educational achievements, professional «qualifications, employment history, skills, accomplishments, hobbies and interests 1 Shortlisting isthe systematic process of identifying and selecting the few most suitable candidates from all the applicants for an interview, because they best fit the profiles in the job description and person specification. Shortlisting eliminates unsuitable candidates from the recruitment process. '= Shortlisted candidates are then invited for interviews and (in some cases) testing in onder to select the most suitable candidate for the job. 1 Testing is used for some jobs to ensure the best candidate is recruited. Examples include: Aptitude testing: a method of assesing the skills and ability ofa candidate to doa particular job, eg typing speed fora receptionist or driving ability fora driving instructor. Psychometric tests: used to asess the attitudes and personality traits of candidates, eg, their level of drive (or motivation) and their ability to deal with stressful situations, ‘These are used to ensure the chosen candidate is a good match with the organizational culture. Trade tests: industry-specific assessments used to examine the candidates skills and expertise in a specific profession. Intelligence tests: used to asess a candidate’ skills of numeracy, literacy and general knowledge. = Background checks are made with referees (one of whom is likely to be the current or last employet) to ensure information declared by the applicant is truthful and to get a character reference so the business can assess the suitability of the candidare. 1 A job offer is made to the most suitable candidate prior to of employment. 1 Internal recruitment f= Inyernal recruitment is the hiting of people from within che organization rofl a job vacancy. t= It iscommonly used for targeting suitable employees for supervisory ot guile 2:1: The rectultmiers process management positions. Source: Business Review, February 20132.1 Functions and evolution of human resource management 39 Table 2.1 Advantages and vantages of internal recruitment Advantages of internal recruitment Disadvantages of internal recruitment ‘© Lower risks as the employer already knows the strengths and» ‘Dead wood! (outdated practices) might exist in the organization suitability ofthe existing worker 0 an external candidate could bring in new ideas © Relatively ower costs of ecrutment comparedito external _»-_Similarly, external candidates may be more skilled or better reaitment ‘walfed © Itis generally faster than extemal recruitment ‘© Alower numberof applicants can mean the employer has fewer It strengthens the loyalty of employees as there ae career ‘captelaies to cimorst troy development opporturites within the organization ‘© Itcan create unnecessary internal competition and confict ‘© Itreduce or eliminates the need for induction as existing between existing workers who apply fora particular job wotkers are already familar with te practices and ‘© Hing someone internally means there isa vacancy created, 0 organizational clture another person sil has to be recruited lm External recruitment sm External recruitment is the hiring of people ftom outside of the organisation. 1 Ic requires placing job advertisements using @ range of media to attract potential applicants, eg, newspapers, websites and trade magazines 1 Interviews are the main method of selection for both internal and external recruitment 1 In some cases, specialist recruitment agencies in a particular industry take responsibility for advertising, interviewing, selecting and hnting suitable people. In rer, they charge a fee for their services. = The advantages and disadvantages of extemal recruitment are the opposite to those of internal recruitment (see Table 2.1), eg it can be difficult to determine the suitability of an external candidate to fit into the culture of the organization. Types of training (Ao2) = Training is the process of teaching a particular new skill or knowledge in onder to develop a person's competence in the workplace, The purpose is to match the skills of employees with the needs of the organization. = Itisimportantas it improves the productivity of workers, boosts motivation and reduces labour turnover. Training can also help to improve customer service and customer relations. =A business that invests in its people can benefit from an improved reputation, which helps to attract good quality candidates in the recruitment process = The main types of training are on the job, off the job, cognitive andl behavioural. ® On the job (including induction and mentoring) = Induction — This type of training is intended for employees who are new to the cepanization. Ir aims to support new staff in gotting acquainted with the people, plans, palices and processes of the firm, [It can help new workers to avoid costly mistakes by familiarizing themselves with standard procedures, formalities and coxes of conduct. [5 Induction training can be cestly as it uses up valuable management time to set up and! run the training for new staf Keyword definition Oncthe-job training is training conducted within the workplace whilst the employee is working. = Mentoring —Thisis the process of an adviser or trainer (the mente) providing support to less experienced colleagues (the mentees) in various aspects of their job role, eg. a head of department providing advice and training to new employees40. Unit2_ Human resource management Table 2.2 Advantages and disadvantages of on-the-job t ‘Advantages of on-the-job training xdvantages of on-the job traini "© Cheapest form of training ifthe firm uses in-house specialists to © Trainees may pick up bad working habits from the trainer provide the training “© Internal staff may lack the necessary sil, confidence and ing © Training istelevant as itis targeted at specific sues related to expetience to deliver the training the firm's needs ‘© Internal trainers cannot get their own work done whist planing © Fewer disruptions to daily operations as the trainee is stl at ‘ordalvering the training work © Can help to build better relationships at work due to team working 1 Off the job - — = Day release ~ Employees take time off work to attend training at a ‘Keyword definition local college, training centre or conference centre, eg. IB teachers Off-the-job training is training attend three-day workshops as part of their professional reflection and conducted by specialists away from development. the workplace, = Distance learning — Employees undertake self-study courses to improve theie skills and qualifications, pechaps by attending evening classes or following an online training course = Seminars ~ Staff attend a lecture or meeting as part of their professional learning and training. Table 2.3 Advantages and di ‘Advantages of off-the-job Disadvantages of off-the-job training ‘© Awider range of skills and qualifications can be obtained ‘© Itis more expensive than on-the-job training, e., training ‘© Staff can learn from outside specialists or experts who may not course fees ‘exist within the organization ‘© Lost productivity during time when staff attend the training ‘© Employees are not distracted from the dally operations in the © Employees gaining new skills and qualifications may decide to workplace leave the firm for better jobs elsewhere ® Cognitive training 1 Cognitive training refers to exercising and developing the mental sills of employees soas to improve their performance an! prestuctivty ‘= Cognition isthe brain's ability toleam and think, so cognitive thinking helps to develop the learning and thinking sills of employees. 1 Ic focases an improving memory, attention, perception, reasoning, judgement and general learning ills. 1 Research has shouin thar cognitive training can lead to improvements in the self-esteem, selfconfidence and emotional stability of employees. = Behavioural training Behavioural training seeks to change or impreve the pattems of behaviour at work based on the desired outcomes. © Examples of such behaviours include: team building, conflict resolution training, anger management, scress management, leadership training, mindfulness, emotional intelligence courses, or health and safety training ‘= An important aspect of behavioural training isto identify the functional ‘issues that could be hindering performance. Case studies and role plays ae often used to facilicate this. = Esentially, behavioural training stives to improve both personal and professional effectiveness.2.1 Functions and evolution of human resource management 41 Types of appraisal (ao2) = Appraisals are conducred for several reasons, including: (assessing an employee's performance against pre-agreed targets Keyornd déAniticn (identify training needs ofthe individual employee Appraisal refers to the formal helping the management to rew. achieving employees. Smeal a paeets 1 bedping the management to reward high achieving empl performance with reference to the sm Target setting isan integral part of appraisals. Targets should be SMART: roles and responsibilities set out in specific, measureable, achievable, realistic and time bound. the job description. = Wan employee's performance is deemed to be les than satisfactory, it should be followed by providing relevant taining or counselling. Such appraisals do not necessarily result in severe or demotivating measures such as warning letters or dismissal © Different organizations use different appraisal systems, such as: formative, summative, 360-dlegree feedback, and sef-appraisal @ Formative appraisal 1 Formative appraisal takes place on an on-going basis to enable employees to {improve their job performance. 1 Ic helps wo identify an employees strengths and weaknesses in a specific roe or the peogress made in a particular task or project. s= Ie helps the organization to identify the training needs of an individual employee. = Summative appraisal = Summative appraisals rake place periodically, such as quarteriy oc annually, conkhucted by the line manager who summarizes the personal performance and achievements of the appraisee = The apprasee is held accountable for the outcome of his or her work, including identifying any areas for improvement. = 360-degree feedback 15 360.degree feedback isan appraisal system that invelves getting comments, opinions and information about an appraisee from the various groups of people who work with that person, e4. peers, line managers and subordinates 1m 360-legree feedback is usually obtained using questionnaites, surveys, observations or interviews. = In some culcures, such an approach to appraisal (where a senior member of staff is appraised by a junior colleague) would be deemed inappropriate and might not produce open and truthful discussions. © Self-appraisal 18 Selfappraisal involves employees evaluating themselves against a predetermined ser of criteria. The appraisee reflects on their strengths ancl weaknesses in order to set new targets for themselves. = Toavoid potential bias and any inconsistencies, selFappraisals are often used {n conjunction with an appraisal conducted by the line manager.42 Unit2_Human resource management Common steps in the processes of dismissal and redundancy (401) 1 Dismisal is fair an employee lsc higher ob due to incompetence ce See Lt gress misconc nthe workplace, eg thet fraud, drunkennes, violence or [ acriwa eaten eyword definitions 1 Managers have to handle dismiss very arf, There nec oe very definitive and comprehensive reasons for dismisinga worker to prevent any | Saey eamrennce oe Resch af legal challenges being made in a cout of law. conlormen cones 1 Ir scat cases, dismisal based on ree eligon, age, gets or sexual HedarBhocy mcarevhens preferences is eyanded as unfair dismal penne me neta 1 In genera cismisls po through a threestage process ising the staff hie a certain number or group of member an initial verbal wnening followed by a formal writen warning, and | workers or because the job ceases finally termination of contract if the employee fails to meet the agreed targets, | 10 exist, perhaps due to seasonal or technological factors. Dismissal refers to the termination ‘of a workers employment die to '= Redundancy occurs when a firm can no longer afford to employ a worker, when a job ceases to exist due 0 the completion of a project, or a lack of available work. = Redundancies can be voluntary or compulsory. Voluntary redundancies are often associated with generous compensation packages (severance pay). Involuntary redundancies happen as a last resort, often causing low stafé = Iccan be difficult fora business to decide which workers to make involuntarily redundant. This needs to he done objectively, eg, based on a lastin first-out system (numberof years of service with the organization). How work patterns, practices and preferences change and how they affect the employer and employees (Ao2) ® Teleworking © Teleworking refers to employees working away from the office by using electronic forms of communication, eg. telephone, the internet or mabvle technologies. = Homewerking isan example of teleworking, where staff work from home. = Advancements in telecommunications and internet technologies, as well as sing office rents, have increased the number of businesses choosing to use teleworking. = Teleworkers can benefit from autonomy in decision making and the absence of strict company policies, such as dress codes |= However, productivity can be an issue due to the distractions at home or the lack of central when working outside of an cffce environment. @ Flexitime 1 Flexitime isa variable work schedule requiring employees to work a set number of hours but giving employees the right to choose when they work. There is normally 2 core (peak) period during the day when employees must be at work, ‘This is common in the tech industry. © Flexitime and parttime workers have led toa fallin the numbers of fulltime workers in several industries, e.g supermarkets and fastfood. = Such practices help to improve employee morale and productivity by {improving the way they operate. 1 Flesitime has cost implications for the business as managers need to supervise ‘and monitor the hours actually worked by all flexitime employees.2.1 Functions and evolution of human resource management 43. | Migration for work = Migrants usually move to other countries in search of employment opportunities = Recruiting more immigrant and temporary workers can help employers to fil short-term gaps such as during seasonal or peak trading periods = Highly skied workers are mere likely to be able and willing to migrate as they havea greater chance of securing well-paid jobs overseas © The migration of skilled workers has increased due to globalization (such as the widespread growth of multinational corporations) and internet technologies enabling better flows of information to workers looking for job opportunities overseas, @ Part time = Part time is an employment practice that hives workers for fewer hours per week than thase witha full-time job = Paretime staf workin shifts but may remain on call (tardby) while off duty to caver for fulktime staff who might he off sick, attending a training course or on annual holiday leave. = Paretime and shift workers give employers greater flexibility in their ‘operational hours. m= Whilst parttime work might suit some people (such as mothers with young. chien or flim students in higher education), they do not qualify for the same employment perks (benefits) as those on full-time contracts. Outsourcing, offshoring and re-shoring as human resource strategies (A03) = Outsourcing isthe use of external providers for certain non-core business activities, eg, cleaning, catering and security. 5 Many businesses outsource their non-core activities to third party firms to reduce coxts and ro focus on their main business functions in which they hhave core competencies. [The outsourced firm provides specialist services on a contract basis and at highly competitive prices. They are also used due to the improved quality standards provided. = Offshoring isthe practice of relocating business functions or activities abrond 1 Itis pursued mainly because of lower production casts by using cheaper Inbour in less economically developed countries. 15 Cost savings abo arise due to lower operational costs, e.g fewer fringe benefits and lower training costs. 5 Countries such as India, Vietnam and the Philippines have seen a sharp rise in multinational frmas choosing to offshore theie operations, e9. ccastomer service call centres, accoxtancy services and computer sfeware development. = Resshoring is the transfer and relocation ofa firm’ overseas operations hack to its country of origin due to cost or competitive advantages (see Unit 54) (G)There has heen a surge in re-shoring in countries such asthe UK and USA due to incentives offered by domestic governments for relocating production back to the home country. 15 Italso occurs when offshoring no longer offers cest savings, eg, increased ‘wage costs in countries such as China and Mexico have driven some ‘multinational companies to re-shore their operations,44 Unit2_ Human resource management 51 Unethical labour practices in many off shored countries (such as the exploitation of female workers and child labour) have given firms reason to reshore. 15. The increasing cases of product recalls and Low quality output from offshored production units has damaged the reputation of multinational companies, thus forcing them to pull out of their overseas operations, How innovation, ethical considerations and cultural differences may influence human resource practices and strategies in an organization (A03) ey Examples of how the concepts of innovation, ethies and culture may influence ‘human resouce practices and strategies are outlined below. = Innovation 15 Homan resource managers are increasingly relying on the use of information communications technologies (ICT) in workforce planning, eg; the use of company websites to advertise job vacancies or video conferencing facilities to conduct job interviews around the world Social media and necworks such as Linkedin and Facebook are also used as part of the recruitment process, m= Ethics, 1 The use of parttime and flexitime workers has raised some concerns about employers who take advantage of these employees yet gain from having lover operational costs The unethical treatment of people in the workplace has huge consequences, eg lower staff morale, negative corporate image and casts of possible lawsuits, Unethical business practices of some offshored firms, such as the use of child labour, mean that more businesses are choosing to re-shore their operations, = Culture 15 Firms with high rates of labour tumever may suffer from poor human resource management and a weak or fragmented corporate culture. [2 Theenlture of some firms is such that human resourcesare viewed as a long-term investment so training and development become integral to eos het hiner titer Investigate how innovation, culture Although 360-degree feedback is used in some counties, the act of| and ethics have impacted on subordinates appraising their senior colleagues in an organization is human resource planning for an ‘unacceptable in other countries. ‘organization of your choice. ia? Figure 2.2 Culture impacts on how appraisals are conducted2.2 Organizational structure 45 2.2 Organizational structure Terminology to facilitate understanding of different types of organizational structures (401) Small businesses are often characterized hy informal organizational seructures while larger businesses need to adopt more formal structures due to the larger ‘numbers of staff involved. Revised CI 1 Asa business grows, it needs to organize staff into formal organizational structures to ensure effective communications, increased efficiency, and clear expectations of accountability and responsibility. '& The following terms help to facilitate understanding of different types of organizational structures: delegation, span of concro, levels of hierarchy, chain, of command, bureaucracy, centralization, decentralization, and de-layering. lm Delegation = Asa tusiness grows, it becomes inevitable chat managers need to relinguish > some of their roles and responsibilities. This is known as delegation. Keyword definition Delegation isthe process of encrusting and empowering a subordinate to successfully complete a task, project ot job role '= It involves passing on control and authority by the line manager while still, holding the subordinate accountable for his or her actions. The overall responsibility stil remains with the Hine manager '= Delegation makes people accountable for their actions, Accountabi extent to which a particular individual is held responsible fo the success or failure ofa job role or activity ‘= Decision making can be delegated but responsiblity remains with the executive directors as they are ultimately responsible forthe organization's strategy. = Iecan be a motivational ral foremployees as it recognizes their talent, ability and potential. Staff who are empowered may feel inspired to perform well. They fel a sense of achievement and pride in their work. Morale is high as they feel trusted and valued by management. ‘Whilst delegation empowers a ‘worker with decision-making rights 1 Delegation can, but does not always, come with extra financial rewards, eg Sh authority, responebity cannot Baynes bbe delegated — the line manager 1 Successful delegation frces up managers to atten to other important rasks {remains resporsible forthe work or such as strategic decision making. tasks delegated to others 1 Span of control = The span of contro is inversely proportional to the numberof hierarchical = layers in an organization, Keyword definition The span of control describes the ‘number of subordinates who are direetly accountable to a manager. © Having a narrow span of control can improve communication and control of the team, =A wide span of control means a manager is responsible for many subordinates, while a narrow span of control indicates fewer workers who directly report to the line manager. sm The wider the span of control, the greater the need for strong leadership and clear lines of communication. =A wider span of control makes the organization flatter. = Organizations with wider spans of control require fewer managers, which loywers their costs46 Unit 2_ Human resource management im Levels of hierarchy 18 Hierarchical structures shew where each person within an organization fits anal hence his or her oles and responsibilities. Keyword definition = Hierarchical structures can he tall, with a narrow span of control bat many ‘LEEW GE Bistnschiy tet ct thes levels in the hierarchy, ‘management structure ofan ‘organization based on the number = Altematively, organizations ean be flat, with wider spans of control but with | Gf layers of formal authority, fewer levels in the hierarchical structure. usually presented in a diagram or chart & Chain of command = The chain of command in an organizational structure is usually shown as a ity indicating how decisions and responabilty are pased | Keyword definition dovwn the hierarchical layers The chain of command is the = Instructions and commands flow downward along the chain of command formal line of authority through ‘hich orders and decisions whilst accountability flows upward in the organizational structure. 1 The clearer che chain of command, the mote effective the decision making saabogrmenin the ont tends to be. ‘operational workers at the bottom © A clear and established chain of command improves the efficiency of of the hierarchy. communications in the workplace = Businesses with fewer levels in the hierarchy (flat structures) have a shorter chain of command, are passed down from senior ™ Bureaucracy = Boreaucratic organizational structures have a number of layers of management, with decisions passed down from senior executives to regional managers, Keyword definition departmental managers, supervisors and operative workers. Bureaucracy refers tothe administrative systems of a business, such as the set of rules and procedures and formal hierarchical seructutes in an organization. = In bureaucratic organizations, authority and decision making are generally centralized. Hence, strategic decisions can he made faster as fewer people are invelved in decision making. f= Bureaucracy offen leads to excessive administration, paperwork and ether formalities, f= Teencourages a culture focused on rules and standards, where daily operations are rigidly controlled with close supervision and accountability. = Rigidity means that bureaucratic organizations are often slow to react to changes in the external environment, Italso discourages creativity and innovation. = This reduces flexibility and discourages progress in the organization, and thus, eau to inefficiencies and slower decision making © Centralization 1 In centralized organizations che importance of subcrdinates is reduced whilst the importance of senior executives is increased, Keyword definition Centralized structures were favoured by management theorists such as Centralization refers to FAW. Taylor and H. Fayol due to faster decision making and better control ‘organizational structures where the majority of decision makin t= Itis associated with a paternalistic or autocratic style of leadership isin the hands ofa very saall (ee Unit 2.3). number of people at the top of the = Rapid decision making can result in fewer conflicts due to cansistent policies | hierarchical structure. coming from the top few highly experienced managers Costs are alo reduced as there is less of a need for hiring more specialists or departmental manages sm However, centralized structures are highly inflexible, put added pressure on senior managers and can be clemotivating for employees2.2 Organizational structure 47 § Decentralization = Decentralization involves passing responsibility and authority away from the Board of Directors and senior executives to individual departments. ss Indecentralized structures, there is shared decision-making authority and responsibilities. = Decentralization is associated with fewer ties (flatter structures) in an organizational structure and wider spans of control © Unlike centralized structures which have a ‘top-down’ approach to management and decision making, decentralized structures are seen as ‘bottom-up’ and democratic. f= The larger the business, the more decentralized its onganicational structure tends to be, = Decentralized structures ae often found in organizations with an informal corporate culture, © Delegation and empowerment, vital aspects of decentralization, can result in berter motivation for employees 1 Iealbo results in quicker and more flexible decision making However, decentralized strictures can result in poor decision making due to the lack of experience and expertise of less senior stat = The decision to have a more centralized or decentralized exganizational structure is influenced by several factors, such as the corporate culture, the size of the organization, and the nature of the decisions to be made (whether they are strategic routine decision lm De-layeting ss Delayering results in flater structures and managers hi of control. Wider spans 1 Reasons for dedayering inclide improving communications in the organization, having shorter chains of command, and cutting costs as there are fewer levels of management. 1m The biggest disadvantage of de-layering is the potential stress and anxiety of subordinates due to the added workload, 1 Firms may choose to downsize or de-ayer hecause i improves or speeds ‘up communication and is cheaper due to fewer layers of management, = The move towards flexible working practices (see Unit 2.1) means less of a need for traditional hierarchical structures. Types of organization charts (A02, 404) Keyword definition Decentralization refers to ‘organicational structures which include the delegation of decision- making authority throughout an ‘organization, away from a central authority. Gia Evdation skils require candidates to demonstrate thinking’ skils. Make sure ‘you apply your understanding to the Context of the business in queston, €. bureaucracy isnot suitable for creative industries that require autonony. By ‘contrast, the emergency services fre, ppolce and ambulance services) would require centralized stuctures and stict chains of command to ensure that ‘the services are caried out properly ‘without endangering the safety of the ‘general public. Keyword definition De-layering is the process of removing one or mote layers in the ‘organizational hierarchy to make the structure flatter. § Flat/horizontal 1 A flat (or horizontal organization has few layers of management (Gee Figure 23), = Line managers have a wide span of control in flat hierarchical structures. This gives the manager alot of authority over decision making but also places alded pressure on his or her level of responsibility. = Organizations with flar structures are suitable when employees are multiskilled and can organize their own work effectively. Figure 2.3 A flat organizational chart48° Unit2_ Human resource management ss Flatter structures have shorter chains of command, which imprewes, communication in the organization, 15 The culture of relationships in flat structures is often open and informal This is partly because there is minimal contol ever inkivcual employees, which allows employees to take responsibility foe their own work. = With a large and wide span of control in horizontal structures, itcan prove difficult to have tight control and close supervision of workers. Ths is because ‘managers ina flat organizational structure with a wide span of control directly supervise a large number of people. @ Tall/vertical = There are many layers in a tall (or vertical) hierarchical organisational structure (see Figure 24), Roles, responsibilities and departments tend to be highly specialized, = Generally taller hierarchical structures are characterized by a narrow span of control, with each manager being responsible for fewer subordinates. = Vertical structures are hierarchical, with clear chains of command. Rules, policies and procedures are written and formalized, This reduces the chances of making mistakes. = Such structures can be motivational for junior staff as there are prospects for promotion and moving up the hierarchical structure, © A drawback of vertical structures is the potential for miscommunication problems due to the lange numberof layers in the organisation. Decision Figure 2.4 A tall organizational ‘making can be slow due to formal, inflexible and bureaucratic structures. structure ® Hierarchical © Hierarchical structures are tall with many levels of responsibility. Such structures place people within an organization in terms of their rank, = They are suitable when job roles are straightforward and routine as ourput can be easily measured and checked and because there are clear lines of accountaility. = The person directly above an employee on the next hierarchical evel is known as the line managee. The line manager supervises and manages the subordinates on a day-to-day basis. = Hierarchical structures are rigid and bureaucratic so responding to changes in the internal or external business environment (see Unit 1.5) can be slow. © They tend to be overly administrative and bureaucratic so employees feel rather distanced due to the impersonal nature of the hierarchical structure. = Organization by product 1 Organization by product is suitable for large businesses that have a broad product Line of goods or services as this requites specialized expertise in. Keyword definition marketing and operations. Organization by product occurs ‘when an organization groups its Jhuman resources base on the distinct goods or services it sells. 1 Each product group has its own internal structure related specifically to that particular product line (see Figure 2.5). = For example, the Volkswagen Group would have different executives responsible for different divisions ofits product range, eg. Volkswagen, Audi, Porsche and Bugatti. Each executive would be responsible forall products under that division. = The main advantage of this type of organisational structure is that products created using completely different and separate processes ate better managed and controlled.2.2 Organizational structure 49 Food Maker PLC Figure 2.5 Example of a product organizational chart for Food Maker PLC lm Organization by function 1 unctional organizational structures arrange individuals by specific functions performed, eg. human resources, finance, operations management and Keyword definition marketing Gee Figure 2.6) Organization by function involves Iris the most common form of organizational structure. establishing the organizational structure acconding to business functions such as marketing, production, and finance. = Managers of different functional areas report to the respective director or vice president who holds overall responsibility for the department or division, eg marketing managers must report to the marketing director = The advantage of this type of structure is that functions ae separated by expertise but the challenges come when different functional areas turn into silos that focus only on their area of responsibility and don‘ support the function of other departments, Figure 2.6 Organiz: jon by function = Organization by region '5 Organization by region is sable for businesses that are located in several different geographic regions within a country or around the world (sce Figure 2.7). | Keyword definition Organization by region refers to i establishing the organizational 1 There are efficiency gains and operational benefits of organizing people by seructure according to different different regions, eg. to better support and meet the needs of eustomers in ela different locations. = 1 Tecan support logistical demands and differences in different geographical locations, = Typically, operations are managed and overseen by a regional director.50 Unit 2_Human resource yement pee ee sm sa Figure 2.7 Organization by region Changes in organizational structures (A02) In reality, organizational structures are not static. Changes in the internal and. ‘external business environments mean that organizational structures need to be more flexible and adaptable. Examples include: project-based organization and the Shamrock organization. lm Project-based organization = Using fleable project teams involves the temporary use ofthe most suitable — employees from different departments fora particular project. Keyword definition Often referred t0.as a matrix structure, such a flexible organizational structure | Project-based organization refers is conducive to a democratic leadership style (see Unit 2.3) as it encourages the iene Seem generation of new and creative kleas fom team members oreteieeeeaet f= Matrix structures ate a popular way of organizing highly skilled and experienced staff. They help to utilize the synergies created from interactions amongst staff in the matrix. 1 Project-based organization can create problems for the business hecause staff imay have some uncertainties about prioritizing tasks when they have more than one line manager. = Similarly, chere can be difficulties in controlling team members from various departments in the project who have conflicting interests and priorities. 1 Projectbased organizational structures create opportunities for job enlargement and job enrichment (see Unit 24), thus boost morale and ‘motivation. However, they can cause some staff to become demoralized due to the axided workload and pressures of working on different projects = Additional resources and finance will be needed to facilitate the running of the projects ® Handy’s Shamrock Organization 1 Irish scholar Charles Handy’s Shamrock Organization theory (1991) suggests that organizations face continual change s0 need to adapc accordingly. 1 The changing oxganiation comprises of thee ‘leaf (types) of workers: core workers, peripheral workers and outsourced workers (see Figure 2.8). 1B. The professional core consists of fulltime, experienced ane essential staf needed for the organization's operations and survival. With improvements in technology and the trend for downsizing and delayering, there is less of a need for so many core staff in an organization.2.2 Organizational structure 51 1 The contingent workforce refers ro peripheral workers i.e. the temporary, portfolio and flextime workers employed by organizations on a short-term basis, However, this often causes job insecurity and low staff morale. [Outsourced vendors are individuals or businesses hired on a contrac basis to do specific tasks such as an advertising campaign. They are specialists in their field so can be expensive ro employ. Figure 2.8 The Shamrock Organization 1 The model emphasizes the growing practice of outsourcing non-essential activities as well as the recognition of flexible working practices (see Unit 2.1) = The model presents cost savings and greater flexibility for ganizations, eg, labour costs are cheaper because only the core staff receive full employment perks (benefits), whereas peripheral and outsourced workers do not = Handy’s academic work on organizational structures has shaped the thinking behind present day organizational structures in many business organizations around the work How cultural differences and innovation in communications technologies may impact on communication in an organization (403) = Communication is the transfer of information from one party to another. Managers spend a significant proportion of their time communicating with internal and external stakeholders. Effective communications enable managers and workers to have a better understanding and control of what they do, = Cultural differences can havea large impact on communications in an organization. Cultural ignorance can cause offence to others and can cause marketing messages to be misinterpreted or misunderstood by the wider community. = For multinational companies, an understanding of local cultures and traditions is a major competitive advantage when communicating with theit target markets = Innovations in communications technologies also impact on. communications in organizations, eg, internet technologies have reduced the costs of internal and external communication, both domestically and internationally. '= Social networks and social media have become popular means of cotmmunication for many businesses around the globe. = However, innovations in mobile technologies have led to information overload from the overexposure of online marketing. ‘While this section of the syllabus looks at the formal organizational structures, itis important for ‘managers to be aware of and understand the informal structures that are likely to exist. Informal structures can help to promote a sense of belonging in the workplace. Knowledge and skils are unevenly spread out in an organization so informal networks can help to identify and exploit different sources cof knowledge and skills. Te eas Investigate how change and culture have impacted on the organizational structure for an ‘organization of your choice.52. Unit2_ Human resource management 2.3 Leadership and management The key functions of management (402) = According to French engineer and management theoretician, Henri Fayol, management is about: planning, organizing, commanding, coordinating and controlling. These management activities are taskoriented, rather than, people-oriented. '= According to Irish management guru, Professor Charles Handy, management is about ackressing and solving problems in the same way asa general practitioner ‘octor) would co. Managers identity the problems (Symptoms), investigate the causes, decide on a course of action and then implement the plan. = According to American management consultant and author, Peter F. Drucker, management is about setting strategic objectives in onder to manage the organization and its people to establish the furure direction of the business. = Other functions of management include developing and motivating employees ‘measuring and evaluating performance against organizational objectives, establishing personal contacts and nurturing professional networks 1 Essentially, the functions of management concern the effective and efficient use of an organization’ resources Management versus leadership (402) Table 2.4 Management versus leadership. Management Leadership ‘Follow the culture ofthe organization ‘Set the culture ofthe organization © Manage others © Inspire others © Planning, organizing, controling, commanding, coordinating, © Cope with and promate change, witha more eration dimension and setting objectives to inspire and align people © Work within the parameters of orgarizational plcis and © Focuson he future procedures © Instigatos of change, setting the strategic direction ofthe © Focus onthe present organization «© Focus on operational objectives ‘© Focus on vision and mission statements © Mainly concerned with processes “© Mainly concerned with people ‘© Tactical deesion making ‘© Strategie decision making © Deal wth individual needs of staff ‘© Focus on common needs © Poy makers and decison makers © Risk-takers and decion makers «© Move involved with administrative aspect of the organization © Are opin inovate, inspationa, entrepreneurial and creative © Conirmative capacty fearing todo) «© Adoptive cpacty (learning to lear) Leadership styles (A03) ‘Leadership style refers to the way in which managers and leaders provide direction, implement organizational plans, and motivate people. CoD 1m Autocratic Although distinctions are made Aurocratic leaders are authoritative ie. there are formal systems of command Se taleeantien and concrol. in realty, the terms are often used = They avoid discussions as empleyees are nor involved in decision makit interchangeably and a distinction is ore . “ somewhat unimportant as there are Delegation and consultation are non-existent desea bee A jac ac Fa the capacity to manage and a good & Communication is top-down and one way, i. managers onder and instruct their subordinates, ‘manager has the capacity to lead,2.3 Leadership and management 53 © Ics most likely to be used when employees are unskilled, inexperienced, lack initiative andjor cannot be trusted. = An autocratic approach may also be suitable or necessary when critical decisions must be made, eg, the emengency services (police, fire and ambulance services) or in the military and navy. The success of the organization very much relies on the ability of the leader. Table 2.5 Advantages and disadvantages of autocratic leadership Advantages of autocratic leadership Disadvantages of autocratic leadership ‘© Eneures thee ke control and dose oversight within the "© Stiles intative and creativity as employees ate not involved in organization decision making © Quick decision making takes place ‘© Demetivates workers as thelr ideas are not valued © Employees have a clear sense of cliection © Does not nurture future leaders among employees so can damage ‘© Effective when deadlines are imminent or major decisions competitiveness in the long term need to be made © Subordinates are usually ineffective ifthe leaders absent from work @ Paternalistic 1 Paternalisic leaders see the workforce as an extension of the family so make decisions that they perceive tobe in the interest oftheir employees. tis often effective in family-run businesses. 1= Itis used in organizations where the leader is highly experienced and genuinely values the workers, = There is close supervision of employees and their work (comparable to a parent's traditional control over their children) ‘Table 2.6 Advantages and disadvantages of paternalistic leaclership Advantages of paternalistic leadership isadvantages of paternalistic leadership ‘© Asofter form of autocratic leadership which often results in» Employees can become dissatisfied as their viewpoints are often improved staff motivation and lower staff turnover ignored (decisions are made by top management) so it does not ‘© Feedbacks invited, so this can improve relationships at work as__‘help to develop thet careers employees’ social needs are emphasized “© Communication is mosty downward ‘© There ic often commitment and loyalty to leaders who workers © Pateralistc leaders can become too dictatorial and make poor perceive will take care of their well-being decisions (does the parent or leader always know what s best?) @ Democratic = Democratic leaders involve workers in the decision-making process, ie. consultation and collaboration are considered to be important to the organization. Leaders encourage discussion and employee participation, although they hhave the final say Leaders delegate authority and empower their staff. Itis likely to be effective when used with skilled, experienced and creative employees Table 2.7 Advantages and disadvantages of democratic leadership Advantages of democratic leadership Disadvantages of democratic leadership ‘© Can be motivational as workers fel their opinions ‘© Dedsion making is slower as employees have greater involvement in and input are valued, thus creating a greater sense of the process belonging and staf loyalty © Reaching a consensus over decisions can be time consuming and costly © The collaborative environment oftenresuits in better The possiblity of disagreement among intemal stakeholders during the informed solutions to challenges and problems ‘scussion process can negatively affect day-to-day operations © There is two-way communication so this encourages the 4 jnappropriate for uigent decisions needed during challenging times sharing of ideas inthe workplace faced bythe business54 Unit2_ Human resource management § Laissez-faire © Laissez faire leaders delegare responsibility and authority to their staff enabling them to complete tasks in their own way (although the leader sets Bese lend dennis tan och ie expec mit Spea = At polar opposite to autocratic leaders, the success of laissez faire leadership ‘ti common in IB exams for students primarily depends upon the aptitude and artitucle of the employees. to claim that democratic leaders ; . are better than autocratic ones, © Staffare given the freedom to work without supervision from the Seatingihet the fonneracrt ace ‘management as there is a deliberate attempt to delegate power and authority. than the latter This suggests 2 1 tis suitable for mundane and routine tasks which do not require managerial ‘ack of critica thinking 2 the most effective leadership style depends sperviskn. fon the context of the organization, 1 tis also suitable when staff can be trusted, ae highly talented and self fits workers and the task at hand. motivated, and are willing and able to take on responsibility, eg. Google and Leaders do not exist to be popular, Ficehool but to get things done Table 2.8 Advantages and disadvantages of laissez. ire leader ‘Advantages of laissez-faire leadership Disadvantages of laissez-faire leadership ‘©The freedom given to employees can allow them toeicel in.» Individual gol seting could confit wlth organizational what they do best, without any constraints imposed by the objectives, especialy as there san absence of management management contol © Provides opportunites for staff with sion and intoprenerial © Often ctied forthe poor definition ofthe rolefpupose of skills Ge Unit 1.1) management ‘© Autonomy in decision making can have pestve impacts on staff = As management take 2 hands-ef approach, meitring and ‘motivation, productivity and staff retention levels contol ofthe arganization's operations become very challenging. ® Situational leadership © Situational leaders adapt their style of leadership acconding to differences in circumstances, = Tris assumed that there isno single best leadership style but rather different styles are suitable depending on the context or situation. 1 Relationships at work have a key role in the success of situational leadership. 1 Ie roles on che skills and level of experience of the leader Table 2.9 Advantages and disadvantages of situ: al leadershi ‘Advantages of situational Disadvantages of situational Sal fy FLW onde leadership _____leadership__ style adopted in an organization, Ttrecognies the needforleaders «Most managers and leaders havea inlucing the: tobeflexbleinthelr styl qiven—_prefemed or natal style, o expecting them the dynamic nature of business tochange here according todiferent” —_~ ture of he ask eg, whether it ‘management situations can be difficult is routine or strategic ‘© Itispractcal and applies across.a = Employeesmay have grown accustomed ee at mt eager vree range of industries and business toa particular leadership stye in the = problems workplace, so staf may become dkorented _* {ype of labour, eg. skiled or ‘© Workers can benefit fram the mix ‘and unsettled were the leader to change inexperienced, taper Gan berthed Wiser ile + personality and preference (natural appropriate, and directive activities ¢ The inconsistent approach can mean the style) of the leader atother times leader loses credit with the employees.» organizational culture.2.3 Leadership and management 55 How ethical considerations and cultural differences may influence leadership and management styles in an organization (403) © Leadership is generally vital to the operational success of a business. It has Implications across all areas of the organization and shapes its culture, = Whilst leadership is important, a business can succeed in the absence of effective leadership ifthe staff are highly talented and self 1+ assume that only one organizational change. aaah cae = By contrast, an adaptive culture entails a coherent and open-minded team ‘organization. Sub-cultures are likely with a high level of CQ. This helps to reduce the likelihood of culture clash, 0 existin different departments or conflict and miscommunications. ateas ofthe organization. The reasons for, and consequences of, cultural clashes within organizations when they grow, merge and when leadership styles change (Ao3) = Culture clash might exist if the beliefs and values of employees differ from those of senior leaders. Keyword definition @ Itoften happens when there is a merger or takeover, resulting ina new senior | Culture clash exists when there ‘management team or board of directors. isa difference between the values and beliefs of individuals within an organization. = An understanding and awareness of organizational culture is vital to managing change asa business grows and evolves. = Different leadership styles within che organization can cause inconsistencies and confusion, Similarly, weak leadership isa cause of culture clash as workers lack direction and purpose. = Radical change such as mergers and acquisitions (M&As) are likely to dliseupt existing corporate culcures, creating uncertainties and causing anxiety for employees. = Culture clashes are a major reason why many M&As fal = Miscommunications in the workplace are more likely to happen as a firm grows in size. Different languages being used by workers can create sub- cultures and cause further barriers to effective communication,2.6 industrialemployee relations (Ht only) 67 = As firms grow or evolve, a new vision and mission statement may be created but could be met with resistance to change from the workforce. Consequences of culture clashes include: lower staff morale, lower productivity, conflict in the workplace, higher labour turnover, and redced profitability. How individuals influence organizational culture and how organizational culture influences individuals (403) f= As corporate culture is linked to the nature of organizational structures adopted in the firm, it has direct impact on individuals. = Organizational culture directly influences individuals, eg, in a power culture, workers are suppressed because senior managers exercise strict command and control and hold all decision-making power. By contrast, firms with an innovative or person culture allow individuals to shape the culeute ofthe organization. '= A scrong and innovative culture can enable individuals to satisty their higher onler needs (see Unit 2.4), which influences theie level of motivation and productivity. By contrast, a risk-averse culture results in individuals being less creative and innovative. = The cultural norms influence individual behaviour, eg. ifthe senior management team adopts an autocratic leadership style, then newly appointed managers who do not naturally use this approach may fee! pressurized to adapt to the culture. 1 Organizational cultures can and do change over time, Asa firm grows ot evolves, or a the external business environment changes, markets bacome more competitive which may necessitate managers to change the way in sehich things are done: To iaurvive; S¢may be necessary to intrendace new pos easen sae) ideas and practices, ensuing people are able ro adapt. Investigate how a particular entrepreneur has changed or influenced the corporate culture for an organization of your choice. = Charles Handy argued that organizations with a person culture have individuals who see themselves as unique and superior to the organization. Such people can therefore exert major influence on organizational culture. 2.6 Industrial/employee relations (Hi only) The role and responsibility of employee and employer representatives (A02) = Employee representatives are individuals or organizations (such as a trade union) who act as the collective voice of the workforce. They are usually lected hy theit colleagues (Fellow employees). Co a 5 Binployee representatives are used as it is nor practical for most businesses to negotiate with all their employees. 1 They have a duty to make the views of employees known to the ‘management, eg. training and development needs, better terms and conditions of employment, and improved pay. They strive to build trust and! improve relationships with employers (5 They represent employees during times of legal disputes and conflict, eg. ceases of unt ssa or large-scale redundancies,68 Unit 2_ Human resource management 1G Employers can heneft from recognizing employee representatives due to the inclusive style of management, which may improve the commitment and performance of the employees. 18 Employer representatives are the individuals er organizations that represent the senior management team in the collective bargaining process. They negotiate on behalf of the employers in the process. In some situations, the employer is legally obliged to consult or inform cemplogees about developments in the business, eg. relocation decisions, redundancies (job losses) or the threat af a hastile takeover from a rival firm. Employers may typically use members of their senior management team in the process, although some may choose to use specialist management consultancy firms to represent their interests = The outcome of the negotiation and collective bargaining process depends on the methods used and the relative bargaining strengths of the employee and employer representatives. Methods used by employees (A03) ‘= Industrial action refers to the methods taken by employees to achieve their objectives It is often associated with conflict between the interests of the employer and employees = Examples of such actions include: collective bargaining, slow-dwns/go-slows, work-to-rule, overtime bans and strike action. 1m Collective bargaining 1 Collective bargaining isthe process by which employers’ and employees’ representatives negotiate on the terms and conditions of employment. = Negotiations usually involve discussions regarding pay (wages and salaries), hours of work, and working conditions. © Collective bargaining is important to individual workers as they have litle, if any, negotiation power on an individual basis. = Negotiations and collective bargaining allow employees to put some pressure fn senior management to listen to their requests = The purpose of collective bargaining isto achieve a mutually beneficial outcome, thereby preventing conflicts from escalating beyond control. § Slow-downs/go-slows © Go-slows are the act of working at the minimum allowable pace (under the rules of the workers employment contract) in onder to reduce productivity yet without the worker being sanctioned for breaching the terms ancl conditions of employment. 1m Employees deliberately perform their duties with reduced efficiency and productivity, taking longer to complete each and every task. © Itis often used as an alternative to strike action which is a more extreme form of industrial action. Slow-downs mean that employees are sill paid as they are at work, and are less risky and costly to workers and trade ® Work-to-rule = Work-to-rule occurs when workers adhere to every single rule, policy and procedure of the organization with the intention of purposely disrupting production and reducing output2.6 industrialemployee relations (Ht only) 69 = Employees strictly observe the rules and clauses of their employment contract, such as following all health and safety regulations very precisely. ‘The intention isto ger the employer to renegotiate rather than to serve the purpose of the rules and regulations of the organization. = Workers withdraw any goodwill by refraining from tasks and activities which might be customary but not required by rule or in their job description, e.g answering the telephone during @ lunch break or leaving work slightly later than contracted in order to complete a task. © Overtime bans = An overtime ban is aditective (command or order) from the employee representatives (such asa trade union) instructing its members to refuse working beyond their contracted hours. For mest employees, overtime work is not part of an employee's employment contract. As workers do not engage in any extra work (overtime), this ean limit the firm's productivity and profitability & Strike action w= Strike action is an extreme method of industrial action asi involves employees refusing to work, which temporarily prevents the organization from continuing to operate. = Teisusually used asa last resort when the other methods of negotiation between employee representatives and employers have failed to resolve a conflict. = However, those inwolved in strike action are not paid (as they refuse ro work). Hence, strike action is usually only a temporary method used by employees. = In many counties, there are legal issues surrounding the use of strike action, eg, trade unions having to give advance warning to employers prior to raking such measures Strike action is a potential cause of a crisis for businesses (see Unit 5.7). Methods used by employers (Ao3) & Collective bargaining = Collective bargaining isthe process by which pay and conditions of employment are settled by negotiations between representatives of employees and their employers '& Negotiations and collective bargaining are important for the employer because they can help to prevent disruptive industrial ation such as slow- downs or strikes. 1 Industrial action would he detrimental for employers who would face lower staff goodwill and loyalty, lower productivity and reduced profitability, @ Threat of redundancies '= In some circumstances, employer representatives might pressure or threaten eimployees with redundancies if industrial action continues. = However, this does not mean that employers can simply abuse theit power by dismissing their workers if they do nor agece to the employer's demands ‘Workers ae protected by employment laws that prevent such exploitation, = The threat of redundancies, due to the loss of profits caused by industrial ‘unrest, can be a legitimate reason for encouraging employees to renegotiate in order to prevent job losses70 Unit 2_ Human resource management Changes of contract f= As the chreat of redundancies can cause negative media attention, employers may choose to change employment contracts for employees who cause industrial unrest. = Thisneeds to be completed legally, eg changing employment contracts when the time comes to renew contracts, such as changes to the terms and conditions of pay and working conditions. 1 In extreme cases, the employer has the egal right not to renew the employment contracts of employees deemed to be counterproductive to the organization, @ Closure and lock-outs = Closure isan extreme method used by employers to deal with workers taking industrial action by stopping all business operations. This means there is no work for the staf, forcing them to renegotiare. © Closure means that workers do not receive any pay. It can also result in job losies. Both consequences can weaken the hargaining strength of employees, driving them to compromise in the negotiation process. = Lock outs occur when the employer temporarily prevents employees from working during an industrial dispute. Typically, security guards are hired o locks are changed to prevent employees from entering the premises © Lockouts eventually put financial pressure on workers as they are not paid during the period of being prevented from working. 1 However, closures an lock-outs can be disadvantageous to the industry as such hostile actions can damage the organizations corporate image (#e Unit 2.5). Sources of conflict in the workplace (Ao2) © Conflict occurs when the needs and wants of employees are ignored or not met, = Incompatible values within the organization (different perspectives or points of view) are a major source of conflict as this causes disagreements between, different stakeholders. = Miscommunications, misunderstandings and internal politics cause poor working conditions, lowering staff morale and productivity. = Demoralized staff ae likely to become less productive © Grievance exists when workers have a cause for complaint or conflict in the workplace, especially regarding unfair treatment. It is 9 perceived injustice which causes conflict. © Unmanaged conflict can become a problem for businesses, resulting in lower morale, higher staff absentecism, higher labour turnover, and industrial unest. Conflict is not necessarily a negative thing a it raises and addresses real problems in the organization. Conflict itself is not necessarily the problem, but the way in which it arises and how it is managed can create problems Approaches to conflict resolution (Ao3) = Conflict not only damages working relationships but also the reputation of the organization. It acts as a barrier to effective communications and hinders productivity. '= Reducing or minimizing conflict in the workplace is in the best interests of all stakeholders in an organization, '& Methods of conflict resolution include: conciliation and arbitration, employee participation and industrial democracy, no-strike agreement and single-union, agreement.2.6 industrialemployee relations (HL only) 71 © Conciliation and arbitration '= Conciliation involves to partis in a dispute, such as emplayee and employer representatives, agreeing to use the services of an independent ‘mediator (called the conciliator) to help in the negotiation process to help resolve their differences. 1 Arbitration goes one step further as it involves an independent arbitrator deciding on an appropriate outcome. Both parties agree to be legally bound, by the final decision of the autonomous arbitrator. = During conciliation and arbitration, both parties are kept separate to avoid the tense moments which can further intensify conflict. The conciliator communicates back and forth between the two sidesand steers the discussions towards a settlement that both parties can agree on. Conciliation avoids high legal fees as it can prevent the case being taken to court. Iris a simpler process than arbitration. Indeed, the threat of high legal fees of a court trial means conciliation and arbitration have a high sucvess rate, = Ifone of the parties does not agree to the terms and conditions advised by the coneiliator,itcan take the case to arbitration. '= Both coneiliation and arbitration can take up alot of management time an financial resources. = Employee participation and industrial democracy '= Industrial democracy isthe practice of involving and empowering people in the workplace, This includes giving employees opportunities to share responsibilities and empowering them with decision-making authority. = Industrial democracy occurs through employee participation, ie, workers are involved in the decision-making process and are given responsibilities and autonomy to complete theie jobs. = Examples of employee participation include: 5 Works council ~ Employer and employee representatives that meet to discuss company-wide issues, e.g. health and safety at work or organizational change. Pay negotiations are left to trade unions, not ‘works councils 5) Teamworking opportunities ~ People tend to respond positively 0 ‘working with others as this helps to satisfy theie social needs or belonging needs (see Unit 2.4). © Employee share ownership schemes — Awarding employees with shares in the company isa common way to develop their sense of purpose and motivation. |= Motivation theorists such as Maslow and Hersbery (see Unit 24) argue that industrial democracy helps to increase productivity because workers are more involved, so fel valued. © Employees also benefit from a more participative culture so are less likely to experience industrial unrest. Employers benefit from lower rates of absenteeism and labour turnover. | No-strike agreement = Annosstrike agreement is a contractual agreement whereby a trade union pledges not to use strike action as a form of industrial action, provided the ‘employer keeps to their obligations in the agreement. © If workers choose to strike during the period of the agreement, employers hhave the legal right to fire (dismiss) the employees.72 Unit2_Human resource management lm Single-union agreement = A trade union (or labour union) is established ro protect the inrereses of its members, e.g to negotiate with employers for improved pay and conditions at work, The unions are financed by the membership fees. = Workers can belong to more than one trade union. Not all workers in the same organization have to belong tothe same labour union, | Asingle-union agreement means employers negotiate with just one labour union which represents all employees in the organization. This helps to simplify the collective bargaining process and to speed up decision making, Reasons for resistance to change in the workplace (Ao2) 1 Self-interest — The pursuit of selfinterest often takes priority over organizational objectives. Workers are often more interested in or concerned with the implications of change for themselves rather than how it might benefit the organization. Hence, they may feel that change is unnecessary and requires too much effort unless it directly benefits them. = Low tolerance — The lack of open-mindednes for change often happens because people fear or dislike disruptions and uncertainties. They might also fear failure in adapting to change, so naturally resist = Misinformation — Lack of understanding causes resistance to change when the purpose of change has not been communicated effectively. Employees often feel that change is not necessary, especially when things ae going well for the organization. '= Interpretation of circumstances ~ Management and employees may disagree on the purpose and benefits of change. Different interpretations ofa particular situation can cause conflict and hence resistance to change. Human resource strategies for reducing the impact of change and resistance to change (Ao3) Getting agreement/ownership — Allowing workers to be involved in the decision-making process and giving them ownership of their work can help to prevent misunderstandings and misinterpretations of the purpose of change. ‘= Planning and timing the change — Rapid change is often poorly communicated and executed, Effective change management needs careful planning, including considerations regarding the timing of change. Training needs should be considered to facilitate the impact of change in the organization. = Communicating the change ~ Effective communication of the purpose and rationale of change is vital to get support from staff. This helps to educare employees abou the need for and benefits of change. How innovation, ethical considerations and cultural differences may influence employer— employee relations in an organization (Ao3) & Innovation = The extent to which innovation is part of the organizational culture impacts con employer-employee relations. Firms that allow employees to share ideas and pursue their interests can henefit from improved employer-employee relations.6 industrialemployee relations (HL only) 73 '= Innovations can bring about improved communications, thereby improving relationships in the workplace. = Advances in technology can make it easier for firms to operate with a smaller workforce. This can have a large impact on industrial refations, at least in the short term. '= Innovation and change can increase stress levels of employees so this needs to be managed carefully, § Ethical considerations = Unethical practices result in poor emplayer-employee relations, eg. ignoring health and safety issues at work. By contrast, working for an ethical company that considers its social responsibilities can help to improve relationships at work. = Staff morale is higher when working for an ethical organization; people tend to be more cooperative and productive when their needs are met, so intrinsic motivation is improved. = Having a clear and agreed cexte of ethical conduct reduces the likelihood of conflict in the workplace, © Cultural differences = The onganizational culture shapes the behavioural norms in the workplace. ‘Thiscan either improve ot hinder working relations, e.g. an open, blame-free culture can help to promote creativity and innovation, ‘= Cultural differences of multicultural employees mean that workers are motivated by differenc rewards, be they financial, non-financial, extrinsic or intrinsic. = Subcultures within an organization (see Unit 2.5) can cause culture clashes and conflict. Similarly, new employees might have some difficulties adjusting to the cultural norms when joining an organization @® INTERNATIONAL ARRIVALS Figure 2.14 Cultural differences can shape behavioural norms eae esas Investigate how the concepts of ‘ethics, innovation and culture have impacted on the employer ‘employee relations for an ‘organization of your choice.Unit 3 Finance and accounts 3.1 Sources of finance Role of finance for businesses (402) f= Finance is neaded for starting up a new business or to fund an existing firm's Reus CT expansion, eg the purchase or ret of premise, machinery captal equipment [9 A finitions and vehicles Aeterna wt Busineses need to finance on-going costs,eg, the puchase oftaw mattis, | CaP! ingen fixed assets and capita) components and stock (inventory). They need to pay wages to their employees, soul illo sich as wt ge eleghoe an ery Sceppmiets ess Each 1s Established businesses may seek additional sources of finance to grow: equipment, ools and vehicles 1m The need for finance can be categorized as capital expenditure and revenue (Capital expenditure is commonly ae known as investment expenditure, Revenue expenditue refers to the need for businesses to finance their daily and routine operations, Examples include finance to pay forthe purchase of raw ‘materials, paying utility bills and remunerating employee: Internal sources of finance (Ao2) = The term 'sources of finance’ refers to where a business gets its money from. '= Internal sources of finance come from within the business using its own, resources, eg, personal funds, retained profit and the sale of assets. = Personal funds (for sole traders) 1 Sole traders and partners are likely to have their own personal funds from, theirsavings in order to fund the startup of their business. Sole traders and partners who do not invest (or risk) any of their personal funds are highly unlikely to secure finance from banks and other financiers © Retained profit = Retained profit refers to the surplus funds reinvested in the business rather than being distributed to shareholders in the form of dividends. This is shown, at the bottom of the firm's profit and loss account (see Unit 34). 1 Ie actsas an internal source of finance forthe business asthe funk belong to the owners of the organization. © Itisreconied ona firms halance sheet as part of its equity (see Unit 34). ®@ Sale of assets 1 Businesses can sell some of their fixed assets to rise finanee. = Icprovides the business with an opportunity to dispose of fixed assets that are ro longer needed (pethaps hecause they are old or obsolete), ea supermarket chain might sell its fleet of ok delivery vehicles in onder to purchase newer ones. = However, the sale of assets can compromise the firms ability to raise working capital (ee Unit 3.7) if there are insufficient resources for production.1 Sources of finance 75 External sources of finance (Ao2) = External finance comes from outside of che organia stakeholders (see Unit 14). 1 Ir isused when a business is unable to generate sufficient finance from its internal sources (the cheaper ofthe two categories of sources of finance). ie. via external © There are two main kinds of extemal sources of finance: share capital and loan capital m= Share capital Share capita is long-term, external source of finance for a limited Likilty company (ee Linit 1.2) obtained by selling shares ofthe company te individual and institutional investors. '= An initial public offer (IPO) occurs when shares ina limited Kabilty company are sold forthe very firs time. 15 The value of share capital is based on the value ofthe shares when they were first sold, not che eurrerc marker price of the shares. = Asan alternative to loan capital (which involves debr and incurs interest repayments), a limited liability company can raise finance by selling additional | Keyword definition share capital. This does, however, dilute ownership and control for existing “Asistke nati (oe tc shareholders exchange) isa place for buying 1 shares are sok this is done viaa stock exchange without the company being | and selling shares in public limited directly involved —the original share capital is not affected; only the share companies. It oversees the IPO of ownership changes hand between the seller of the shares and the buyer (the znew companies and subsequent new share owner). share issues of existing companies Iris also the marketplace for buying and selling second-hand shares. | Only public limited companies (See Unit 1.2) ae allowed to trade their shares on a sock exchange. Figure 3.1 The New York Stock Exchange = Loan capital 15 Lean capital refers to borrowing funds from a financier (lender) such asa commercial hank: ss Bramples include mortgages, bank loans and overdrafts (se below). =A loan agreement is set fora period of time, such as one, five or twenty years. Ir isusually repaid in instalments overtime or at the end of the loan. agreement period. 1 The lender charges interest on the loan amount. The interest rate can be fixed or variable76 Unit 3_ Finance and accounts A mortgage isa longterm source of loan capital which involves the financier demanding the borrower has collateral (a fixed asset such as property that provides financial security in ease the borrower fils to repay the loan) ‘Make sure you can differentiate between debentures and share 1A debenture (or corporate bond) isa source of long-term loan capital, secured capital Shares represent permanent against a specific asset. Debenture holders do noc have any ownership rights capital and shareholders have but usually get some interest on their investment and are paid dividends (if ‘ownership (voting) rights. Debentures awarded) before sharchoklers receive any dividends. represent loan capital (long-term liabilities) to a firm and debenture i Overdrafts holders do not have any voting rights |= Anoventrftis a financial service that enables a business to withdraw more ‘money than exists in its hank account. Itis, essentially a type of short-term loan, = The loan period is negotiable, but tends tobe short-term because the interest charges on overdrafts are usually very high. = Overdrafis enable a business to have emergency access to finance during times of shortterm liquidity problems (see Unit 37) when cash flow is poor. = Ieisa very common type of borrowing for small businesses, © Trade credit = Trade credit isa very common source of external finance that enables business to obtain goods or services from a supplier without having to pay for these immesiately. = The usual trade creit period is between one and two months, Some supplies offer a price discount for customers who pay their invoices earlier. sm Examples of trade credit include the use of credit card and store cards which provide interestfree credit if the outstanding balance (the amount owed) is paid on time. © Hire purchase is another example, This involves paying for fixed assets (such as vehicles and expensive equipment) in regular instalments over 8 predetermined period. The finance company (lendes) etains ownership of the fixed asset until the business pays the final instalment, thereby legally becoming the owner of the asst. Figure 3.2 The use of credit and store cards is a popular form of trade credit, © Grants = Grants are a form of financial assistance from the government, given to qualifying businesses to aid their operations, eg. business startups and R&D (esearch and development) © Grants are often provided to reduce production cests for businesses anilfor to encourage employment opportunities in less economically prosperous regions. ‘= Grants are noc widely available asa source of finance and are ofien anly available to small businesses,3.1 Sources of finance 77 © Subsidies 1 Subsidies are provided in onder to encourage output, eg, public transport operators are subsidized in many countries to reduce their operational costs and hence prices. This helps to encourage people not to drive private vehicles = They help to stimulate investment that would otherwise be too expensive for businesses to pursue. © Large businesses can qualify for subsidies, and this can cause controversy. For example, farmers and film (cinema) producers are subsidized in China and France to help these industries compete with foreign rivals. © Debt factoring = A busines might struggle t get payment from its debtors (individualsand firms that owe the business money). A debt factor isa business, such asa kan, that takes over the debtors of a business, Debtors are customers who have bought on cre = The debt factoring service provider will usually change around 20% of the ‘value of debtorsas ther fe. 1 The provider takes its commission, before passing on the remaining amount tw the business. This gives the business most ofthe value of debtors to improve its cash flow position without having to personally chase the payment from its customers. Leasing = Leasing isa common way for businesses to finance fixed assets without the necessary capital expenditure, © A leasing contract commits the business to pay a monthly fee fora fixed period of time. = The fixed asset is not the property of the business, and i s the leasing company that takes responsibility to maintain it. '= For example, schools might lease computers and laptops for teachers and students instead of buying them outright (which would be very expensive). © Venture capital '= Venture capital comes from external firms that invest in business startups and/or expanding small businesses with significant growth potential. = Venture capital represents a combination of loans and share capital = To.compensate for the high risks, venture capitalists often require rights to partial ownership and control ofthe company. Therefore, this dilutes the owner's control hut does bring in much needed knowiedge, experience and expertise, 1 Venture capital can be useful for businesses that are unable to raise finance through the stock market or bank loans. ™ Business angels 1 Business angels are wealthy individuals who invest in high-risk business projects with high profit potential 1 Bosiness angels take huge risks because they invest their own personal funds, so f che project fils, they lose every dalla invested. 1m They can provide a vital source of finance for small businesses thar do not have access to conventional providers of finance such as banks. Students often confuse grants with subsidies. Whit both serve a ‘common purpose, they are different. Grants are awarded for a specific [purpose or project and can helo to finance expenciture entirely, ¢.9. ‘rants to fund higher education or 10 purchase computer equipment, Subsidies help to partially pay for the cost of something in order to encourage production (output). ‘Make sure you can explain the difference between hire purchase (HP) and leasing. With HP, ownership of the assets transferred to the ‘business after its final instalment is ppaid at the end of the credit period, ‘With leasing (or hiring), ownership is. not transferred throughout the entire leasing contract. Students often incorrectly use “business angels’ and ‘verture capitalist’ interchangeably. Business angels are wealthy individuals who tisk their own personal money in a project. Venture capitalists are institutional investors and risk the money of the investing organization.78 Unit3_Finance and accounts Short-, medium- and long-term finance (Ao1) Businesses need sufficient access to sources of finance to meet current and future needs. Definitions of short, medium? and long-term finance vary from country to country, but generally: [5 short term means up to one year, eg, overdrafts, trade credit and debtors C medium term means up to five years, eg. hank loans, subsidies and leasing 5 Tong term means more than five years, eg. shareholders’ fund, mortgages and debentures. '= The important thing for businesses isto match the type of finance to its use, eg, short-term finance such as ovenirafis should be used to provide finance for daily operations and to cope with fluctuations in cash flow (see Unit 3.7). By contrast, long-term finance is used to fund growth and expansion. The appropriateness, advantages and disadvantages of sources of finance for a given situation (A03) ‘The appropriateness of different sources of finance depends on the situation faced bya business, For example: = The sale of assets would be appropriate ifa business is upgrading obsolete (outdated) fixed assets cr if it is facing a major liquidity issue. 1 The sale of shares is only available (suitable) fr limited liability companies, ie. it isnot appropriate for sole traders and partnerships. © W the owners ofa business are unwilling to allow others to have a significant stake in their business, then venture capital and business angels are not appropriate. = Loan capital is less appropriate for businesses with liquidity problems or with a very high gearing ratio (ee Unit 3.6), ie. firms that are already heavily indebred with extemal sources of finance. f= Debs factoring i stable ifthe business needs quick access to cash andor feels it smo longer able to secure the money owed by its debtors. Table 3.1 Summary of the advantages and disadvantages of internal sources of finance Source of finance Advantages Disadvantages Personal funds ‘© There areno interest or adminisvative charges «These are unlikely tobe sufficient to fund business Imposed “operations Retained profit ‘© Itcan be used to pay for goods outright, without the © There is unlikely tobe sufficient funds to allow the need to borrow business to grow sufficiently ‘© Unlike bank loans, retained profits do not have tobe © Shareholders might demand higher dividend pay- repaid outs Sale of assets > Geterid of outdated fred assets "= May not fetch much money due to assets being ‘© Can provide much needed finance during liquidity secon hand crises ‘© The business may still need to replace the fied assets3.2 Costs and revenues 79 ‘Table 3.2 Summary of the advantages and disadvantages of external sources of finance Source of finance ‘Share capital ° ‘Advantages ‘Share capital reduces or removes the need to| pay high interest on loans (debt) ‘large amount of finance can be raised by Disadvantages ‘Converting toa limited liability company can be complex, time consuming and costly Dilution of ownership exposes a business to seling shares ‘takeover bids Loan capital (© Helps to fund the purchase of fied assets «All forms of loan capital incur interest charges © Accessible to most businesses © Increases debts of the business Overdraft © Quick and common source for dealing with © Very high interest rates ae charged on the debts liquidity problems Trade credit © Enables firms to buy now and pay later "© Giving trade credit can increase the chances of bad debts © Itis usualy offered interest-free 2 _Itcan encourage overtrading, causing high inventory costs Grants ‘© Grants do not have tobe repaid ‘© Not easly accessible for most businesses Subsidies "Subsidies do not have to be repaid © Most businesses do not qualify for financial assistance, © There are taxbreaks (benefits) for subsidized __50 Subsidies are dificult to secure businesses Debt factoring © Gets immediate access to cash without "© The debt factor charges a large commission (fe) forts having to chase debrors services Leasing © Gives access o fixed assets without capital © Leasing is more expensive in the long frm expenditure The lessor is responsible for maintenance costs Upgrades are easly aranged ‘© Thellessor can impose quantitative limits, e.9, a limit on the mileage for leased vehicles Venture capital and business angels eure eas Investigate the sources of finance for an organization of your choice and Useful for smaller firms that cannot ral finance via the stock market or bank loans Gain the expertise and advice ofthe investors ‘examine how these have impacted on its business strategy. 3.2 Costs and revenues Often involves dilution of contol and ownership of the business Not easily accessible funds for many businesses Keyword definition Overtrading exists when a business expands too quickly without sufficient sources of finance to sustain its operations. Types of costs (A02) 1 Costs, or costs of production, refer to the payments thar a business must make as part of its operations = Examples include: rent for hiting premises, wages to employees, the purchase of raw materials, and utility bill for gas, electricity and telephone charges. ‘The section below examines the different types of business costs. © Fixed costs = Fixed costs are costs of production that do nor change with che level of output, i.e costs that have toe paid even if there is no output = Examples include rent on land, leasing costs of equipment and machinery and salaries to managers. = Diagrammatically, total fixed costs (TFC) are drawn 2s a horizontal line, starting on the yaxisat the value of fixed costs (see Figure 3.3). s a $ 10000 TE ‘Output (units) Figure 3.3 Fixed costs of $10000 for abusiness Eton tis incorrect to assume that fixed costs do not change. For example, advertising costs can and do change overtime, but not because of the cerganization’s level of output.80 Unit3_ Finance and accounts © Variable costs we 15 Variable costs are costs of proluction that do change noconding to the level of output, ie. costs that increase when thece isa greater level of output or production. & = Examples include the costs of purchasing raw materials and the wages for g employees. = Diagrammaticaly, coral variable costs (TVC) are drawn as an upwards sloping line, starting at the origin because no output means no variable Culpa att costs 0 pay (ee Figure 34) Figure 3.4 Variable costs of a business ‘What might be a vaiable cst for one business might nat necessarily be so ‘The total cost of production (TC) is for another, e.g. the cost of fuel is @ variable cost for tax firms but nat for @ made up of total fired costs (TEC) restaurant or cinema. itis important to consider cost in the context ofthe and total variable costs (TVO) Le. business being studied TC= T+ 1VC, Bae Calculate the following costs to two decimal places (where appropriate) from the data in the table below. 2 fixed costs of production. a b average fixed costs at 10 units and 15 uns of output, a < _ average variable costs at 10 units and 15 units of output. a average costs at 10 units and 15 units of output a cra ase aed 10 2000 4545 15 2850 5395 ® Semi-variable costs '& Semi-variable costs have characteristics of both fixed and variable costs, = Forexample, telecommunications service providers (for telephone and internet services) chargea minimum fixed moathly fee. Thishas to be paid irrespective of whether the service is used. However, the more the service is used the greater the cost becomes, © Another example is electricity service providers. They might charge, for example, 2 minimum rate of $100 per month (che fixed component of the cost) and $0.15 per kilowatt hour (the variable component), © Direct costs ‘= Direct costs are costs that can be clearly and specifically identified with the output of a certain product or project. For Higher Level students, direct costs can be allocated to a particular cost or profit centre (see Unit 39). '= Direct costs can therefore include variaNle costs of production, such as raw materials costs = However, direct cests can also include fixed costs such as the cost of motor insurance for taxi drivers. ® Indirect/overhead costs 1 Indirect costs (or overheads) are recutring costs that cannot be dearly {identified with the production or sale of particular good or service. For Higher Level students, indirect costs cannot be easily or objectively allocated {toa particular enst or profit centre (see Unit 3.9). © Examples include: rent, legal fees, salaries of administrative staff, accounting fees, telephone bills insurance and electricity costs, which can he linked to all departments within a businessCosts and revenues Total revenue and revenue streams (A02) © Total revenue m Sales revenue or sales turnover refers to the income from the sale of goods and services. se Total venue (TR) is calulted by multiplying the quantity sold bythe unit price. “Total sales revenue = Price x Quantity sold Do not contuse revenue with profit. Pre att peste atte = eat eee — Soe te Pett Ne Te Onater TRePeQ. all costs of production have been paid. Hence, ifa cinema sells 1200 tickets fora movie, at an average price of $1, chen from a fms revenues can it declare a its total revenue is $11 x 1200 = $13200. profit or loss. @ Revenue streams Maat businesses have more than one source of revenue. These various sources of income are known as revenue streams. Table 3:3 below shows examples of various ‘revenue streams for different businesses. Table 3.3 Examples of revenue streams for selected businesses MeDonald’s Apple Virgin Group Fast fod sles Computers Viti Atlantic (ative care) Franchise lense fees Computer acessories Vigin Money (nance) CET SU ETGG REE Royalties from franchises Smartphones Virgin Megasores etal) ‘on the costs and revenues for an Rents paidby hanchisees Tunes ign Radio (entertainment) ‘organization of your choice. Sawai 2 Complete the cost, revenue and profit data in the table below. All figures are in US dollars (9). M4 Ce ae eg Ea 6000 8800 3480 5280 2580 1500 1500 1500) 5100 6780 Poors Variable costs oe Ga 220 3. The table below refers to the costs and revenues of YT Toys Ltd when ‘operating at 5000 units of output per month: i (ouch as a commercial vehicle, photocopier machine ot computer) before it Keyword definition needs to be replaced. The payback period (PBP) is f Wheeannialnetcah fo fan theinesnentpcectereknom,the | *betmowncof eine ake fra formula used to calculate the payback period is: meee ee eee cof an investment project. Payback erie! = £2sof the investment tae eee ‘Annual net eash flow © The larger the annual contribution (or annual net cash flow), the faster the payback period = An investment project is generally accepted or considered desirable ifthe PBP is relatively short (which depends on industry norms and the management’ ‘maximum desired PBP).102 Unit 3_ Finance and accounts = The PBP method is suitable for firms thar: [5 focuson time asa prioeity for investment decisions regard liquidity to be of more importance chan profitability pursue a quick return on their investment. Table 3.4 Advantages and disadvantages of payback period ‘Advantages of payback period Disadvantages of payback period ‘© It isthe simplest and quickest method of investment "© Itignores the timing ofthe net cash flaws, despite the future value of appraisal to calulate cashbeing lower ‘© tls easy for managers to understand the results ‘© Itis not generally suitable forlong-term projects Le. those with a © The depreciation of fixed assets donot directly affect the long PEP PP but can be easiy included in the calculation ‘© Time, rather than profitability is the focus of attention, which could ‘© Helps managers choose projects with a short PEP to reduce ‘be unrealistic for most private firms investment risks Itdoes not consider the useful fe ofthe asset after its payback period EXAM PRACTI 28 Nimes Construction Co. is considering investing €1 155000 in new ‘machinery. The annual net cash flows arising from the investment are +€330000. Calculate the project's payback period. a 29 Brownsword Books is considering an investment of $220000 in new printing equipment that is expected to generate the following cash flows lover the next five years: Sone 1 30000 2 ‘340000 3 360000 4 '$70000 5 360000 ‘The management at Brownsword Books wants a quick recovery of the investment expenditure due to the competitive nature of the industry. Define the term payback period. a bb Calculate the payback period for Brownsword Books and comment ‘on your findings. fa Investment opportunities using average rate of return (ARR) The average rate of return (ARR) measures the predicted annual profit generated from an investment project expressed asa percentage of the investment cost = The ARR is compared to the firm's desired rate of return to determine (ARR) wv averdeil whether to accept of reject an investment proposal. This is often based on the in eeae ee prevailing incre rote fn banks andr the predicted ARR for other proposed | *ecniaue thas calculates che investment projects up anual investinent project expressed as a = Iris calculated using the formula percentage of the initial amount invested in the project. ‘ARR ~ Average annual profit hia Initial investment l= The higher the value of the ARR, the more financially attractive an investment project tends tobe. 15 The higher the interest rat, the less artractive the ARR tends to be as is safer to just leave cash in the bank instead of being burdened! with risks, especially for firms that need to borrow money to fund their investment project Keyword definition The average rate of return3.8 Investment appraisal (some HL only) 103 Tal Advantages of ARR ble 3.5 Advantages and disadvantages of average rate of return isadvantages of ARR ‘The ARR is simple to understand and straightforward to calculate © Unlike the net present value method, the ARRignores the Unlike the payback period, the ARR focuses on profitability rather timings of cashflow than time ‘© Unlike the PBP, the ARR focuses on profits rather than cash ia Tha tne cance enum na ea ie Bare flow in oder to break even quickly and to generate cash to ‘© As the ARR is expressed asa percentage, itcan be useful to compare Invest in other projects si ervauvenas of sia oleftoret inaction vejas ‘© The figures are pedictons ony, so tend tobe les accurate the longer te investment project sunder consideration Bea aire 23x 3 10 The management at Chandelier World is investigating the feasibility of ‘replacing its old precision-cutting machinery. The new machinery would cost $460000, It would increase the firm's annual revenue by 6150000 but ‘aise operational costs by $60000 a year. The estimated useful ile of the new machinery is 12 years with no scrap (second-hand) value. The management wants an average rate of return (ARR) of 15% on allt capital investments. & Calculate the average rate of return (ARR) of the new machinery for Chandelier Worl. a Comment on whether Chandelier World should purchase the new machinery. a Villani Watch Company is deciding whether to upgrade its computerized invoicing system for $155000. The expected gains (or total contributions) {rom doing so over the system's expected useful life cycle of five years is shown below. ao $3000 2 ‘$4000 3 50000 4 ‘$4000 5 $3000 Calculate the average rate of return and comment on whether Villano ‘Watch Company should investin the computerized invoicing system. [d] Investment opportunities using net present value (NPV) (403, AO4) (HL only) ‘Net present value (NPV) isthe difference between the total present values of future net cash flow and the initial cast ofthe investment project. Icis calculated by taking away the cost of the investment project from the sum. of the present values forthe duration of the project. Ifthe interest rate is 10% per annum, then the present value of receiving $1000 in one year time is $909.10. This means $909.10 invested today, earning 10% ‘would be valued at $1000 in a year’ time. The ciscoxmt rate is therefore 09091, ‘The NPV shows the monetary value ofthe total financial return on an investment project expressed in today’s value. ‘The NPV looks atthe opportunity cost of money as cash received in the future is worth less than itis worth presently. In general, the higher the interest rte, the lower the present (current) value of money that is received in the future.104 Unit 3_ Finance and accounts Keyword defis [Net present value (NPV) isan investment appraisal technique that calculates the real value of an investment project by discounting the valu of future cash flows. Once the initial cost of the investment project is deducted from the toral discounted cash flow, the NPV is found A discount rate isa number used to reduce the value of a sum of money received in the furure in order to determine is present value. 1 Ifthe NPV figure is postive, then the investment project is feasible on financial rounds. The higher the NPY, the more attractive the investment project. s: The onger the inesmen rjc under consideration, the longer takes fo ‘net cash flows to materialize, so the lower the future value (net worth) ofthe piscount tables will be provided project tends to be. ‘to HL students in the final exams | The higher the discount rate the lower the NPV because of the higher when required ~ see page 89 of the “opportunity Cost of receiving cash in the distant future. Business Management Guide. Table 3.6 Advantages and disadvantages of net present value ‘Advantages of NPV Disadvantages of NPV © It-considers future net cash flows (earnings) expressed in today’s _Itis difficult to forecast net cash flows in the distant future valu, making the cakuaton more reais © TReNPV canbe tedious to caleate, especially 25 so many ‘© eismore acurte than the ARRas he NPV discounts the future varables can after the al net cash low figures values of net cash low (money worth ess inthe ute) 6 ncan be df to decide on an accurate dscount ate the ‘© Managers can compare the effects of different discount rates on inflation and interest rate fluctuate considerably theirinvesmens Saar 32 Kucharek Parlour is considering the purchase of five industrial massage Meathtac caaipctonsin eg eee tice moat during the useful life cyde of five years from the investment are shown This unit only considers some of the below, along with the discount rates at 4% for the duration of He ttne cok asda oer ‘fhe investment appraisal. In reality, non-quanttative Year Netcash flow Discount rate einigasdpild aaa bs aed 1 $1500 0.9615 judge whether an investment project Piso ene worthwhile, eg. whether the investment decisions well suited 3 pone GREE to the organization's aims and 4 $2000 0.8548 objectives, its corporate culture and 5 20000 o.a2ta external fectors such asthe state of ‘2 Calculate the payback period of the investment project. ely Bhsseneum b Calculate the average rte of return from the investment project, 2] eer ae erect Te ee eal meer et ee ae discounts future net cash flows. Le Wiesner cect Calculate the net present value ofthe investment project Sim) WBecieniiery none epee e Explain whether the purchase of the industrial massage chairs the investment decisions for an represents 2 feasible investment for Kucharek Parlour. 4 ‘organization of your choice.3.9 Budgets (HL only) 105 3.9 Budgets (HL only) vised CO The importance of budgets for organizations (Ao2) ‘A budget isa plan of the costs and revenues with the purpose of achieving the objectives of a business in a given time period, usually one year. A budget usually includesall the activities of a business and its predicted level of sales revenue, Budgets are important to organizations for several reasons. '= Planning — The budgeting process helps decision makers to plan their ‘operations based on the amount of money they have been allocated in the budget per rime period, = Cash flow forecasting Helps to plan the timing of business expenditure based on the planned revenue streams, '= Prioritizing — Porces budget holders to prioritize their activities, eg, which, members of staf to send on training and which courses to send them on. = Controlling Enables managers to identify and analyse differences in planned and actial revenues and expenditure. This helps them to better understand ‘Possible financial problems and to devise corrective actions. = Target setting — Budgets help departments within a business ro set financial goals, thereby preventing costs spiralling out of contre = Accountability ~ Budgets make people accountable for their actions and spending, Formally monitoring this through budgetary control is important, especially in organizations with an informal management style (see Unit 2.3) = Benchmarking — Budgets provide a basis for measuring the degree of success or fallure (see section on variance analysis below). Managers can see if cost anor revenue targets are met and to take corrective action ifneed be. |= Motivating — Empowering budget holders can act asa form of motivation (see Uni 24), especially if there are financial rewands linked to the attainment of| financial targets such as sales revenue. However, there are some limiations of budgets: = Preparing, setting and updating budgets may be expensive and time- consuming. = Ifbudgets are inflexible and unrealistic, reganiless of changes in circumstances, staff may become highly demotivated. ‘= Similarly, setting realistic budgets may be difficult in a dynamic business REE exposed to the constant forces of change. Hence, budgess could be a waste pSV ees of time and resources The budgeting process may be detrimental to organizational = The culture of many organizations is that budgets are often related! more to citine fia a oases power and status, than to the needs of the business, Department budget holders and cohesion between ‘may exaggerate budgets to elevate cheir position in the organization. departments as they compete to improve their own budgets (to ‘enhance their own status and protect their own self-interest) at = Budgeting is only based on forecast costs and revenues, so may turn out to be rather inaccurate 1 In organizations that do not allow buxgets to be carried over to the next the expense of other departments financial year (to prevent overspending), budget holders may feel the need ‘Therefore, such an internally to spend towards the end of the financial year rather than having the money ‘competitive culture is harmful to taken away by the master budget holder. the overall success of the business.106 Unit 3_Finance and accounts The difference between cost and profit centres (A01) = A cost centre isa department or division within an organization thar is responsible and held accountable for its own costs, The cost centre does not generate any direct revenue but adds to the cost of running the business = Examples include the following departments: personnel (human resources), research and development (RSD), marketing, echnical support, and customer service. = A profit centre isa department or division within an organization that is responsible and eld accountable for both its own costs and revenues, and hhence the resulting profits = An example is multiple chain businesses, with each branch or store of the ganization responsible for its owen profits or losses The roles of cost and profit centres (402) Monitoring and eontrol — Cost and profit centres help businesses to control each aspect of their operations. This is particularly the case fo large and expanding businesses. Thus it becomes easier and more accurate to monitor the organization's performance by using variance analysis of each centre. = Enhancing decision making — The speed and the quality of decision making {improves hecause managers of cost and profit centres are empowered to make autonomous decisions = Motivational - Empowering, entrusting and delegation of esponsibility to cost ann profit centres can be highly motivating for employees: © Accountability — Using cost and profit centres helps to make managers accountable for their specie responsibilities, including the ability to control costs andor revenues. However, there are some limitations of establishing cost and profit centres: = Centres can create unhealthy and destructive competition between the various departments, hindering the organizations ability to reach its targets = Distributing the firm’sfixed costs to cost and profit centres isa somewhat subjective and arbitrary tas, and so can lead! to arguments between employees For example, how should rents and wilty bills be split herween the various centres? Variances (402, A04) © A variance exits when the actual outcome differs from the buxgeted igure, eg. avariance would occur if sales were planned to be S000 units bur actual m= sales were only 4500 units. Keyword definitions A favourable variance exists when 1 Variances are usually measured each month, by comparing the actual result the difference between the eetucl with the lageted fgure: and budgeted figure is beneficial to 1s Variances are classified as either favourable variances (if they cause higher the husiness, ie. sales revenues are ina fallin profit), higher than planned andor costs than expected profits) or adverse variances (if they res are lower than planned. Table 3.7 Examples of v 3nces for Joyce Tong Garments Co. ‘An adverse variance exists Variable Budget Actual Variance oes Sales of product A (units) 1000 {M0 10 units favourable Hivacaial il Bae Agel Sales of product 6 (a) 50000 450005 000kgs adverse ‘Mes ventagenuit the since, Raw material costs) 4500051000 $6000 adverse eg, actual sles revernes are lower Wages ($) ‘19000 107000 __$3000 favourable ‘han planned oe wages ane higher than budgeted.= Regular variance analysis helps to provide an early warning sign to managers. For example, if sles fora particular product are below budget, managers can respond by reducing output oF increasing marketing expenditure in an attempt to boost sales. 1 Budgetary control is important bat variance analysis also allows businesses to examine whether budgets and targets are being adhered to. Hence, variance analysis acts as an additional control mechanism, = The budgeting process and variance analysis help to ensure that no department or individual budget holder spends more than the business expects, thus preventing unpleasant surprises, Sw aie 33 Calculate the variance for the folowing items for Anita Mata Caterers: 2 Cost of materials: budgeted = $10000 but actual = $11500 a b Cost of labour: budgeted = $3700 but actual = $3200 a <_Sales of cakes: budgeted = $2500 but actual = $24800, a +34 Stefan Hagan runs a successful hair salon business. His latest monthly ‘budget is shown in the table below. ‘2 Explain why Stefan Hagan uses budgeting. a Complete the missing figures for Stefan Hagan Hair Salon. 4 ‘< _Explain why a favourable variance might be investigated by Stefan Hagan. (2) 340 favourable 3450 3.9 Budgets (Ht only) 107 Budgets are used widely in almost all organizations, irrespective of their ee een ene For example, therne parks such as. sales, from admissions, catering (in ‘their food outlets) and retail shops. See ire ere recession make budgeted targets very difficult to stick to. In some cases, budgets become rather futile, The role of budgets and variances in strategic planning (402) © Budgets are vital in strategic planning because they ensure that the financial {implications of business decisions are fully considered. = By empowering bxxkgot holders, such as heads of departments, budgets allow senior management to concentrate on core business issues (strategic planning) and only to get involved if significant variances occur. ‘= Budgets enable a business to tum its strategy into practice. Thisis because all business operations need to be funded by the money available from various buclgets of the omganization. = The process helps to provide a benchmark against which a managers success (or lack of) can be measured and rewarded, e.g a sales manager who exceeds fm agreed sales baxiget might receive an annual bonus or quality for the company’s share ownership scheme (soe Unit 24), = The effectiveness and appropriateness of leadership becomes questionable if budgets are ignored or not adhered to = Budgets and variance analysis enable senior managers and other key stakehoklers to measure the degree of successor failure of the firm’s business strategy. Expe Budgets and vaniance analysis do not, on their own, ensure successful strategic planning and implementation. Although they are useful management tools for ‘monitoring business operations, they ate based on assumptions and predictions that may prove to be inaccurate, There are mary external influences that can cause a divergence between actual and planned outcomes. eure esas Investigate how organizational culture impacts on the budgeting process for an organization of. your choice.Unit 4 Marketing 4.1 The role of marketing Marketing and its relationship with other business functions (401) | Marketing is the process of anticipating, identifying and satisfying the needs and desires of customers in a profitable way. ‘= The marketing department of an organization aims to provide the right products, stably priced, disributed conveniently for customers to purchase, and promoted effectively to attract customers. 1 The marketing department of a business has close ties with the production department, as sales forecasts (see Unit 4.3) produced by marketers help in preparing production schedules, © Italo has links with the human resources department as market research can, help to predict the level of customer demand, thus determining the number of workers needed. = Marketing is also connected to the financial function of businesses. For example, marketing helps the finance and accounts department to set appropriate budgets for research and development, or promotion and advertising. The finance department will also work with the marketers to determine suitable prices for the various goods and services being sold, The differences between marketing of goods and marketing of services (Ao2) Services are unique from goods in four ways: Intangible —Unlike goods, services are not physical in their nature. Inseparable — The service received is attached to the people who deliver the service, Perishable Services do not last but are usually consumed at the time of purchase 15 Variable — services are heterogeneous ie. each customer experience is unique. = Hence, the marketing of services is characterized by the emphasis on prot differentiation due to the unique experiences that customers have. 1 The marketing of services builds upon the marketing of products so includes the same elements (the 4Ps in the marketing mix): product, price, promotion and place. 1 The marketing of services includes three ackitional elements (called the extended marketing mix): people, process and physical evidence (see Unit 4.6} [5 People refers to the customer service element of a service 1. Process refers ro the way a service is provided, eg. waiting times, payment methods, aftersales care and delivery methods. Physical evidence refers to visible and tangible aspects of service, eg staff ‘uniform, lighting and ambience, and the cleanliness of the building.4.1 The role of marketing 109 = Due to the difficulties in ensuring a consistent standard of output, the marketing ofa service is generally more challenging than the marketing of a tangible product. Market orientation versus product orientation (Ao2) ® Product orientation '= Product orientation is an inwardlooking marketing approach that focuses on. making products that a business knows how to make or has been making for a long time, rather than focusing on needs and wants of potential customers, 1 Iris the approach used by technologically advanced and highly innovative rmanufacturees of high-tech goods. 1s Productoriented businesses invent and innovate, which can give them a unique selling proposition, 1 Productoriented businesses are more focused on issues relating to internal production. This can lead to a business losing its marker if competitors are instead highly focused on customer needs, eg, Apple missed out on two years of saesin the large smartphones (phablets) market due to its product-oriented approach, allowing Samsung to dominate the marker. 15 Prosluct orientation can succeed when businesses have a serong market reputation, such as Google or Apple, or where the pace of change is very dow: lm Market orientation = By contrast, marker orientation is an oatwant-looking marketing approach that focuses on meeting the specific wants and needs of customers and potential customers, i firms focus on marketing prexiucts they can sell rather than what they can make well. 1 Marketoriented businesses research what the customers want, then focus their energies on making the right products, and improve these in line with customer feedback. 1 Businesses that take this approach use promotions and advertising to keep customers informed of changes and developments in the products on offer. 18 Ie forces businesses to be more flexible (by focusing on changing consumer needs and wants), there lowering the risks of failure. = As market-oriented firms are able to align their products with the expectations and demands of customets, there isa higher likelihood of success. = Whether a business opts for market or product orientation depends on several factors: 1 The nature of the product, eg. market orientation is used for mass- proxluced goods bur product orientation is more suitable for innovative and high-end quality products, 5 Organizational culture, eg. pioneering firms such as Apple and 3M focus oon product orientation whereas retailers such as Walmart focus on meeting the needs and wants of their customers The number of compesicos, eg, an industry with few competitors means a product-oriented approach could be suitable.110 Unie 4 Marketing The difference between commercial marketing and social marketing (Ao2) Commercial marketing focuses on the marketing of goodsand service thar pegelerantand need: Keyword definitions = Successful commercial marketing helps businesses co increase choirsalesand | Commercial marketing is the use profits ‘of marketing strategies to meet the mit does not focus on the ethics of marketing, e.g, the marketing of alecholic ‘needs and wants of customers in. drinks or fastfood would be considered in the same way as the marketing of | @ptofitable way for the benefit of ny other prod the owners of the business f= Ic focuses on providing the right products, at che right pricesand places, and | Social marketing refers to promoted to the right customers in order to. maximize sales ‘marketing activities designed to influence the behaviour of the 1 Social marketing is about influencing and changing the social hehaviout general public ronda to banat of people in order to benefit society over the long term, eg. environmental the wider community. protection, anti-smoking campaigns, or promoting healthy eating, = Social marketing uses commercial marketing strategies to achieve the desired social change, eg. anci-drinkedriving campaigns =A social marketing campaign is deemed to be successful ifit achieves the desired social change. 1 Iris often used by notforproft organizations, such as charities or co- operatives, governments or by businesses with a strong culture of being socially responsible (ee Unit 1.3). = Social marketing can give businesses a significant competitive edge over their rivals as itean attract customers who perceive the business as ethical and driven by moral values. Characteristics of the market in which an organization operates (401) A market is traditionally made up of buyers and sellers coming together to exchange goods and services at a mutually agreed peice. This can happen physically or online (Gee Unit 43). © Marketers often conduct market research and produce market analyses in order to hetter understand their customers and the markets in which they operate, such as the marker size — the value of sales revenue in the industry 5 acompetitor analysis —to identify the nature and degree of intensity of competition in the industry the market growth potential ~ the probable increase in the size ofthe marker in the foreseeable future. 1 Markets can cater for private individuals Gelling consumer products) or other businesses (selling producer products). = Consumer goods can be perishable (aich as fresh flowers and foxx! products) or durable (such as furniture, televisions, smartphones and motor vehicles) = Markets can provide homogencous products, Le. physically identical products such as potatoes, oranges or oi. Firms are unable to charge premium prices for sich procicts unless there fssome form of product differentiation (ce Unit 42) such as branding. = Some businesses operate in mass markets, catering for a broad range of customers. Other products are marketed in niche markets, catering for a small and select marker segment4.1 The role of marketing 111 = The competitiveness of a particular industry depends on the nature of harriers to entry in the industry, eg, aircraft manufacturing is dominated by Boeing and Airbus due o the high costs of entry, prohibiting competition Market share (Ao4) © Market share is a measure of a ficm’s relative size. It is sales revenue of a particular busines expres at. percentage ofthe total marker sie. Market share is calculated by using the formula Pde dace Bee edits ‘Tora sales ofa particular business, yy portion of the total value of sales Total sales of the market revenue in a particular industry © Ieallowsa business to compare itself to the siz ofits competitors in terms of sales revenue or sales volume. Keyword definition = Marker share data helps to reveal the extent to which a marker is competitive by adding the market share of the langest few firms in the industry, = Asacommon marketing objective, businesses strive to increase their market share. EXAM PRACTICE ‘1 Kowdoon Pots has a 16.4% market share of the garden pots market in Hong Kong. The market is worth $14milion per year. Calculate the annual sales of Kowicon ots. a The importance of market share and market leadership (a03) = Being able to compare the relative size of businesses enables managers to take appropriate actions to remain competitive. (Keyword ‘definition ss Havinga large matket share can give a business competitive advantages, eg. | Market leaders are firme with the brand lovalty, economies of scale (due to lager scale operations) and higher largest market share in a given, profits as customers are less sensitive to higher prices being charged. industry. 1m Beonomies of scale, customer loyalty and price leadership in an industry are all forms of competitive advantage for marker leaders and so act as harriers to entry for firms wanting to compete in the industry. 1 Market leaders also enjoy a good corporate reputation, which can help to attract more investors and better quality employees. In addition, retailers and distributors are more likely to stock the predicts of marker leaders, further helping to improve their sales and profits, = However, changes in the external business environment (sce Unit 15) can change the fortunes ofa firm without much warning, including those which are market leaders. Uinit 5.7 outlines examples of crises that can threaten the survival ofeven large and well established firms Still, itis the larger firms that have the best chance of survival in these instances, The marketing objectives of for-profit organizations and non-profit organizations (403) " m= Marketing objectives will differ depending on the type of organization under consideration. A forprofit business is likely to strive for improved profitability ‘whereas a non-governmental organization might choose to focus on social marketing to promote its social cause.112 Unie a Marketing 1 The markering objectives ef a non-peefit organization (NPO) focus on the = ‘work it does or the cause it supports, rather than focusing on marketing a Keyword definition physical produc. Marketing objectives ate the 1= The major dference between the marketing of forpeoft organizations and pestis eet te mebsion NPOsische ulflment of customer needs The forpmofit organizations marketing _| CPartiment in order to help objectives focuses on meeting the customer's needs for his or her own benefit. For a a — These NOs, the focus is about recognizing and meeting the need of other. eeeneier x= included in 2 marketing plan and Marketing objectives provide a clear purpose and framework fora firms help to formulate appropriate marketing activities. marketing strategies. Marketing objectives tend to be SMART — specific, measurable, achievable, realistic and time constrained, eg. to increase market share by 2.5%) by 2023. Examples of marketing objectives include: 15 Increased marker share ~ A firm strives to account fora greater proportion of the industry’ sales revenue. 15 Teget new customers —In an attempt to sell more goods and services, a business may target its products at new customer markets, both domestically and overseas Enhance customer relationships - Developing customer relations helps to iptove customer satisfaction and loyalty, chereby giving the business a competitive advantage. 5 Improved produce anal brand awareness ~ Marketing activities itn to improve customer recognition of the product and brand in onder to increase sales and marker share. New product development ~ Producing new products that appeal to new and existing markers ean help to improve a firms sales and compesitiveness. [5 Brana management —‘This involves using marketing to remind customers about a brand, rather than to promote a particular good or service. Increased proftabiliey for a business— Achieving the above marketing objectives helps to achieve the main aim of most organizations, ie. to increase profits. Increased awareness of social issues — In addition to some of the ahowe ‘marketing objectives, NPOs will also aim to raise awareness of their social cause, How marketing strategies evolve as a response to changes in customer preferences (A03) = Consumer tastes change over time, Successful businesses change theit marketing strategies in response to changes in customer preferences = The growing popularity of mobile devices and internet technologies mean that an increasing number of organizations now rely on e-commerce (see Unit 4.8) ‘and social media (see Unit 45) as part of their marketing strategy. 1 Marketing objectives and strategies may need to change as a good or service enters different phases of its product life cycle (see Unit 45), eg. extension strategies might prevent sales from declining when the industry becomes saturated. = The growing trend and social expectations of firms behaving in a socially responsible way directly impacts on their marketing strategies. Indeed, having a reputation for being socially responsible can improve an organisation's competitiveness '= Globalization has had a huge impact on altering consumer demand. Firms need to adapt their marketing strategies to suit different local preferences and cultural norms in overseas markets.4.1 The role of marketing 113 How innovation, ethical considerations and cultural differences may influence marketing practices and strategies in an organization (403) & Innovation '= Innovations in internet technologies have an increasingly large impact on the marketing practices and strategies ofall businesses, be they large or small, for- profit or non-profit organizations, eg. e-commerce (Gee Unit 4.8) enables firms to promote their cause in a costeffective war, 1 Information communications technology (ICT) facilitates market practices and strategies, eg online subscriptions and newsletters, = E-commerce has also provided an extra channel of distribution, creating huge marketing opportunities for firms such ase Bay, Amazon.com and iTunes. © The growing popularity of guerilla marketing (see Unit 45) has meant that firms need to he ever-more creative in their marketing strategies in order to grab the attention of the general public. Innovative guerrilla marketing techniques can help a firm to stand out in a work! of advertising clutter. ® Ethical considerations ‘= Marketing ethics are the moral aspects of a firm's marketing practices and strategies. Unethical marketing happens when moral coxes of practice are {ignored oe when marketing activities (such as market research or advertising campaigns) cause offence to the public. © Marketing practices and strategies that ignore ethical considerations are likely to result in negative consequences for a business, eg- customer complaints, damaged corporate image and a public relations disaster. = The use of unethical marketing, deliberate or unintentional, is high-risk strategy that can backfire. With the widespread use of social media and social networks, bad publicity is not necessarily better than no publicity for a business '§ Examples of unethical marketing practices and strategies include the following: 15 Bait and switch ~ Marketing methods aimed at luring customers by using advertising deals that are just too good to be true che bait) who become hooked but find that the product is no longer available so end up buying a more expensive alternative (the switch) Ambiguous advertising daims— Using unproven or untested claims that ean mislead and deceive the public, eg promoting health benefits and mesical cores from the consumption of certain uncertified products [5 Produce misrpresentation ~ Giving misleading and ambiguous information to customers in order to persuade them to pay for certain goods or services, eg; imaceurate prosuct descriptions. 1 Pester power Using chikiren to pressurize their parents to buy certain. products, eg. toys, sweets (Candi), fastfood, sportswear and mobile apps © Cultural differences = Caltural differences can have a significant impact on marketing practices and strategies, especially for multinational businesses using international marketing techniques (see Unit 47). 1 The marketing practices and strategies of successful firms in the domestic market do not necessarily work in international markets due to societal and cultural differences.114 Unie 4 Marketing = Caltural factors have a large and direct impact on the demand for certain goods and services in different parts of the world, eg. KFC includes rice UT products on its meni in China, whilst there are no beef products sold in Exarnine haw the conceptsicl ‘McDonald's restaurants in India. change and ethies have impacted = Hence, marketing is only successful if international markerers truly understand = 0" the paietes aie ran and cater for differences in cultural values. saa 4.2 Marketing planning (including introduction to the 4 Ps) eer The elements of a marketing plan (Ao1) 1 Iris usually preceded by a marketing audit—a review may addtess issues such, asthe intensity of competition in the marker, the firms prodact portfolio as Se io well as an assessment of the effectiveness of its past marketing efforts Rare Heli ain A marketing plan is a document = The main components of a marketing plan typically include: the executive that outlines a firm's marketing summary, market research, target market(), the product, the existing objectives and steategy fora stated Competition, marketing objectives, marketing strategies and the associated, period of time. budgen(9) = The marketing plan should include a situational analysis, examining all the internal and external aspects that may impact sales of the business. = Thete is likely to bea review of the firm's current marketing mix in terms ofits strengths, opportunities, weakness and threats = Marketing strategies refer to the approaches taken by an organization to achieve its marketing objectives. © Marketing plans and marketing strategies cannot work effectively without all four elements of the traditional marketing mix. The role of marketing planning (Ao2) | Marketing planning is the systematic process of conducting a marketing audit, setting marketing objectives and devising marketing strategies in terms of the marketing mix to achieve those objectives. 1 The main role of marketing planning is to identify and meet the needs of customers: Thus, the plan allows marketing managers to make more informed decisions about their marketing strategies = The plan allows marketers ro have a sense of purpose and direction, ie. the marketing plan provides a written guide for a business to follow in marketing its goods and services. & Asthe marketing plan is one part of the organization's overall business plan, managers can align marketing plans andl strategies with the overall aims and objectives of the organization. = The operations department uses these sales forecasts (see Unit 43) to create a production schedule. The finance department uses the forecasts to create budgets (Gee Unit 35). The human resources department uses sales forecasts for workforce planning (see Unit 21) = Iralso acts. asa forecasting tool because it requires managers to estimate sales resulting from market research. = Irenables the business to engage in meaningful marketing communications, eg, advertising, promotional, and public relations campaigns,4.2 Marketing planning (including introduction to the 4 Ps) 115 The four Ps of the marketing mix (ao2) “The marketing mix isa term coined by Jerome McCarthy (1964) used t0 describe the four key components of marketing: product, price, promotion and place (see Unit 45). Alsoknown as the 4 Ps, the marketing mix isa business tool used within 1 marketing plan to refer to the se of actions that an organization ses 10 market its products or brands: product, price, promotion and place. Product refers to what the business is selling, The term refers to both goods and services. Price refers to how much the busines is selling its products fo, Promotion refers to the methods used to ensure customers know about a firs proxets. 5 Place refers to the methods of distributing products to customers, eg, using wholesalers retailers, e-commerce, mail order or vending machines. An appropriate marketing mix for a particular product or business (Ao2, A04) ‘The marketing mix for a particular product or business will depend on several factors, such as 1 Whether it isa good or service (see Unit 4.0, 1 Thesize ofthe business, eg, sole trader or multinational company. 1 Thesize of the market, eg the market for horse saddles or the market for bottled water 5 The firms market share — businesses with larger marker share have greater ceustomer loyalty and are able to charge higher prices. [5 The firm’ marketing budget (see Unit 39) and available sources of finance to fund its marketing activities, Consumer profiles, eg gender, age, educational attainment or income levels The countries or regions where the product is sold, because culture can have a significant impact on the marketing of certain goods or services. Businesses often conduct market research (see Unit 44) to determine the proxlucts desired by specific target markets, eg. Tesla, the US electric vehicle maker, targets adults with a relatively high income who would typically buy high-end brands such as BMW, Audi, Porsche or Mercedes-Benz Legal and ethical aspects of marketing will also affect the marketing mix used. For example: 1 Thocthics of marking shouldbe considered when tating chikren in PUSS Sa the marketing of products such as toys, fast food and beauty products, st sea Investigate how the concepts [5 Promotional strategies must comply with advertising codes of conduct in leg viccetion and atlas Raaw different countries, eg, adverts should be accurate, honest and truthful peed sriienatana rt for a product, brand or business of (Legal restiction can apply tothe marketing of ome products, eg.alcche, fF» od cigarettes, fastfood, soft drinks ot medicines.116 Unie4 Marketing The effectiveness of a marketing mix in achieving marketing objectives (403) = An effective marketing mix enables a firm to achieve its marketing objectives, e.g increased market share, better product positioning and improved consumer satisfaction. | Marketing strategies to achieve the firm's marketing objectives incluck product development, market development and diversification (see Unit 13. = All elements in the marketing mix must be effective in onder forthe firm 10 succeed. An outstanding product that is not promoted well or se atthe right price or widely distributed wil fal to sell wel. = Many businesses use the AIDA model to judge the effectiveness of their marketing mix, i. it must grab the attention of customers, get ther interested, create consumer desie and generate action (spending) 1 Other measures of the effectiveness of a marketing mix include the impact on sales revenues, brand recognition, customer loyalty, market share and profits The difference between target markets and market segments (Ao2) and possible target markets and market segments in a given situation (Ao4) mA market segment isa sub-group within a larger market, made up of customers wich similar characterises, eg ag, gender, income, een oun ot eliton. LO atiniions = Asiccan be expensive to create different marketing mix for diferent market | 44 market segment isa distinct segments, firms often resort to targeting specific segments. oly rouse wich eae m= Once a market is segmented, particular sub-groups can then be targeted using characteristics and similar needs an appropriate marketing mix and strategies to achieve the firms marketing | oF wants, objectives, eg, Samsung’s marketing aimes at young people in their 205 will be |” target market i particular somewhat different to thei strategies targeted at older customersin their 40s | jnarket segment tata busines ats os, to focus its marketing effort on. © Segmentation allows firms to gain greater knowledge about their customers, This knowledge is likely to create more costeffective and successful marketing, Hence, without market segmentation, a firms markering mix might be inappropriate for its potential market, | Market segmentation can be useful in identifying new business opportunities, eg, finding an unfilled niche in the market. = However, market segmentation only generates a limited number of groupings, with potential sereoryping of customers. Some customers may not fit neatly into these categories. = Ultimately the purpose of market segmentation and targeting isto allow firms to generate greater sales and higher profits. Being more customer focused enables businesses to improve the coxt effectiveness of their marketing whilst increasing sales, market share and profits, The difference between niche market and mass market (Ao?) = Niche markets are small and focused, s9 there are opportunities for high profi margins because premium prices can be charged. Keyword definition 1 Anniche markets identified asa group of customers with a distinctive setoftrats | Niche marketing isa corporate \who fave rather unique needs or desires, eg. organic foods, euscomized proxtucts, | strategy basal on identifying and cecostourism, or the market for private tutors of heginner’s Iralian in Taiwan. serving a relatively small marker segment. ol4.2 Marketing planning (including introduction to the 4 Ps) 117 = Irenables small firms to operate profitably as large organizations do not often cater for these markets due to the limited opportunities to exploit economies of seal. 1 There are few barriers to entry in most niche markets. However, this also means there is a high risk of new businesses entering the industry, which increases direct competition. J Mass markets are those which provide goods and services that appeal to an Keyword definition extensive number of customers, Mass marketing is marketing = In mass markets, producers sell standardized products to large consumer strategy aimed at all consumers markets, so profit margins are lower on each unit sold, ina market without trying to 4 “ differentiace them into separate = Mass markoting helps a firm to enjoy economies of scale by catering for alae | trarket segments, ‘number of customers, leading to larger profits from increased sales How organizations target and segment their market and create consumer profiles (ao2) | Market segmentation acknowledges the fact that customers are different, such as demographic factors based on characteristics including religion, gender and marital status. Hence, in any marker there will be several market segments. Keyword definitions 15 Organizations choose to segment their market in onder to create distinet Market segmentation is the consumer profiles in several ways, based on demographic, geographic or process of splitting @ market into psychographic factons distinct consumer groups to better understand their needs 5 Seainentation enables businesses to gain a better understanding of consumer profiles in each seament. This is crucial ro devising an effective markesing mix, | Consumer profile refers to the demographic and psychographic = Consimer profiles uaslly include the person's age, gender, marital status, er en education, occupation and income level, area of residence and spending scion patterns. Knowledge of consumer profiles is an important consideration when | ‘Ifferent markets devising the marketing mix ‘Targeting is the practice of devising an appropriate marketing 1 Socio-conumic segmensaton secks to classify consumes ncconding to their Sune ney “i income, profession cr education. Businesses can then devise different a ad nee na sates te marketing mixes targeted at each market segment. es 1 Psychographicsegmensaton focuses on personality traits, lifestyles and atitudes, eg, customers who Ike ro buy organic produce. 1& Demographic segmentation focuses on population structures such as age, gender, ethnicity, marital status, language, family ize and religion. = Geographic segmentarion is based on the physical location of the customer. This includes consideration of the natural environment and climate of the location. Ik is useful when target markets have different preferences based on where they are located 1 Markee segmentation is followed by targeting, This enables an organisation to devise an appropriate marketing mix for different marker segments in the industry. © Market segmentation allows a business to target ts efforts and marketing strategy more effectively by devising an appropriate product, price, place and promotion mix foreach segment. This offers prospects of higher sales and growth for the business. 1 Tecan also be costeffectve iftageting leads to an efficient use of the organization's resources in conducting successful and justified marketing activities.118 Unit 4 Marketing A product position map/perception map (A02, Ad4) =A perception map helps a business to illustrate the position of its products in a marker, relative to is rivals in the industry (see Figure 41) Keyword definition = Having a clearer idea of customer perceptions helpsa business tofine-tune its | product position map isa marketing strategies to enable it to increase sales and maximize profits, mealies fi s= Different categories of products can be seen in a perception map that uses perception of a prot, relative tots price and quality asthe benchmark variables competitors, eg its price and quality 5A premium product on a perception map is perceived by customers 1s one that offers high quality ata high price, e Cartier watches, Porsche cars or Hager-Dars ice cream, 5A comboy product on a perception map is perceived as one that offers low quality but at a high price. This strategy can maximize sales in the short term bur is unsustainable. High price 5A bargain product is perceived as one that offers high quality but ata low price. This shortcerm tactic can help to boost sales and gain brand antes aualiy quality An economy brand is one that offers low quality but ata low price, eg, supermarket own-branded products such as toilet thsue, wines and canned foods Brand 1 Ifa firm finds is postion on a perception map to differ from what the firm. Low price envisaged, it needs to reposition the product or brand by appealing toa Figure 4.1 Example of a perception map. ferent marker segment or by an improved marketing mix. The importance of having a unique selling point/proposition (USP) (Ao2) A unique selling proposition (or unique selling point) can he an important source of competitive advantage for a business, eg. Apple's USP has been its distinctive and highly innovative products. Keyword definition A unique selling point (USP) is = Businesses with a USP focus on marketing the exclusive features and attributes | any aspect of a husiness, brand or ofthe product. roduc: thee maker idiamneive = Havinga USP makes a business special and differentiates it from cempetitors. | (std out) from those offered by ‘This helps to improve brand awareness (recognition) and brand loyalty, and so their competitors. gives the business a compestive advantage over its rivals SSS How organizations can differentiate themselves and their products from competitors (A03) = Product differentiation creates a perception amongst consumers that the firms product is different or unique, and so creates better value relative to its competitors Keyword definition Differentiation isthe act of making Market research and market segmentation data enable afirm to differentiate | 4 bygsiness o its products distinct its products, from its rivals in the industry. = Firms try to differentiate their products by altering some or all aspects of the marketing mix. For example: product ~ adding new features, changing the colour, or introducing different sizes price — differentiated pricing for different market segments place —using e-commerce for the convenience of customers promotion — using logos, slogans and branding.4.3 Sales forecasting (HL only) 119 Table 4.1 Advantages and disadvantages of differentiation ‘Advantages of differentiation Disadvantages of differentiation ‘© Allows the firm to charge ahigher price due to the uniqueness © Itcan be avery expensive strategy ofthe product ‘© Making products unique can mean that tis ficult to reap ‘© Creates brand awareness, brand recognition and brand loyalty the benefits of economies of scale ifthe products were mass ‘© Creates placement (or distribution) advantages as more Produced ‘etalers will want to have the product for sale ‘© Itcan create confusion in the minds of consumers through excessive differentiation and advertising clutter 4.3 Sales forecasting (HL only) Up to four-part moving average, sales trends and forecasting using given data (including seasonal, cyclical and random variation)(Ao4) 1 Sales forecasting is necessary to help an organization with its business functions, such as Vrares eeelct otter the bese tre, ds Keyword definition Ooi. Sales forecasting isa quantitative sources department may technique used to predict the level Cash flow forecasts will als rely on sales forecasting data, Profit forecasts | Cf sales revenue that a firm expects will depend on the level of sales expected over a certain time period. toeatn overa certain peicd of 15. Production schesdules will he based on the expected level of sales. Stock time, (inventory) management will depend on the forecasted level of sales. 1 Hence, sales forecasting drives many other aspeets ef strategic planning in a business. Managers want to understand the trend in the market and the ‘underlying reasons for this © Icisan important tool that enables a business to identify opportunities and threats in advance. 1 Sales forecasts are generally based on recent sales trends, market analyses of the industry and the state of the economy (such as the expectation of a revesion or economic boom). © Forecasts are often presented in the form of time series data, This sales forecasting technique predicts sales revenve by using the unklerlying trends froma series of actual sales data recorded at regular times in the past. = The moving average technique is che simplest method of sles forecasting. I ‘enables managers to identify a trend from the data set, as well as changes in Keyword definition the trend, fora given period of time. ‘The moving average isa quantitative method used to discover the underlying trend by 5 Caleulate @ moving total, eg, total sales for four months. levelling out variations in a data Calculate the centred average of this data set, ie. the average of the set, Such deviations are typically monthly figures. eather cyclical and! © There are two steps to calculating the moving average: 1 Forexample, suppose a frm’ sales figures for the last four months are: $121000, $123000, $122000 and $124000. The fim’ four-point moving average is $122 500 (ie. the sum of the sales figures for the period of $$490000 divided by four months), © Ieisa useful way to identify trends where there are strong seasonal influences om sales (see Table 4.2) or when sales are irregular for no obvious reason,120 Unie 4 Marketing Table 4.2 Calculating the m \g average using four-point averages Month Visitors Four-point moving average 20000 20500 22000 21375 Apr 23000 2265 May 25000 24500 sun 28000 27000 sul 32000 29750 ‘Aug 34000 ‘30000 Sep 26000 29000 oct 24000 26500 Wav 22000 24000 Dec 24000 = The data in Table 4.2 shows the monthly visitor numbers to a campsite. This is shown diagrammatically in Figure 4.2, which suggests there are seasonal factors affecting the level of demand. = To calculate the fourpoint moving averages, in onder to identify a trend line (Gee Figure 4.3) itis necessary to calculate the arithmetic mean of each data set consisting of four months. So, the average visitor numbers from February to (20500 + 22000 + 23000 + 25000) $ May is 22625 people, ie. Visitors 40009 35000 30000 25000 20009 15000 10000 5000 ° Jan Feb Mor Apr May Jun Jul Aug Sep Oct Nov Dec. Figure 4.2 Raw data of number of visitors to campsite 49000 35000 30000 25000 20000 15000 10000 5000 ° Jan Feb Mor Apr May Jun Jul Aug Sep Oct Nov Dec. key Visitors © —Moving average -=- Linear (moving average] Figure 4.3 Raw data and trend line of number of visitors to campsite4.3 Sales forecasting (HL only) 121 = The moving average line shows the four-point centred moving averages, which smooths out some ofthe seasonal variations in the vistor numbers, = The linear (moving average) line shows the line of best fit ie the trend 15 Sales forecasting enables managers to extrapolate the sles tend! as part of their planning, Extrapolation assumes thar sales patterns are stable in the near future 1 Ie identifies the trend by determining the line of best fit and then simply extending this line to make the predictions (see Figure 44). Sais 2 Calculate the three-year moving averages for Alexis Corp. from the data below. 4 Sales ($) 200000250000 240000 270000 20000 § Seasonal variations '= Seasonal variations ate deviations in the values of sales data around the trend line, repeated on a regular bass 1 These variations are caused by environmental or cultural factors which cause different people to have different levels of demand at different times ofthe year. l= Tocalculate the seasonal variation, managers find the numerical diference between the observed data values and the values on the trend line. The variations can be expressed in absolute money terms or as a percentage of the deviation from the trend. = Calculations of seasonal variations are used to adjust the predicted sales reventie from the trend over a one-year period in order to generate a more accurate prediction of quarterly sales. |= Mang products face seasonal fluctuations in demand, eg umbrellas, ice cream, Easter eggs, Caristmas trees, school uniform and IB examiners, = Cyclical variations = Cyclical variations are generally attributed to fluctuations in the business cycle (see Unit 1.5), such as a booming economy (with high rates of economic growth) or a recession (when activity is low, causing mass-scale job losses in the economy). = Unlike seasonal fluctuations, which occur at predictable intervals during the year, cyclical variations can last more than a year, eg. many countries took more than five years to get over the global financial crisis of 2008. = To make the predicted figures mote accurate, the forecaster adjusts the sales figures by the average of the cyclical variations along the trend line. @ Random variations '= Random variations are caused by inegular, accidental and unforeseen factors, eg, anatural disaster, prolonged periods of inclement weather, the outbreak of war, an infectious epidemic, a corporate scandal, or a public relations disaster following a major product recall. = Asrandom variations are erratic and unpredictable, there is no specific formula that can be used to isolate and identify the deviations. = Random variations can occur at any time, thus causing unusual and irregular sales revenue figures Keyword detinition Extrapolation isa sales forecasting technique that makes future predictions of sales (in units or dollars) based on trends identified from using past data. Units (0008) Time Figure 4.4 Extrapolation of sales data Keyword definition Seasonal variations are expected periodic fluctuations in sales revenues over a given time period, eg, peak periods during certain times in the year. Keyword definition Cyclical variations refer to the recurrent fluctuations in sales revenues linked to the business cycle, Keyword definition Random variations are unpredictable and erratie fluctuations in sales revenues, caused hy ierogular factors,122 United Marketing The benefits of sales forecasting (A03) 1S Sales forecasting techniques such as moving averages help to identify trends by smoothing out seasonal, cyclical or random variations in the data set. 1 Iris useful planning tool to help managers to reduce the uncertainties of the future. = Klentifying the trend enables the business to extrapolate or predict future sales revenues as a bass for strategic and financial planning, 15 Sales forecasting enables managers to allocate various budgets for the different functional areas of a business The limitations of sales forecasting (403) 1 Only sales forecasts for a short period of time are likely to be accurate so the usefulness of the tool can be questioned. ‘= The key assumption of sales forecasting techniques is that what happened in. the past is likely to continue in the future. This can prove to be unrealistic so extrapolated results can be somewhat overly simplistic, It ignores the concept Revised a anes ear of ehange in the ral Easiness word Investigate how sles forecasting 1 Tobe of value, forecast data must be based on reliable information and data, Gegaes Gr iuences) he although these are nor necessarily easy cr cept collect. a yoru 2 Sales forecasts can be acura for predicting the sles of single items but tend to e less accurate fr firms that sla broad rage of roves sm Ie isnot always suitable for all eypes of businesses, eg productriented Fare otaneats teria industries with very dynamic custome preferences sich asthe fashion and aece Gamer inate chica hightech inlusties, dilemmas in the choice of data 1 Qualitative factors that affect sales revenues are not incorporated in sales Sel re ces as tow hs elects forecasting techniques 4.4 Market research Why and how organizations carry out market research (402) Reasons why businesses conduct market research include the desire toc 1 determine customer preferences about a product, eg design, colour, size, Keyword definition smell or caste Market research is the systematic discover the likelihood of customers buying their products process of collecting, collating, : analysing and interpreting data 1S assess customer sensitivity to different price levels and infrmation about existing and 1 discover and learn about new market trends ote consumers compte is ls reduce the risks of marketing activities such as new product launches and feo ea ae — pricing decisions planning and marketing strategies. 1 investigate various market demographics and their potentially different reactions, preferences and behavioural variations, e.g. age, gender, religion, marital status, location and income level = explain sales patterns and variances (wee Unit 39).4.4 Market research 123 In general terms, organizations can carry out market research in one of two ways ss Primary research is market research that does not already exist about a good or service. Features of primary research include the following: 5 The collection of firsthand data for a specific purpose. It often represents a limited or skewed perspective 5 Hence, there is a need to select a sample that is representative and statistically significant to ensure the results are reliable Often provides indepth qualitative data and information. [Primary sources are not always cbjective sources a they are often based on people’ opinions and the judgement of the researchers, 15 Itis relatively expensive to gather the data and information compared with secondary marker research. © Secondary research is the market research of data and information that already exists. Features of secondary research include the fllowing: Reusing second-hand data and information already collected by semeone clse fora different purpose, Generally draws findings from large, representative samples, o ‘Some secondary sources involve a cost, eg, subscription and association fees, The internet has revolutionized how secondary marker research is obtained, by offering convenience, speed and an immense range of online Table 4.3 Advantages and disadvantages of primary market research ‘Keyword definition Primary market research (or field research) is the systematic process of collecting, recording, analysing and interpreting new data and information about a specific issue of direct interest to the business, eg. questionnaires, interviews, focus groups and observations. Keyword definition Secondary market research (or desk research) isthe collection, collation and interpretation of existing data and information from previounly available sources, such as market analyses, academic journals, government publications sand medi articles, Advantages of lary research, advantages of primary research ‘© Itprovides bespoke, specialist market research data, whichis» Relatively higher costs af conducting primary research compared Lupto-date and unique to the requirements ofthe business ith secondary market research © Itcangjve businesses a competitive edge by gathering new data © The monotonous task of conducting primary research such {and information about customer purchasing pattems and habits as carrying out lengthy interviews or a tedious numberof Inorder to anticipate changes in tele spending behaviour ‘questionnaires ‘© enables firms to focus on more effective and targeted © The time-consuming process of collecting, coating and ‘marketing approaches, rather than an expensive and less Ineerprting primary data effective mass marketing approach ‘© Decision making can be delayed due to the lengthy time ‘© can provide detailed and informative qualitative findings to inyolved in designing, conducting, colating and interpreting Inform a firm's marketing and corporate strategies primary research ‘© New technologies allow online surveys tobe conducted faster, © Imperfections in primary market research techniques (such as easier and more cheaply biased questions ora statistically invalid sample size) lead to unrepresentative and misleading research findings Table 4.4 Advantages and disadvantages of secondary market research Disadvantages of secondary Advantages of secondary research _research ‘Relatively aster and cheaperto collect «The data and ntarmation have to be than primary research ‘dated tothe fms particular needs © Often available free of charge, e.g. ‘© The data and information can become ‘company websites, government statistics ‘out of date very quickly and online news media sources Rival es also have acces othe ‘© Fase of access to data sources, especially same secondary data sources: vith online sources such as Wikipedia and. There maybe biases inthe data enn search engines suchas Google and esearch that snot apparent to Allows access to a wide range of sourees__the user Organizations can use internal sources of secondary data, i.e. data previously published by the firm itself, such as company reports, historic sales figures and profit levels. This differs from external secondary ‘market research data (published by cother organizations, auch as market analyses reports and academic journals), which is what students tend to write about124 Unie d_Marketing Methods/techniques of primary market research (A02) Primary marker research can be conducted using several methods, including: surveys, interviews, focus groups and observations. lm Surveys = Surveys are a method of gathering both qualitative and quantitative information from a sample of individuals for market research purposes. = They are the most popular method of primary research, = There needs to bea large enough sample of consumers to provide statistically valid and representative data. 1 They are often used to gain customer feedback from people who have recently bought a good or service, eg horel guests, restaurant diners or car drivers. = Questionnaires are used to ask consumers or potential consumers for theit opinions and preferences about a particular gpod or service = A combination of closed questions (eg Yes{Not, or Male/Female’) or open ended questions (eg “Tall us about... oc ‘What is your opinion concerning...) can be asked, 1 Variations include postal surveys, personal surveys, self completed surveys, telephone surveys and online surveys. = They can bean expensive and time-consuming method of market research. © They can suffer from selection or interviewer bias andor poorly worded questions, thus generating unrepresentative results. = Questions can be poorly worded, s0 the findings are misleading and. inaccurate, '= Furthermore, many people are reluctant to fill out questionnaires or they do so in a hurry, without giving much thought to the questions or their responses, © Interviews '= Interviews are conducted by an interviewer who asks respondents (interviewees) a series of questions Interviews tend to be more detailed than surveys. = They can be face-co-fie (eg, interviewers ask people an the scree or in shopping malls a series of questions) or interviews on the telephone, 1 Like questionnaires, they can be specifically designed to meet the needs ofthe organization. 1 They help to determine the interviewees opinions and beliefs = Questions that are difficult to understand can be explained to interviewees. This can help to resolve the issue of cultural and linguistic bias that surveys can suffer from. = Asicinvolves only a sinall number of customers, che results might not reflect the views of the market in which the business is interested. = There is also potential interviewer bias, which could distort the results or analysis of answers 1 Interviews are time-consuming and can be costly to conduct.4 Market research 125 lm Focus groups 1 Focus groups are small groups of customers and consumers who meet together with a researcher for market research purposes. = They involve groups brought together on one or more cecasions, where consumer panels are asked to answer and discuss questions about a specific goo or service. © They enable detailed investigation of the psychology of customers, ex, their opinions and attitudes, and what motivates them as consumers of the product. As parc ofthe target marker, focus groups are used to identify the wants and needs of different market segments = Using focus groups ean be costly as participants are usually provided with, financial incentives such as gifts and free samples, @ Observations = Observations involve researchers watching and recording customer behaviour, eg isentifying which supermarket aisles customers spend most of ther time in. = Unlike surveys and interviews, observations are not dependent on the willingness and ability of research subjects (those selected for market research) torespond accurately = The information collected from observations tend to be more objective and accurate as there is na interviewer bias 15 However, analysing the results ftom observations is very labourintensive and time consuming. Methods/techniques of secondary market research (402) Secondary market research can be conducted using several methods, inchuding: market analyses, academic journals, government publications and media articles. 1B Market analyses 1 Market analyses refer to the collection of data and information about market characteristics ofa particular good, service or industry, eg market size, market growth potential and information on competitors, © Ttisa quick and relatively cheap way of examining and assessing the potential of anew good or service. 1 New businesses often rely on market analyses reports to prepare their business plans 1 Valuable sources for conducting market analyses include: market research, firms, annual company reports, websites of competitors and trade journals or publications. = Ieisoften included as part ofa firm's SWOT analysis (see Unit 13) lS Academic journals f= These are formal scholarly journals related to a specific academic discipline such as business management, psychology, natural science or economics 1 They are written by academics such as university lectures and professor, and the content is often peer-reviewed. © They are typically written in a standard format: abstract, methodology, results and findings, discussion, conclusions, bibliography and appendix. Citations and footnotes are also used. = The intended audience isthe research community, eg. professionals and academics such as university students and professors.126 Unie4 Marketing 1m They often serve asa critique of. ing marker rewearch or an introduction of new research presented for academic scrutiny. . ‘Many students confuse academic m= Academic journals are generally objective as they are not usually written for (or scholarly) journals with business the benefit of any single busines ‘magazines and other popular 18 Examples incluse: the Academy of Management Journal, the Cambridge Jounal business media (e.g. Bloomberg Businessweek or Forbes and Fortune of Eoomomis, and Journal of international Management. Paanteeal terete Wwtenies a cf academic journals are academics © Government publications rather than professional journalists. = Government publications refer to official documentation and information released by local, national, international governments or treaty organisations (uch as the Earopean Union or United Nations). 1 These documents vary widely in purpose and content. Unlike academic, journals, there isno standardized format with government publications. = Governments produce a huge volume of publications on a broad variety of issues, thus providing researchers with a rich choice of data and information. = Examples include: population statistics, unemployment figures, inflation rates (consumer price levels), economic growth rates, the annwal government budget, and international trade data. = Government publications are a major source of i field of research, formation in virtually every |= Most government publications are available to the general public and are usually accessible free of change. 1m However, many researchers undecuse government publications hecause the documents tend! to be difficult to find, @® Media articles Media articles are documents or articles that appear in print or online media. Examples include the following: Newspapers, both in published format and online versions, providing a vast range of market research information, eg, the International Herald Tribune, the Times of India, the Wall eee Journal and USA Today. News magazines, eg. TIME, Businessweek, The Economist and Forten. Trade journals, eg. Advertising Age (marketing), The Grocer (supermarkets), Autocar (automobiles) and Compurer Weekly (ICT). = Access to media articles is usualy straightforward with plenty of non- subscription websites available (e.g. he-co.uk) and the spread of news via social media and social networks (eg, Twitter and Facebook). = Users of media articles need to be conscious of potential bias from the authors of the articles. Ethical considerations of market research (A03) [© Ethical considerations result in the expectation that market research is conducted objectively, using honest, unbiased and reasonable techniques. 1 This inchides the protection of research subjects (respondents) regarding the confidentiality of theie personal data. = There should be an absence of deliberate bias, stereotyping and prejudices of market researchers, Examples include: 5 not telling respondents what the information collected isto be used for manipulating data to change the results,4 Market research 127 1G breaching confidentiality, ie. unauthorized disclosure of customer information to third parties (5. invasion of privacy Le. infringing people's right to privacy using market research data and information for personal gain. Such considerations are important for firms in order to avoid a public backlash if their market research practices are perceived as unprincipled and immoral. ‘Unethical behaviour can negatively impact a firm’ relationship with its key stakeholders. The difference between qualitative and quantitative research (402) Table 4.5 Features of qualitative and quantitative research Qualitative research “© _lavolves an in-depth investigation into ‘the motivations and reasons behind consumer behaviour ‘© Based on opinions and perspectives © Often uses primary research to find out about consumers’ tastes, opinions and buying behaviour ‘© Can be conducted using market ‘esearch techniques such as focus ‘groups, questionnaires and interviews ‘© Can provide a wealth of information despite the low numberof respondents ‘© Provides far more detalled and honest Information regarding the motivation, attitudes or habits of consumers Quantitative research "© Relies ona large number of responses ta get numerical results © Uses dosed questions, categorical selections andor scaled rankings {or responses in order to gather and caleulate resuts easily © Quicker and easier to collect, collate ‘and interpret than qualitative responses © Wes to establish correlations, ‘whether theres a relationship between ‘wo of more variables © Quantitative analyses help to make Secision making more objective “© Quantitative analyses alone do nat reveal the ‘whole picture’ without qualitative input Methods of sampling (ao2) Keyword definitions Qualitative research is hased on ‘opinions, feelings and perspectives, eg why they prefer a certain brand. It generates in-depth, non- ‘numerical information, The results of qualitative research are usually descriptive rather than predictive. Quantitative research is based on facts and figures, ie. numerical patterns, correlations and results, such as how many people prefer a particular brand over its rivals. The results of quantitative research are usually predictive rather than descriptive, 1 ‘Population’ isa statistical term that refers ro all potential customers ofa particular market oral the people that fulfil a chosen criterion, for a market research exercise. = ‘Sampling is the practice of selecting a small group of customers from the population of a certain market for the purpose of market research (Gee Figure 45). = Sampling secks to create group of respondents for market research who are reganded to have representative views of the target market. = Sampling is used as it is impractical, too expensive and unnecessary to include the entire market population for research purposes = Sampling methods include: quota, random, stratified, duster, snowballing and Quota sampling BA quota refers to a pre-determined allocation of specific sub-groups of the population for sampling, eg 25 females and 35 males in a sample size of 6 people. 1 Itinvolves selecting a certain number of people from different market segments with shared characteristics, eg. age, gender, religion, ethnicity or income levels, Figure 4.5 The difference between sample and population,128 Unie 4 Marketing 1 The asembled quota sample has the same proportions of individuals as the entire population (ofthe market for the product) regarding known characteristics 1 The purpose is to gather representative data from sub-groups to get around the issues of random sampling. 1 Ieissuitable when researchers want to investigate a trait ora characteristic ofa certain sub-group or to observe relationships between subgroups. 15 Researchers need to determine in advance the specific characteristics on which they will base the quota sample. This is vital to ensure representative results from the research, = Quota sampling is often used with convenience sampling, so the researcher thas control of who is included in che sample. @ Random sampling 1 This method involves selecting individuals in such a way that everyone in the total population has an equal chance of being chosen, sm Research subjects are often randomly chosen by a computer using information, stored in a database, = Hence, there is no bias in the selection of respondents for marker research, s» the outcome of the research is likely to be mote accurate. ‘= Random sampling is simple, quick and cheap method of sampling, especially as research subjects are readily available. = However the convenience of random sampling also means there isa high probability thar the solected sample is unrepresentative of the population lm Stratified sampling 15 A stratified sample requires the proportions in the sample to reflect the proportions in the population as a whole, based on common strata (divisions or segments) such as age, gender and socio-ecanomic status. = A number of respondents proportional to the population from each segment is chosen randomly, eg. ifthe target population consfsts of 40% male and (60% female, a 50-person sample would include 20 males (40%) and 30 females (60%). = However, itis more dificult to organize such samples as they require fairly detailed knowledge ofthe population characteristics, so the cost of conducting research can be high. 1 Stratified sampling is often used with random sampling so the researcher does ‘not control whois included in the sample. EXAM PRACTI 3 001 Pharmaceuticals wants to sample 80 members of staff to get feedback about its canteen faclities, The workforce consists of 75% full-time ‘workers and 25% part-time staf. Stratify the sample in order to calculate the number of full and part-ime staff used for the sample. a @ Cluster = Cluster sampling involves selecting several geographical areas and then randomly chocsing people within these areas for market research purposes. 1 Itis suitable and cost-effective if travel costs between clusters are high. = It can suffer from bias and sampling errors because respondents are selected from only a few areas (clusters) to make extrapolations about the population. '= Increasing the number of clusters would be one way of reducing the bias and improving the validity ofthe findings, but it would also increase the costs cf market research.4 Market research 129 = Snowballing = Snowball sampling involves the use of customer referrals to reach out o their friends, family oc colleagues for market research purposes. = The method requires minimal planning and isa cheap method of selecting subjects for sampling, especially as it can be operated through social media networking sites. © It isuseful when the researcher does not have access toa sufficient number of people with the desired characteristics. = However, ican lead to biased samples as fiends and family are often like- minded people, with similar habits and tastes 1 In addition, researchers using this sampling method have no idea of the true distribution or sub-groups of the population. The choice of the initial contacts is therefore of vital importance. ® Convenience © Samplesiare created using subjects who are easly accessible to the researcher, eg, IBstudents often use other students or their teachers when conducting research for their HL Internal Assessment in Business Management. 1 The selection of research subjects in convenience sampling is usualy slé- selected (hecause the research subjects are easily accessible) or unguided, eg, volunteers who choose to respond. = However, the findings could be skewed and unrepresentative of the wider population, = Generalizations and inferences are difficult to make as the researchers are unlikely to use a sample that covers sufficient sub-groups within the population, Results from data collection (A02) ‘Keyword definitions Sampling errors are the mistakes that arise from sampling design, eg, the sample size heing too small, selecting an unrepresentative sample, the use of inappropriate sampling methods or having bias built into the research, \Non-sampling errors are market research mistakes that are not attributed to human errors, eg untruthful answers by respondents which distort the findings. 15 Results from data collection can contain both sampling and non sampling errs = Resultsare often presented using different formats, including: Pie charts to show percentages, eg the percentage of respondents who selected a certain choice in a survey. 15 Line graphs ro show time-series data, eg. a firm's profic figures over the past five years, 1 Barchartsto show frequencies, eg, comparative sales figures of different LEGIS EON EERIS: companies Businesses are increasingly resorting to social media (e.. Tablesare also used to present numerical data in various formats Twitter, WhatsApp and Facebook) inca rele rat fe by presenting the main findings in a sum and websites (€.. SurveyMonkey ws Ramtron ed br renting team tng mn ‘and Zoomerang) to collect and collate data faster, more cheaply tnd more fequety. Invert ‘When analysing results from data collection shown in graphs and charts, it haw a business of your choice has important to check the data axes carefully. Don't assume thatthe examiner knows used technology in an innovative ‘what you understand. ‘way for market research purposes,130 Unie 4 Marketing 4.5a The 4 Ps: Product The product life cycle (aoa) The product life cycle (PLC) refers to a marketing theory that ested UI illustrates the different stages a typical product goes through from Product Ife cycle its launch to its eventual withalrawal from the market. 1 The PLC diagram (sce Figure 4.6) shows sles revenue on the ‘yaxs and the timeline on the sais = The five typical stages of the PLC are: Research and development ~The fist stage of the PLC which involves designing and developing a product before being launched forsale. © Introduction — When the product is launched onto the ‘market for ul, [ewsunlly rquiressignificancinvostmencin promerion and advertising to sustain sales Figure 4.6 The product life cycle 5 Growth — When sales increase rapidly with the product becoming well known to the market. Teas sales (8) D Mattaity — When sales revenue are at, or near, their maximum with Examine how changes (uch as the ‘minimal or no more scope for growth, i. sales become saturated forces of technology and feshion) = th : have impacted on the product ite (5 Decline ~The last stage in a preduct’ life cycle, when sales continually ERG risteieieel emeicen decline. The product is eventually withdrawn from the market. The relationship between the product life cycle and the marketing mix (Ao2) Managing the marketing mix fora product varies according to the stage of the product in its life eyele. Examples are shown in Table 46 below Table 4.6 PLC stage and the appropriate marketing mix PLC stage Marketing mix RED Expenditure on market research o refine the product Pricing, distribution and promotion ideas are discussed prior to launch Marketing efforts to raise brand and product awateness,e4. sales promotion campaigns ‘Advertising expenditures high in an attempt to boost sales Limited distribution channels so sales are generally low Possibly high prices if there is limited competition and to recoup RAD costs, or low prices to gain marketshare Investment in branding to differentiate the product from tvals Brand and product preference develop, so sales increase Marketing efforts to build brand preference and customer loyalty Stabilizing prices to ensure market growth and value for money Sales promation and ather marketing campaigns ta get potential customers to switch frm val brands Marketing effort focus on holding the market position to maximize profits Produc differentiation is vital to lengthening this stage inthe PLC Promotion Is widespread Price competition can become intense Possible extension strategies to prolong life of product, e.9, new features and benefits, ther forms of differentiation, or entering new markets Lower prices, possibly aiming tobe the lowest cost provider ‘© Decision made either to continue with marketing efforts to sell the product (for as long as possible) or to pullit losses ae incurred) Introduction Growth Maturity Decline4.52 The 4 Ps: Product 131 Extension strategies (A03) 1 Extension strategies are marketing techniques used to prolong a produces life cycle (se Figure 47). = Examples include: cutting prices, product enhancements (such as special editions), redesigning or repackaging the product, short-term promotions and exporting the product to overseas markers, ‘They are used when a product isin a saturated market or as it enters the decline stage of the product life cycle. = The extent to which product extension strategies are used depends on the dais teil ice feta) fas lei a Figur 47 Extension strategies and * me " =e et ‘the product life cycle Sales (5) The relationship between the product life cycle, investment, profit and cash flow (ao2) — ‘Table 4.7 The relationship between the productllfe cyde, investment, profit and cash flow PLC stage Investment Profit Cash flow RED Very high RAD costs Loss Negative Intoduction Very high marketing costs Loss, but smaller ‘Negative, but improving Growth High marketing costs High Positive Maturity Lower Profit peaks Positive Dedine Litt, if ary Profit falls Decines/negative Sales and profit (5) Induction Growth Maturity Dede Figure 4.8 The relationship between the PLC and profit, Boston Consulting Group (BCG) matrix on an organization's products (403, Ao4) The Boston Consulting Group (BCG) matrix isa marketing ‘tool used to examine an organization's product portfolio. = Forexample, the Volkswagen Group's proict portfolio includes: Audi, SEAT, Skoda, Bentley, Bugatti, Lamborghini, Porsche, Ducati and Scania, = There are two dimensions to the matrix a product's market share and the market growth (see Figure 49). = There are four quadrants in the BOG matrix: (5 Question marks are products that have low market share ‘n.a high growth market. Managers try to convert these products into stas, although this requires investment. Market growth Figure 4.9 The BCG matrix132 United Marketing G_ Stars are products with high or increasing market share in a high growth ‘market. They have yet to become market leaders but have the potential to become cash cows. 15 Cash cous are products with high market share in low growth (mature) ‘marker, 0 are the greatest earners of cash fora busines [51 Dag are products at the end of their product lifecycle s operate in low growth markets yet have low market share. Hence, dogs drain cash from the organization. = The BOG matrix isa useful tool for managing a diverse range of products in an organisation's portfolio, helping to provide balance toa firm’ product portfolio, Table 4.8 Categories of the BCG matrix Stars Question marks © High market growth ‘© High market growth © High market share ‘© Low market share © Growth stage inthe product He ycle(PLC) © Introduction stage inthe PLC 6 Invest totum nto cash cow ‘© Drain cashflow Cash cows Dogs © Lowmarket growth ‘© Low market growth © High market share ‘© Low market share © Maturity stage inthe PLC ‘© Dedine tage inthe PLC © Main generators of cash Divest to prevent further losses Table 4.9 Benefits of a product portfolio Developing a group of products inthe portfolio can help to Increase brand awareness © Reduces the risks of relying on a single prosuct © Increases the revenue streams (see Unit 3.2) ofthe business Having a variety of products helps to limit the impact of seasonal fluctuations in demand Aspects of branding (A402) = Branding refers toa unique name or identity fora business, eg Apple, McDonalds, LEGO or Toyota. The role of branding for a business includes: creating a legal identity for its goods and services acting asa source of product differentiation o o building brand awareness, ie. recognition ofthe brand encouraging brand loyalty (customer loyalty) 1 creating particular comorate image. 1 An effective brand helps to give the firm a major competitive edge. Aspects of branding include: brand awareness, brand development, brand loyalty, and brand value. @ Awareness = Brand awareness refers to the extent to which people recognize and remember «particular beand. 1 Ics langely about gaining new customers and adding value forthe business. '= Promotional strategies such as ahove-the-line promotion (see page 138) and fice samples are used as part of a brand awareness strategy.4.52 The 4 Ps: Product 133 Familiarity with a brand leads to higher sales volume of a good oe service. Businesses often use family branding to raise brand awareness, This type of branding involves selling different products under the same brand name, eg. Kellogg's and Heinz. 1 Development = Brand development is an aspect of marketing strategy about what a brand stands fo. Its also about communicating the value ofa brand to customers, = Different people are attracted to a brand for possibly cferent reasons, so brand development is concerned with establishing the relevant valuable aspects of the brand to different consumer profiles (See Unit 4.2) 1 Itisabout delivering a consistent brand image that gives it a competitive edge ver is rivals. An example is McDonalds use ofits brand for its products, eg, “McNuggets, MeMutfin, MeCaté and McPlurry. = Product endorsements and sponsorship deals are common methods of brand development. f= The market is often flooded with a large numberof rival brands, thus offering customers array of choice, Brand development is about connecting with customers to build lasting relationships and theie loyalty f= Brand development shapes people’ perception of a brand, which ultimately derermines its succes or failure. = Nevertheless, brand development can be extremely expensive and there is ‘no guarantee that it will succeed, Popular brands of the past include Kodak, Compag, Sony Ericsson and Woolworths, 1 Loyalty = Brand loyalty happens when customers repeatedly purchase their Favourite brand, rather than switching to a rival brand = Ic isthe result of successful brand development and marketing strategies 0 that consumers prefer a particular brand, 1 Whilst brand awareness is generally about gaining new customers, brand loyalty is about keeping these customers and getting them to make repurchases. = Branding becomes relatively more important than price once loyalty is developed, = Casstomers purchase their prefered brand regardless of price or convenience, g, according to Coca-Cola's website, its customers enjoy 17 billion servings of its products each day. Loyalty programmes (rewards programmes) are often used as part of a firms promotional strategy to foster brand loyalty. These prograrames provide. incentives for customers to make repeat purchases for addtional benefits such as price discounts Table 4.10 Benefits of brand loyalty Branding can be a vital part of ‘the marketing rox, with research showing that customers are largely affected by branding and not ust prices. However, in some cases, ‘customers prefer lower prices over the brand, Itis important to write ‘your answers in the context of the business in question, © takes customers es pice sensitive, sohigher prices canbe charged, allowing the frm to ear higher sales revenue © Itencourages repeat customers and prevents customers from switching torval brands ‘© Loyal customers are likely to recommend product that they Bike tothe Farly and fends ‘© ean lead toan increase inthe value ofthe business as brands are intangible assets (cee Unit 3.4) © _Itincreases the chances of success wien launching new products under the same brand name134 Unied Marketing @ Value = There isno universally accepted definition or measure of brand vakue, although the most commonly used considers the estimated future earnings attributable to the brand, ‘= Inits simplest form, the term brand value refers to what a brand is worth to the business and is shareholders. 1 Brand value adds to (or subtracts from) the value provided by a good or service, e.g customers buy a Ferrari or Porsche for more than the functionality of driving a cat. = A firm’s brand value can go up or down in value, based on a range of factors such as its earning potential, market share, and its corporate reputation. = Measuring the value ofa brandis difficult and somewhat subjective. ‘= Brand awareness, brand development, and brand loyalty are all dimensions of brand value. The importance of branding (ao3) Branding encourages customer loyalty, i. tepeat purchases © Ie creates a unique identity for a product, enabling it to be distinguished from other rival products on the market. 1 Ir enables businesses to charge higher prices, thereby improving their profit margins = Branding can enable customers to know what to expect, irespective of where they ae in the world. = Brands add value so customers get more than just the good or service they buy, eg. there is an emotional value attached to purchasing certain brands The importance of packaging (A03) = Packaging isan important aspect of product differentiation, eg. product packaging can contain the brand name and logo. = Similarly, packaging helps customers to identify and recognize the brand or product. Some products have a unique or distinct design to grab the attention of buyers, eg, Toblerone chocolate bars, Tabasco sauce, Pringle’s potato chips, and Coca-Cola’s glass bottle. 1 Ichelps to shape customer’ perception of a brand, = Packaging has a functionality role, eg. protection ofthe product (physical, bhygiene and transportation protection), 1 Ieplaysan important role in premoting a product, eg visual appeal such asthe texture and quality of the packaging, which can alter customers perception of the product or brand. © Aside from the value toa business there ae legal requirements fora product’s Figure 4.10 Packagit packaging, ¢g. nutritional information. ‘the marketing mi in important to4.56 The 4 Ps: Price 135 4.5b The 4 Ps: Price The appropriateness of the following pricing strategies (Ao3) 1 Cost-plus (mark-up) . Costpplus pricing also known as mark-up pricing) involves adding a profit clement 10 the costs of production, ic. the price is ser above the casts by a predetermined amount. production cost) or an absolute amount (eg, $20 above costs). = Hence, price = cost of production + profit margin. Table 4.11 Advantages and disadvantages of cost-plus pricing ‘Advantages of cost-plus pricing Di ‘© [tis the simplest form of pricing strategy and suitable for literally all products Itis very straightforward to calculate Ihe to ensure the sling price covers ll preduction costs Eww re ‘The mark-up (or the profit margin) isa percentage (e.g. 60% added on top of xdvantages of cost-plus pricing Itignores the impact of lower prices that rival businesses may be charging Itdoes not focus on the potential level of demand but the Less lexblty & customers have to select from arange of standardized output ‘© There isa greater need fr stocks (inventories), especialy raw materiale ‘© There is ‘downtime’ between batches as machinery might need cleaning andlor changing pri tothe manufacture ofthe next batch5.2 Production methods 161 = Mass/flow/process production 1 Mass production is wed by businesses that focus.on large-scale production Keyword definition Flow production isthe continuous techniques for mass market goods. ane! automated prechction process 1m Iris suitable for che large-scale production of homogeneous (identical or that uses capital intensive production standardized) products such as cil, bottled water, canned soft drinks, motor ‘methods to maximize output by vehicles, televisions, light bulbs, ball bearings and toys. ‘minimizing production time. Is Lower prices are charged due to the standardization of output bron hon a i © There isa high degree of automation as mass production is capital intensive. = The workforce can be unskilled or semi-skilled; the workers can be highly specialized. bi ‘ ji Although there are some technical 1 Marketing support i esential to increase demand as mass production rere eee ned generates large-scale output, process production methods, the differences are subtle so the terms = Ie ishased on specialization and the division of labour, are often used interchangeably. 18 Whils oh production is about quality, mass production is about quantity Table 5.3 Advantages and disadvantages of mass production “Advantages of mass production Di Costs per unit of production are lower due to economies oF scale» Lower poft marin are earned due tothe low prices and Capital intensive manufacturing can ake pac forge standardized ouput petiods Limited any edb as large quantities of identical products © Automation means a low level of manpower is required in the are created prodvtion proces, tus lowering labour costs ‘© Requires an ecient system of stock contra stocking of © Felatively easy and cheap to hie labor for mas production manufctred goods canbe very expensive ‘© Capital-intensive production means there is likely to be efficient ¢ There are likely to be very high start-up costs due to the use of machinery and equipment investment in capital equinment, maciney and producion ontems ‘© Asmass production is capital intensive, itis comparatively easy +o expand production should the leve of demand for the product © Allstages of production are interdependent, so if a problem incense ‘occurs none part ofthe assembly line, production as @ whole comes to @ halt "© Workers can quickly become demotivated due tothe boring and repetitive nature ofthe tasks §5 Cellular manufacturing 15 Callular production (also known 2s cell production) involves teams working In reality, many products are produced cn certain parts of the production ine. The production processes are broken _ sing more than one production down into unit based around these teams working on a complete unit of method, For exampe the engines ofa ouput Ferar or Porsche are hand-made using jb production. However, the leather ss Ie sued by businesses thar focus on mass-production techniques eben bak esc¥ cre tes textures and colours. The tyres are = Bach team (or cell) has complete responsibility for quality assurance, iouetres Table 5.4 Advantages and disadvantages of cell production sistas Michels nel Eee Advantages of cell production Disadvantages of cell production © As cells are responsible for quality assurance (see Unit 5.3), it © High set-up costs, eg. machinery, equipment and stodcordering should lead to less wastage and a lower rejection rate systems ‘© Itenables workers to operate in teams with greater autonomy, © Machinery isnot used as intensively as with flow or mass thus boosting morale, motivation and productivity production ‘© Workers are involved inthe production process from the ‘© Costs of recruiting and training sultable staf to work in cells beginning tothe end, so this creates a sense of ownership and achievement ‘© As teams are multi-skilled, they are mote adaptive to changes In the business environment and the future needs of the organization © Team working can also create new ideas, processes and products162 Unit §_Qperations management Exam questions often ask candidates 1o compare production methods for a Consider how the concepts of, particular product. Be sure to consider the advantages and disadvantages of the culture and innovation have various production methods in your answers. impacted on the production methods used by a business Saar ‘organization of your choice. ‘1 Menelao Clothing Co. designs and manufactures fashionable dothing for children in a variety of designs, colours and sizes. 8 Identify the production method that is most likely to be used by Menelao Clothing Co, a 1b Explain two benefits of this production method to Menelao Clothing Co. 4 5.3 Lean production and quality management (HL only) Features of lean production (401) lm Less waste = Lean preduction, which originated in Japan, involves streamlining operations in onler to reduce all forms of waste and to achieve greater eficiency. = Lean production is about getting things right first time and using fewer resources, both of which help to reduce wastage of resources. Keyword definition Lean production isa philosophy built into the calture of ‘organizations that focus on less ‘wastage and greater efficiency. sm The seven sources of waste (or ‘muda’ in Japanese) are: defective products, overproduction, stockpiling (excessive inventories, unnecessary {ransportation, over processing (over-complex or over-complicated), waiting time and excess movement by workers. Methods of waste minimization include: rocal quality management (TQM), cradle-to-cradle manufacturing and justintime (JIT) production. lm Greater efficiency 15 Efficiency is about using resources more effectively to generate output, eg. using ess capital or labour to produce the same amount of output: 1 Efficiency is measured by the productivity rate of resources (see Unit 5.5). For exatmple, labour productivity can be measured by sales per person or output per worker. = All members of che organization need to be involved for lean preduction to work effectively. = Greater efficiency can be gained in several wars, including: 1D staff raining and development [5 hiigher levels of staff motivation 1D using improved (technologically advanced) capital Methods of lean production (Ao2) meg © Continuous improvement (kaizen) Kaizen is a philosophy embedded in the culture of an organization. 1 Itisa method of lean production and a source of competitive advantage that invelvesall workers committing to improving quality standands.5.3 Lean production and quality management (HL only) 163. = Ie involves making small, incremental progress (rather than infrequent radical changes) to improve productivity and efficiency. l= As people tend to be resistant to change, workers might be mote receptive to remental changes which are ess disruptive and risky than large one~ off changes 1 It involves empowering workers to make their own decisions for continuods improvements = Kaizen can help to reduce costs in the long run by preventing mistakes and outputs of sub-standard quality. ‘Keyword definition ‘Kaizen isthe Japanese philosophy f= Iecan help to achieve greater efficiency through exploring ways to improve the productivity and efficiency of che organization's processes ancl operations, of cceulwous improvement end changing for the better. = However, the implementation of katzen tends to be costly and time consuming. Ie requires the effort and commitment ofall members of the workforce to eliminate waste and to make productivity gains. '= Striving for continuous improvement usualy causes increased workloads, so can lead to demotivation in the workplace. @ Just-in-time (JIT) AJIT stock control syste removes the need to have buffer stocks (lange {quantities of stock on site held as back-up inventory). Keyword definition Justin-time (JIT) is alean stock = Deliveries of socks such as raw materials and components are made a few Eegim6l bye cise nia na enki hhours prior to their use by the purchas (inventories) being delivered only '= Although JIT can reduce waste, there is always the risk of not having any when they ate needed in the stock if required urgently. Hence, JIT can he inflexible and expose the firm to | production process. greater risks, = Table 5.11 (page 170) outlines the advantages and disadvantages of a JIT stock control system, © Kanban = Kanhan isa method of lean production that relies on using a cand system to ensure that stock usage is based on actual demand from customers. = In Japanese, it means signboard or billboard. 1 Ic helps to prevent underproduction (which results in productive inefficiency) or everproduction (which creates waste), = Andon 1 Andon isa method of lean production that relies on using a visual traffic light warning system to achieve greater productive efficiency f= Ieuses visual displays inclating digital display, » communicate the sans of production in the manufacturing proces. © The traffic light system acts.as a quick visual warning for workers to help them ipniter the progress of various tasks, thus achieving greater efficiency, Features of cradle-to-cradle design and manufacturing (402) 1m Cradle-to-cradle (C2C) involves production techniques that are wastefree and can be efficiently recycled, eg. recyclable plastic warer bottles, plastic computer keyboards or biodegradable bamboo tshirts. = The term vas coined by Swiss architect Walter R. Staelin the 1970s when «examining production techniques that are both efficient and waste-fiee.1164 Unit 5_ Operations management = All material inputs in C2C must be either technical (recyclable or reusable with no loss of quality) or biological (consumable or compostable in an ecologically friendly way). = Although C2C can be time consuming and expensive to implement effectively, it can provide competitive advantages by differentiating the brand, thereby attracting and retaining customers. C2C also provides sustainable smanufact gover the long term. = In addition, C2C can generate a positive corporate image to some specific stakeholders, such as employees and environmental protection groups. Features of quality control and quality assurance (AQ1) Keyword definition Cradle-to-cradle (C2C) isa production philosophy with the view that sustainable production involves designing and ‘manufacturing goods so that they ccan be recycled to produce the product again. Keyword definitions Quality control (QC) refers to the traditional approach to quality management by inspecting a sample of products. Irinvolves quality controllers checking or examining a sample of products in a systematic way, eg, once every 15 ‘minutes on the production line, every 500th unit of output (or 10% of the amount produced, ‘Quality assurance (QA) isan approach to quality management that involves the prevention of mistakes in the production process, eg. defective output, poor customer service or delays in distributing goods to customers. It involves agreeing and meeting quality standards at all stages of production to ensure customer satisfaction. Table 5.5 ures of quality control and qu: Features of quality control Features of quality assurance © Traditional approach of using qualty controllers to check the quality of output © QC is mainly about inspecting and detecting substandard output (detects) rather than preventing it © Quality controllers randomly or systematically do the inspecting or checking “© tries to ensure that products meet the quality standards set bythe organization ‘© Firms set an acceptable level of wastage or defects (eect rate) "© QAvses workers, rather than inspectors, to check the quality of output ‘© Allstatf are responsible for quality 5o QA can therefore be ‘considered as a frm of job enrichment (see Unit 2.4) ‘© Fim have various codes of practice that notify customers of ‘quality procedures and specifications (A strives to achieve greater efficiency and less wastage The aim is zero defects, |. the eject rate Is zer0, (Ais process-oriented rather than product-oriented © QC is product-oriented rather than process-orented “© QCis reactive rther than proactive, with quality checks done retrospectively (QAis proactive rather than reactive Methods of managing quality (ao2) — © Quality circle | US government statistician Professor W. Edwards Deming (1900-9) noted that American management had typically given managers about 85% of the respansbility for quality canteol, with only 15% allocated to employees. He argued that this should be reversed. 15 The emphasis of quality circles is preventing defects from arising in the first place, rather than quality control during post pracuction checks. = Deming’ ideas were originally developed by Japanese management and ‘manufacturing techniques, with an emphasis on employees working in sitilar jab roles being encouraged to investigate and suggest practices to improve quality. Keyword definition “A quality circle is a small group ‘of employees who voluntarily meet regularly to identify, examine and solve problems related to their ‘work in onder to improve the quality of output. 1 For quality circles to work, members must receive appropriate training in problem solving. In addition, senior management must be supportive and fund these teams appropriately, even when requests may seem rrivial or budgets are limited,5.3 Lean production and quality management (HL only) 165, = Kaigen usually involves the implementation of quality circles = A limitation of quality circles for employees is that senior management have a clear target for Mame ifthere are quality issues or problems. = Almost any type of organization can set up quality circles. For example, Po Leung Kuk School in Hong Kong has five quality circles set up to promote a broad, balanced appreach to learning (htp:!/go0.gl/T22ay). @ Benchmarking '= Benchmarking involves making internal and extemal comparisons of predetermined criteria (industry standards) with the aim of meeting or exceeding the benchmarks. t= Internal benchmarking involves comparing business practices within the same organization. Best practice is then spread throughout the organization. = External benchmarking involves comparing business practices outside the ganizations with other firms considered toe the best in the industry. This approach can take up significant time and resources to collect, collate and interpret the dara and information, © The ultimate aim of benchmarking isto improve performance. This helps a business to maintain or develop its competitiveness. Sa strategic management tool, it enables managers to commpare the firms performance, its processes and its products with the best of other companies within the same industry. 1 Tes usually conducted at regular intervals, eg. profits per quarter or market share per year = Benchmarks are typically quantifiable, eg, star ratings for the hotel industry. © For benchmarking to be meaningful, comparisons should be made as objectively as possible. However, there is scape for subjective comparisons, ¢. customer perceptions and feedback. Importantly, it includes examining the Competition from the point of view of customers. © Total quality management (TQM) = Total quality management (TQM) isa philosophy about embedding awareness of quality in all organizational processes, Le. i forms a culture of quality by empowering all workers within the organization to take responsibility for quality issues. |= Anesential feature of TQM is zero defects, ie, lean production that is efficient and without any wastage. = TQMasa form of lean production commits the organization to continuous improvement (Kaizen) and benchmarking of all operations relating to the quality of the product. Quality circles can also be a feature of TOM. Table 5.6 Advantages and disadvantages of TOM. Expe Do not confuse quality ces with cellular manufacturing (see Unit 5.2) Call production involves small teams producing a complete unit of work. ‘The focus & output, even though ‘all workers take responsibilty for the quaity of their work, However, members of quality cides form ‘voluntarily to discuss ways to improve ‘ualty. There's no emphasis on actual ‘output in a quality crce. instead. tis 2 participative management technique ‘that involves the input of workers in ‘managing quality. Keyword definition Benchmarking isthe systematic process of comparing a business or its products to its competitors, using a set of standards (called “benchmarks’), such as sales revenue, profits, labour turnover ot brand loyalty. Keyword definition ‘Total quality management (TQM) is a quality management approach that aims to involve every employee in the quality assurance process, It involves corganiation-wide approaches to quality improvements in products, processes, people andl philosophy (organizational culture) ‘Advantages of TQM Disadvantages of TOM "© Motivational impact on employees who feel more involved in © IRvequiresa change in atitudes and commitment from all staf, decision making which can be difficult to achieve ‘© Competitive advantages as it puts customers’ needs at the © Staf raining, including management training, and development centze ofthe production process © Costefetiveness 2s TQM eliminates the need for inspections ‘and the costs of reworking mistakes and defective output ‘© nthe Long term, quality i higher while costs should be reduced © Brand reputation of emphasis on high quality and consistency costs can be high yet must be propery funded Nt all workers are motivated by or ar suitable for job enrichment and empowerment (see Unit 2.4) Accreditation fees paid to awarding bodes such as the International Organization for Standardization (150)1166 Unit Operations management ‘Students often rite that TOM systems remove complaints about quality. Whilst TOM strives for zero defects it does not and cannot guarantee the output will be faultless. For example, toy manufacturer Mattel uses a TOM philosophy but hhas had to recall fauity products in the market. The impact of lean production and TQM on an organization (A403) = The objective of lean proxhiction and TQM is to improve the quality of afirm’s goods and services. Quality isa key source of global competitiveness = A quality product needs to be fit for purpose, i. the product fulfils its intended purpose and function, eg a pen should enable the user to write with ic = Qualicy is important for an organization for several reasons, such as: 15 satisfying the needs and wants of customers 15. raising consumer confidence regarding a business and its products [5 improving the motivation of employees gaining competitive advantage over its rivals G owering production costs, and hence increasing profitability. = Poor quality output will result in higher costs for the business due to customers seeking compensation for substandard products. Examples of poor quality include: the product breaking down unexpectedly the product being delivered late a lack of instructions or directions for use. ‘= Ultimately, lean production and a culture of TOM give an organization competitive advantages over its rivals. Attracting customers and retaining theie loyalty becomes easier as consumers trust reputable businesses and their brands. The importance of national and international quality standards (402) = National and international quality standards are a form of henchmark. A gpod orservice must meet a set of predetermined criteria of quality in order to be awarded certification of quality standards recognized within the country or throughout the world, = ISO 9000 is the intemational quality standard awarded to organizations that ensure their goods and services consistently meet quality standards to meet the needs of customers. = Ieisan internationally recognized quality accolade, awarded by the Internaticnal Organization for Standardization (ISO). Tobe certified for ISO 9000, organizations must ensure there fs evidence that quality is consistently improved5.4 Location 167 Table 5.7 Advantages and disadvantages of meeting national and international quality standards Advantages of meeting quality standards Disadvantages of meeting quality standards ‘© Quality awards an provide the frm with major marketing advantages © Operational costs of meeting national or international quality ‘© It can help to differentiate the organization from its rivals, thus ‘standards can be very high, ¢.9. funding staff training or minimizing potential competition ‘buying the necessary technology ‘© Itprovides opportunities to build brand loyalty and to charge ‘© Inspection costs must be paid t outside agencies such as the ISO higher prices © There are on-going costs of obtaining certification, licences oF ‘© Motivational impacts on workers wito feel proud working fora awards business recognized for its quality ‘© Some customers may be put off by the higher prices een eae For an organization of your choice, investigate the impacts of change and culture on its quality management 5.4 Location The reasons for a specific location of production (Ao2) = Toaccess cheaper andjor better quality resources, such as land, labour or raw materials, = Tobe closer to customers domestically or in overseas markets to gain competitive advantages, eg, easter access to customers and reduced transportation. cost. '= Toavoid crade protectionist policies (when foreign governments impose trade restrictions on imported goods) by locating in these overseas countries. = To henefit from the local infrastructure (the essential physical and organizational structures in an economy necessary fori wo function), eg. transportation and communications networks. © Government incentives for locating in.a specific place, eg subsidies, grants, tax concessions or interest-free loans. Such incentives are provided to firms that locate in asisted areas (locations in need of regeneration, perhaps due to particularly high rates of unemployment, as identified by the government). ‘= Due to industrial inertia — when a business continues to stay in the same location even when there are no financial advantages for doing so, ea. due well established relationships with suppliers and localy-based employees. = To benefit from clustering — when a business locates near to other organizations that function in similar oc complementary markets, eg, shoe stores and clothes retailers © Firms in bulkereducing industries locate near the source of raw materials in order to reduce transportation costs, eg, production plants are located near copper ore mines to reduce the weight (or bulk) and hence the transportation, costs involved in making copper. Figure 5.3 Shanghai is a popular location for firms operati168 Unit 5 Operations management = Firms in bulk-gaining industries locate near their customers hecause the finished product is bulkier (heavier) than the raw materials used to make it, eg, carbonated soft drinks. © Qualitative factor abso affect the location decision, eg, the nature ofthe local infrastructure and management preferences about a particular location. 1 A footloose organization is one that does not have any advantage being located in any particular area, eg. e-commerce businesses or computer-chip makers, = By contrast, traditional retailers such as restaurants and clothes stores need to be located near their customers. Ways of re-organizing production, both nationally and internationally (403) Keyword definition Outsourcing isthe practice of subeontracting non-core activities cof an organization to a third-party provider (an external organization) in order to improve operational efficiency and reduce costs. = Outsourcing/Subcontracting = The outsourced firms (knewn as subcontracton) carry out these activities mote effectively and costetfectively, eg. security firms, school and hospital caterers, office cleaners and ICT technical suppoct. 1 Outsourced business activities are those deemed to be non-essential tasks that can be passed on to an external provider in onder to cut costsand gain from their expertise. = Subcontractors are the people or ganizations that carry out outsourced work: mote costeffectively than the business itself, without compromising the quality. Table 5.8 Advantages and disadvantages of outsourcing Advantages of outsourcing ‘© Using an outsourced provider means the business can ° concentrate onits core activites and competitive strategy © The frm benefits from the specialized services ofthe outsourced © Disadvantages of outsourcing Potential conflict with external parties such as subcontractors “There could be quality issues with subcontractors pariner “©The firm may have to deal with staff redundancies dv tothe ‘© proved customer service from subcontractors can attract new use of outsourced providers potential customers and strengthen brand loyalty ‘© There ate costs of monitoring and maintaining relationships with ‘© thelps the frm to streamline its business operations, thereby cutting costs and improving its profitability ‘he subcontractor = Offshoring = Examples of offthored functions include: manufacturing, telesales, call centres, research and development (R&D), and accounting services, = Offthoring can bur does not necessarily involve thint-party peo Keyword definition Offshoring isthe practice of relocating part of or all ofa firm's ‘business functions and processes ‘overseas. These functions can remain within the business (operating in ‘overseas markets) or outsourced to «an overseas organization. = The relocation decision requires the fim to consider both the risks and uncertainties of moving to unfamiliar reritories and weigh these up against the potential rewards Table 5.9 Advantages and disadvantages of offshoring Advantages of offshoring Disadvantages of offshoring ‘© Aswith outsourcing, offshoring means the fim can concentrate © Its often assodated with unethical practices, eg. the ‘on and develop its core business activity exploitation of child labour in low-income countries ‘© Labour laws may be more elaxed averseas, making iteasierto © There could be cultural issues and concerns about transfering tie and festa functions to an external party “© Employee costsmay be lower, resulting in lover prices for «would inolve making some employes redundant, which has consumers anda boost in sales tobe handled with care and canbe costly “© Relationships wth local cstomers can be improved os the Overseas operations my ead wo areate dfs in vwarkdorceisacustomed to cata sues and differences nthe conducting quay contol offshored country “©The fim could ose some contra over workers as they are based Lower operational casts ean lead to higher profit margins5.5 Production planning (HL only) 169 © Insourcing '= Insourcing involves the retention ofa task, function or project within the otganization, 1 Its often delegated to intemal stakeholders who have the expertise (auch as ICT, accounting or consultancy skills) rather than outsourcing the function to fn external third-party provider. '= Insourcing happens because it can sometimes be cheaper and more productive to have the work done in-house, own resources to fulfil a certain role, function or task which would otherwise have heen outsourced. 1 Ichasbecome poplar with husinesses that have been dissatisfied or unsuccessil with outsourcing, eg, substandard quality or supply chain disruptions, 1 Ieis most suitable when the function, task oc project is only temporary or when, there is no significant capital investment involved. t= It salso suitable for smaller businesses and startups with lite or no experience with outsourcing. Table 5.10 Advantages and disadvantages of insourcing Advantages of insourcing Disadvantages of insourcing ‘© Using existing employees and resources can be cheaper than © Internal staff might not have the necessary skills or experience outsourcing (external specialists may be more effective and productive) ‘© enables a business tohave better contol of whatit would «Multinationals that want to establish or maintain thelr hhave otherwise outsourced International presence cannot rely on insouring © thelps to develop team of sled and experienced workers» Implementation cots are ely to be high, affecting profits ot There sob creation inthe local, domestic econamy least in the short term CUEGIS CONCEPTS Examine how the concepts of ethics and change have impacted the international location decisions of a business you have studied, 5.5 Production planning (HL only) The supply chain process (Aoz) = The supply chain proves is the management process of overseeing the logistics from the manufacturing stage to the finished product being delivered to the 1 Ieincludes managing the storage and movement of raw materials, semi- finished goods and finished goods from the raw material phase tothe point of ‘consumption. = A long supply chain ancior ineffective supply chain management cam be costly fas it increases the chances of things going wrong foe the business = = a. a. Figure 5.4 The supply chain (an example)170 Unit 5 Operations management The difference between JIT and just-in-case GJIC) (A02) A justin-time (JFT) stock control system is designed to eliminate the costs of holding stock, eg. storage, maintenance and security costs a2 JT enables a busines to get hold of raw materials and components only when | Keyword definitions the need arises. Just-in-time (JIT) is a stock control 1m Having access to local and reliable suppliers is essential for JIT as the system. ae see tamcnion) tn ted relies on an efficient stock ordering and delivery arrangement so that the fe supplied and delivered inventory is ordered and arrives forthe start of the operation. Gay eos eda eke, = Ieallows businesses to avoid the costs of storage, maintenance, theft and Jucieeans IO wancccecni wastage. system that relies on having spare stocks (inventory) so that output Table 5.11 Advantages and disadvantages of justin-time TERIG Oe Adve ntoges and Ceacvaniegss of nstvime ___ | can be raised immediately in the Advantages of just-in-time Disadvantages of justin-time Seseecis aereiel ‘There ne need for bller stocks, thie» There complete eliance on third. {Increase in demand. cost of stack managementisreduced party suppliers © There sno need or stockping, thus © Administrative and implementation Improving cash flow and werking capital casts of JT ar high ‘© sT fosters lean production and © There is the inability meet productive efcency unexpected changes in demand = A jusein-case (JIC) stock control sytem is designed to have a reserve (buf) stock level 1 Other costs associated with JIC can ince insurance and maintenance and or security to prevent damage or theft. ss Tt ensures the firm has sufficient amounts of inventory to meet the demands of customers whenever required. 1 JIC is suitable for stocks that are not perishable, such as cotton, rubs, ball ‘bearings or wine, Ici less suitable for perishables, such as fresh flowers or fresh meat. 1 Ie snore suitable for industries where customer trends and preferences are always changing, eg, the fashion and high tech industries. Table 5.12 Advantages and disadvantages of justin-case ‘Advantages of justein-case Disadvantages of justin-case ‘© Thereisfeiblityto meet a sudden and unexpected sein» Supalers can charge premium prices for urgent deliveries of consumer demand stocks © Itenables production to continue if thereisa delay in deliveries, © Higher cost, eg storage, maintenance, secuity and insurance fromsupplies| costs associated witha IC stock contol system © Customer satisfaction is maintained as they do not have to walt» Theres als the isk of large stocks of obsolete and unsold for stocks to arrive products «© Prevents los of potetal customers compared toif a JIC system © Stocks are subject to damage or theft is used ‘There could be liquidity sues because IC Hes up vahuble «© Fem can benefit rom purchasing economies of scale (oul buying) working capital EXAM PRAC 2 Explain the difference between justin-case (JIC) and just-in-time (JT) stock contol systems, 45.5 Production planning (Ht only) 171 Stock control charts (Ao2, A04) Maximum 50000 sock z = Reorder 3 cuantiy i ate so Hock o 4 6 3 70 ‘Time (weeks) Figure 5.5 Stock control chart = The lead time refers to the length of time it takes hetween a firm ordering new stock and the firm receiving the stock for preduction. In Figure 55, the lead time is one week. = The longer the lead time, the earlier the re-onder needs to be andlor the larger the re-order quantity needs to be. 1 Buffer stock is the minimum stock level held by a firm in case of late deliveries from suppliers, damaged stack oF a sudden and expected increase in demand. In Figure 5.5, the buffer stock is 10000 units. The re-order quantity isthe volume of the order. In Figure 5.5, the re-order «quantity is 40000 units (te, 50000 ~ 10000 units). © The re-order level refers to the stock level at the time when the firma places its re-order of stack. In Figure 55, this occurs when the firm’ stock level reaches 30000 tits 1 The usage rate refers to the speed at which stocks (inventories) are depleted in the production process. The usage rate increases during peak periods, but drops during recessions and off peak periods. In Figure 55, the usige rate is 40000 units per two weeks. = A stock-out occurs when a firm has no more stock for production or sale, Le it is out ofstock. This creates problems forthe firm as production also comes to astop. To prevent a stock out, some businesses buy extra stock prior to peak trading periods = By contrast, stockpiling means that a business builds up excesive levels of inventory. However, holding too much stock results in working capital being tied up. Sx 3 Study the stock control diagram (Figure 5 6) for Beyond Bakeries in order to determine the following: 2 the lead time fl , amo b the buffer stack i & < there-order quantity m 3 5 2000 o 2 4 & @ Time (weeks) Figure 5.6 Beyond Bakeries stock control chart172 Unit 5_Operations management Capacity utilization rate (A02, Ao4) 1 Capacity utilization measures the extent to which a firm is operating at its ‘maximum potential level. f= Tecan be calculated by using the following formula: Keyword definition The capacity utilization rate __Aetual output per period _ ‘expresses a firm’s actual ourput Capacity wilzarion = Fall capacity output per period * 100 See puget Hooda = A firm that has a 100% capacity uliation rates operating at full capacity, | potential output, ata particular hal its resources used. point in time = Capacity utilization fora business operating a full capacity or experiencing high growth rates could be improved by subcontracting work (see Unit 54) Table 5.13 Advantages and disadvantages of full capacity utilization ‘Advantages of full capacity utilization Disadvantages of full capacity utilization ‘© Average (uni) costs of production are likely tobe at their» Employees can become overworked and stressed due to working lowest so the business operating efficiently atfull capacity ‘© Lower costs per unit (economies of scale) wil key ead to Machinery and equipment are likely to deteriorate ata faster bigher profits fr the firm pace, thus increasing maintenance and replacement costs Bw raire 4 Calculate the capacity utlization rate for Mei Milk: Company that ‘can produce 200000 pints of milk in its factory each day but has an ‘output level of 180000 pints per day. a b Calculate BF Sausage Company's capacity utilization rate if produces 2800 kilos per month but has a maximum productive ‘capacity of 3500 kilos per month. a 5 Suppose Datho Foods has fixed costs of $1000 and a productive capacity ‘of S000 units per month. Calculate the change in its average fied costs if ‘the firm operates at only 809% capacity compared to operating at full capacity, a) igure 5.7 Mass production is only cost effective if firms operate at a high capacity5.5 Production planning (HL only) 173 Productivity rate (Ao2, Ao4) Productivity isa measure of the efficiency of production. The productivity rate measures the amount of output generated per unt of input. Labour productivity, for example, isa measure ofthe efficiency of workers in ‘an organization. The most common measure of labour productivity uses the following formula to calculate output per worker: Total output per period (units) ‘Number of employees at work '= Labour productivity can also be measured by sales revenue per worker or the volume produced per labour hour. Labourintensive firms prefer to use this measure of productivity. 1 Labour productivity martes because labour cont ane sully a sigan part ‘of a firm's total costs ‘Whilst productivity is important, it ivi 3 itcan be difficult to measure the © Similarly, capital productivity measures how efficiently a firms fixed assets Aas Gaara HOSEL oa sRenerate ourpat fr che business. Capital-intensve firms prefer to use this pulses neuer measure of productivity. Teachers, nurses and doctors. For sm The higher the productivity rate, the more efficient the fim is This is these jobs, the quality of service is important as there isa postive correlation between a firm’s efficiency level ApeTv ee ore Knporanahan, and its profitability and competitiveness. ‘cunput or profits. EXAM PRACTICE 5 Suppose STC produces $500000 worth of output in one week in 3 total cf 1000 labour-hours. Calculate the firm's labour productivity rate. [2] 7 Suppose the 25 sales staff at WIS manage to sell $120000 worth of {goods in one week. Calculate the firm's labour productivity rate, 2 Cost to buy (CTB) and cost to make (CTM) (Ac2, A04) mA make orbuy decision requires managers to compare the cost to make (CTM) with the cost ro buy (CTB). fm Ifthe CTM is greater than the CTB, then it makes financial sense for the Keyword definition business to buy the precluct instead of producing it, and vice versa. A make or buy decision isa The CTB a product from a supplier is calculated by the formula pega set aoe he involves choosing whether to Guastin ‘manufacture a product (take) = The CTMa producti calculated by the formula: (or to purchase it (buy) from an CTM = Fixed costs + Variable costs external supplier. Essentially, it isa = Quantitative methods that can be used to help with decisions about the CTM | ‘esision about whether to insource and CTB include break-even analysis (sce Unit 3.3) and investment appraisal (or outsource production. (ee Unit 3.8), ‘= Non-quantitative factors are also considered (although these are difficult roquantify), eg. quality control, reliability of suppliers, the impace on the workforce, experience and expertise. Bae 8 Organix Fruit Bars can purchase equipment for in-house production costing $25000 and manufacture the goods for $1 each. Altematively, 2 local supplier can produce these for $1.50 each. Demand for the goods is forecast to be 45000 customers. Calculate whether it is better for ‘Organi Fruit Bars to make or buy. Bl174 Unit 5_ Operations management 5.6 Research and development (HL only) The importance of research and development for a business (403) tm Research focuses on creating new knowledge and new products. It is a prerequisite to development. t= Development is about adapting existing ideas and products to create Keyword definition commercially viable products. Its primary function is wo improve new Research and development commercially viable preducts, helping to increase the firm's future earning (R&D) is the systematic process of potential. discovering new knowledge about products, processes and markets, and then applying the knowledge tomake new and improved = RAD is important forthe longevity and competitiveness of a business, irrespective ofthe sector in which it operates (primary, secondary, tertiary or quaternary), products, processes and services to = R&D isan essential part of innevation (the commercalization of abusiness | fulfil marker needs idea that appeals to consumers). 1» Compettive aly in an industry can drive ims o spend more on RED in onder to survive in the long term. ‘Although the terms ‘research’ and 1 Markt leaders often use R&D expenditure asa barrier to entry‘0 thatthey _ evopment are usu sed can continue to dominate the industry, eg, airline manufacturers such as iSuEuiGn he teamerctid Airbus and Boeing. eet erate eae) be enhanced by using real-world earner rere Table 5.14 Advantages and disadvantages of R&D. Advantages of R&D Disad ‘of RaD © Tecan improve fim’ productivity rate Gee Unit 5.5) «© Theres an opportunity cost of spending large sums of money ‘© Itean enhance afim's corporate image, e.g. brand perception «On RAD san novatar ‘© There sna guarante thatthe R&D expenditure wl be ‘© Itean help to gana fist-mover advantage or achieve 2 recouped due to the high allure ate of produc launches compestive advantage ‘© RAD canbe very time consuming in seme industries 9. fe Premium prices can be charged pharmaceuticals, ‘© RAD expenditure can prolong & product's lifecycle (se Unit 4.5) © Rivals might spend more money on RAD, thus wiping out any © RAD doesnot necessarily leed to higher prices, asthe discovery __*tvatfoges ofthe fm cf more efficent production methods can lp to cutprices © RAD‘&ntalvays appiale fr al ims, such as those har make budget apn, as RAD can resin hgh cost and pcs The importance of developing goods and services that address customers’ unmet needs (A02) = Many product ideas fail to get commercialized because: There are legal and administrative barriers which discourage R&D expenditure. The amount of money needed to fund successful R&D is often unaffordable 15 The market for the product might he too small to justify the amount of RSD expenditure The product does not meet the needs or desires ofthe market, perhaps due to-0 lack of market esearch (see Uni 44). = Market research enabled Samsting, for example, to hecome the market leader in the smarzphone industry asthe company developed phones with larger screen, sizes (something that Apple failed to recognize as an unmet customer need).5.6 Research and development (HL only) 175 = R&D addresses the fact that nor all unmet needs are known by the eustomers, Steve Jobs famously said that Apple would create a product that everyone ‘would wane despite no one knowing they would want it (the iPod, which went on to revolutionize the whole music industry) sm To test whether a new product addresses the unmet needs of customers, businesses often develop a prototype. This refers to trial products prior to final development of a product for launching on the market. Types of innovation (402) ‘The types of innovation are often referred to as the 4 Fs of innovation: product, process, positioning and paradigm, ‘Product innovation is about research and development that focuses on. Keyword definition creating new proxlucts or improving existing ones. novation isthe succes ‘commercial creation of a new = Process innovation is about R&D that focuses on new or significantly tatnse ties ehh edie veue ns {improved methods of production or work practices. It refers to changes in the way that production takes place, Le. how production ‘the organization. Iestrives to create ay that production takes place, ie. how preduction takes place, Or oe '= Pesition innovation is about R&D that focuses on changing customer ‘that are noc currently being etifiod perceptions of an existing product, ex Nissan's GTER sports car offers supercar performance ata premium price, changing customer perceptions that Nissan only produces mass-market cars. 1 Paradigm innovation refers to a change in the concept of a product, so is an extreme form of innovation, eg the smartphone revolutionized the use of mobile phomes due to its multifunctionality such as being a camera, gaming device and multi-media player. Paradigm innovation is associated with radical and extensive innovations that involve high tisks to the business. The difference between adaptive creativity and innovative creativity (A02) © Adaptive creativity is about adjusting andl improving something that already exists. This takes place incrementally, eg. Apple's iPad Mini was developed from the original, larger sized iPad. Eo ‘Whilst innovative creativity can create = Innovative creativity is about creating a new product or process, eg. Apples huge competitive advantages for ‘Tunes Store changed the way consumers around the world buy theit music, a business, radical changes do not ‘movies and games. It can occur radically. always work better than incremental 1 Themidatyingditeee immer nisi cenit ond ncraive mets, |e raceme SLES is the pace and degree of change involved in the innovation process. ‘uncertainty for employees. How pace of change in an industry, organizational culture and ethical considerations may influence research and development practices and strategies in an organization (Ao3) = Change in an industry can influence R&D practices. For example: It can create demand for new products, e.g. hybrid or electric fuelled cars. (5) Customers might turn away from rival brands if the firm is highly innovative and sells products that are more appealing to buyers. The life cycle of many preducts is shor, so innovation throxgh R&D can ensure the business embraces change and survives the impacts of the external environment.176 Unit 5 Operations management = Organizational culture determines the degree of risk that a business is willing to take in RED. Italso regulates business practices, eg. a firm that pursues its ‘corporate social responsibilities is likely to focus on innovations that benefit a greater number of stakeholders. = Unethical business practices mean that governments need to protect the intellectual property rights of inventors an innovators, For example A patent gives exclusive rights to the registered owner to use an invention, fora finite period of time. 5 Copyrights protect the published works of artists, composers, musicians, photographers, authors and movie directors by creating legal rightsto these creations, Copyrighted materials carry the © symbol. A registered trademark isa sign or symbol that enables a firm to distinguish its products from those of other traders, eg, brands an logos (Once registred, chese trademarks are the exclusive property of the trademark: holder for a finite period of time. UEGIS CONCEPTS 1m Asthe pace of change quickens in many hi-tech industries, questions about Investigate how the innovative the ethicsof R&D have been raised. Product recalls fee Units 57 and ‘culture of an organization such as 55) anid cves-chritiniption aie fiat toe eitoples OFChe kahea wldiig BOR Google or Apple has shaped its innovation in the business world. opps Soe 5.7 Crisis management and contingency planning (Hi only) The difference between crisis management and contingency planning (402) © Crisis management is about how a business responds to crisis, especially one thar threatens its survival i= Contingency planning involves formulating risk assesanentsin onder tobe Keyword definitions becter prepared for criss, should they ever occur Contingency planning is the development of predetermined 1 Examples of crises include: financial erises, economic recession, severe weather conditions, power failure, major product recalls, the cutbreak of infectious diseases, afte, employees on strike, and natural disasters, Crisis management is about dealing with actual threats and disasters a business faces. strategies to deal with a crisis should it occur. Crisis management is the response taken by a business in the event of ‘an actual crisis occurring. 15 Crisis management is about the way in which an organization responds during, a criss stuation, = Contingency planning helps to prepare a business ro deal with crises if they occur. This differs from crisis management, which is about responding to a Geareis mowihelncbaineen real ei «rises and contingency plans. 15 Contingency planning is about scenario planning, i. examining ‘wha if Although contingency plans can scenarios and developing business continuity plans to minimize the impact cf help a business to deal witha css, ‘the crs itself is unpredictable 50's disruptive and costly to the = Contingency planning involves formulating management actions to minimize organization (otherwise it would not the negative impacts of potential crises. be classed a a crisis) a crisis ifit occurs5.7 Crisis management and contingency planning (HL only) 17 Factors that affect effective crisis management (Ao2) ‘The fundamental factors affecting the effectiveness of crisis management include: transparency, communication, speed and control. lm Transparency = Transparency is about the ethical obligation of businesses to be honest and to inform their stakeholders of the truth during a crisis. = Mos risks in business are quantifiable, e.g, the costs of theft or fire damage to a factory. However, not all risks are easily quantifiable, eg, the costs following the outhreak of an infectious disease. This is hecause non-quantifiable risks are prohibitively expensive to calculate and highly unlikely to happen. = Transparency about the truth can help a business to maintain its integrity, reputation andl public perception, especially if the crisis was beyond the firms control 1 Employees, the general pubic and the media are far more forgiving if business owns up to its mistakes and responds with transparency and honesty. | Communication = During and after crisis, public relations (PR) playsan important role in communicating with and reassuring all stakeboklers. '= Prompt and effective communication with stakeholders is vital in a crisis, eg. contacting the emergency services, informing employees, notifying insurers and communicating appropriately with the media, = Speedy and honest communication is important to prevent a poss goodwill and a public relations crisis. = Within the organisation, a specialist media or PR team is often used to communicate with the general public, politicians and the mass media, © Communicating corporate socal responsibility (see Unit L3) isan important part of crisis management. It might nor always be necessary to communicate with the general public, although all responses and actions must be implemented in a socially responsible way. le low of @ Speed 1 A speedy response is esential to contain the crisis and to ensue itis not prolonged or worsened by causing collatecal damage. A swift strategy applied with common sense can prevent huge expenses resulting from a crisis, eg. BP wastoo slow in responding to an oil spillage in the Gulf of Mexico in 2010, resulting in the company losing 3.19 million barrels of oil and being fined a record $14 billion. 1 Speed is far les of an issue if the organization has adequate preparation and simulation through its centingency planning, = Speed also means the business acts quickly before a biased or untruth fl version of the issue gets reported by others in the media, which could potentially lead to even greater problems that the organization has less control over 1 Speed also helps to pre-empt or prevent a criss from actually occurring. A speedy response, backed by honest actions, helps to return the business to normality,178 Unit 5_Operations management = Control = Criss can be preventable. For example, contingency planning not only helps ‘a business to be better prepared in the event of areal fre, but to prevent fires from actually occurring. Keyword definition ‘Quantifiable risks are financially measurable threats that can, jeopardize the survival of an = Quantifiable risks are measurable risks, eg. the damage or theft of commercial | organiation, eg, there is a property. These risks mean that eontrol i vital fictor that affects the statistically low chance of a fice effectiveness of crisis management. breaking out in a hospital, but a much higher likelihood of taxi To ensute effective contol, i important forthe business to select asuitable | Tue Hishet biel boar of tas team to handle a crisis. accident. = Control of the situation is vital, especially as bad news will spread extremely

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