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YOUR NOTES
A Level Business Edexcel 
3. Business Decisions & Strategy
CONTENTS
3.1 Business Objectives & Strategy
3.1.1 Corporate Objectives
3.1.2 Theories of Corporate Strategy
3.1.3 SWOT Analysis
3.1.4 Impact of External Influences
3.2 Business Growth
3.2.1 Growth
3.2.2 Mergers & Takeovers
3.2.3 Organic Growth
3.2.4 Reasons for Staying Small
3.3 Decision-making Techniques
3.3.1 Quantitative Sales Forecasting
3.3.2 Investment Appraisal
3.3.3 Decision Trees
3.3.4 Critical Path Analysis
3.4 Influences on Business Decisions
3.4.1 Corporate Influences
3.4.2 Corporate Culture
3.4.3 Shareholders Versus Stakeholders
3.4.4 Business Ethics
3.5 Assessing Competitiveness
3.5.1 Interpretation of Financial Statements
3.5.2 Ratio Analysis
3.5.3 Human Resources
3.6 Managing Change
3.6.1 Causes & Effects of Change
3.6.2 Key Factors in Change
3.6.3 Scenario Planning
Page 1 of 138
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3.1 Business Objectives & Strategy YOUR NOTES


3.1.1 Corporate Objectives
Developing Corporate Objectives

Aims and objectives serve as a guide for the businesses' overall strategy and direction,
helping to focus efforts and resources toward a common purpose
There is a hierarchy of objectives which cascade downwards
The Hierarchy of Objectives

A businesses mission flows from its overall aim and is usually expressed in inspirational
terms
From this mission corporate objectives and functional objectives which detail the
achievable goals a business wants to achieve over a specified period are developed
Components of the Hierarchy Explained
Component Explanation Example
Aim What the business is looking to Macmillan Cancer Support

achieve in the long term?
Often expressed as an overall 'To do whatever it takes to
vision and describes the support people living with
businesses reason for being cancer
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Mission Statement An expression of a business's Age UK

YOUR NOTES
overall aim as well as its core 
values and context 'Making a positive difference by
Informs the development of putting older people, and the
corporate and functional people around them, at the
objectives heart of all we do; working with
Often expressed in inspirational partner organisations, to
terms to provide direction and a improve the quality of later life
common purpose for employees and provide effective, timely
support for those who need it
the most
Corporate Objective The specific performance goals Mind UK

set by senior management for the
business to achieve over time 'Provide 3 million employees in
Derived from the firm’s overall low-paid sectors with
aim and mission statement workplace wellbeing support'
Corporate objectives may focus
on achieving specified levels of
market share , profit, sales growth
or new product/market
development
Functional Objective The day to day goals of functions Scope UK

or departments within the
business, derived from 'Working with the Government
corporate objectives and disabled people we will
Functional objectives must be create a Passenger Charter, an
carefully aligned across information resource to help
departments so that all parts of disabled people find the
the business are working information they need when
towards the shared goal using public transport
SMART Objectives
Corporate and functional objectives should be
Specific
Measurable
Agreed
Realistic
Time-bound
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An example of a SMART sales objective YOUR NOTES


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Critical Appraisals of Mission Statements & Corporate Aims YOUR NOTES

Businesses need to critically assess whether corporate aims and mission statements 
continue to reflect the current corporate vision
The content and expression of business aims will likely change over time to reflect
changing social attitudes and norms
For example Apple’s new mission statement - ‘to make the best products on
earth, and to leave the world better than we found it’ - emphasises its
commitment to sustainability, a key social trend
Mission statements are sometimes criticised as being little more than an exercise in
public relations that do little to inform objective-setting or promote a common
organisational goal
For example in 2013 KFC’s mission was ‘To sell food in a fast, friendly environment
that appeals to price conscious, health-minded consumers - in the same year it
launched a burger that replaced the bread bun with extra layers of deep-fried
chicken
Businesses should decide whether changes to the corporate aim or mission statement
need to be made by considering whether
The short- to medium-term strategies adopted by the business support the aim and
mission
The aim and objectives are realistic and achievable in the current trading
environment
The mission statement message communicates effectively the aim of the business
with stakeholders
Revising the business aim and revisiting the mission statement should be seen as a natural
step for growing businesses
It is a chance to involve a variety of stakeholders including workers and suppliers in
determining the direction of the business
Newly-identified opportunities and threats can be acknowledged
Sharing refreshed priorities, particularly with the media can generate positive
publicity
 Exam Tip
When assessing the nature or effectiveness of the objectives for a specific business
based on a case study provided, you should consider the following:
What is their purpose?
Who is the intended audience?
How does the corporate strategy followed by the business compare to the
mission in reality?
Who is the mission statement aimed at and how does the strategy affect
different groups?
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3.1.2 Theories of Corporate Strategy YOUR NOTES


Development of Corporate Strategy
A successful corporate strategy helps to provide a competitive advantage
Effective corporate strategy development requires careful consideration of a range of
internal factors and the external environment in which the business operates
Internal factors include the human and capital resources available
External factors include the economic and political environments
Two strategic models used to develop a corporate strategy are Ansoff's Matrix and
Porter's Strategic Matrix
Ansoff’s Matrix
Ansoff’s Matrix is a tool for businesses with a growth objective
It is used to identify an appropriate corporate strategy and identify the level of risk
associated with the chosen strategy
The model considers four elements, which are broken down into two categories
The market - existing and new markets
The product - existing and new products
Ansoff’s Strategic Matrix
The least risky strategy to achieve growth is to pursue a strategy of market penetration
This involves selling more products to existing customers by encouraging
More regular use of the product
Increased usage of the product
Brand loyalty of customers
Market development involves finding and exploiting new market opportunities for
existing products by
Entering new markets abroad
Repositioning the product by selling to different customer profiles (selling to other
businesses as well as direct to consumers)
Seeking complementary locations
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E.g. M&S Food has achieved significant growth since teaming up with fuel YOUR NOTES
retailers such as BP and Applegreen and providing express retail outlets 
Product Development involves selling new or improved products to existing customers
by
Developing new versions or upgrades of existing successful products
Redesigning packaging and aesthetic features
Relaunching heritage products at commercially convenient intervals
E.g. Cadbury relaunches Christmas-themed products each year, often with a
subtle design change, to recapture the interest of customers
Diversification is the most risky growth strategy as it involves targeting new customers
with entirely new or redeveloped products
Examples of diversification include
Tesco launching a range of financial products including current accounts and
credit cards
Greggs launching a range of themed clothing products
Porter’s Generic Strategic Matrix
Porter’s Generic Strategic Matrix identifies a range of strategies a business might adopt
considering
Its source of competitive advantage (cost or differentiation)
The scope of the market in which it operates (mass or niche)
Porter argues that failing to adopt one of these strategies risks a business being ‘stuck in
the middle and unable to compete successfully with rivals in the market
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Porter’s Generic Strategic Matrix YOUR NOTES


Businesses operating in the mass market should adopt either a cost leadership or a
differentiation strategy, depending on what it is that makes them stand out from their
competitors
Businesses that have a significant cost advantage over competitors should exploit
this as much as possible to achieve success - this is called cost leadership
Businesses that are unable to operate as the most competitive on cost should adopt a
strategy of differentiation
A business that operates in a niche market should adopt a focus strategy that closely
meets the needs of its specific group of customers
A cost focus involves being the lowest cost competitor within the market niche
A differentiation focus involves offering specialised products within the niche market
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Aim of Portfolio Analysis YOUR NOTES

Portfolio analysis involves a business carrying out a detailed evaluation of its full range of 
products in order that appropriate strategies may be identified and pursued
The Boston Matrix

The Boston Matrix is a portfolio analysis tool that considers the relative market share of a
firm's products and the rate of growth within the market in which each product is sold
The Boston Matrix
Stars are products sold in high-growth markets and have a high level of market share
Stars require some ongoing investment to maintain their market position and if
managed well they are likely to become cash cows in the future
A market penetration strategy to increase sales revenue and maximise market share is
likely to be appropriate
Cash Cows are sold in lower-growth markets and have a high market share
Cash cows generate more cash than they need to maintain their market position and
can be used to fund the development of other products in the portfolio
Businesses may seek new markets for these products if it is relatively risk-free
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Question Marks are sold in high-growth markets and have a relatively low market share YOUR NOTES
Question Marks require significant investment if they are to improve their level of 
market share and become Stars
There is a risk that Question Marks will become Dogs when market growth rates slow
Dogs are sold in low-growth markets and have a relatively low market share
Dogs have little potential for future growth and should be divested so that finance
and effort may be invested in other products
Achieving Competitive Advantage Through Distinctive Capabilities

When a business has a particular strength that is very difficult for competitors to copy, it
has a distinctive capability
The nature of that distinctive capability will determine the aims and objectives of the
business and the strategies it will pursue to achieve them
Examples of Distinctive Capabilities
Distinctive Capability Explanation
Operational skills and expertise A business may have an outstanding and

within the business committed design team
This may mean that product development is a
suitable strategy
Relationships and networks A business may have developed close trading

established within and around the relationships with key suppliers
business This may mean that a low cost strategy is
possible
Reputation and image of the business A business may develop an excellent

reputation for quality
A differentiation strategy is likely to be
appropriate
Innovation and the ability to change

A business may be particularly effective at
responding to external change
A market development strategy is likely to be
suitable
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The Effects of Strategic Decisions on Resources YOUR NOTES

Strategic decision-making involves medium- to long-term planning to achieve corporate 
and functional objectives
It establishes the actions that the business intends to take to achieve its goals
It establishes the actions that the business intends to take to achieve its goals
Strategic decision-making will have an impact on a business's human, financial and

production resources
Examples of the Impact of Strategic Decisions on Resources
Impact on Human Impact on Financial Impact on Production

Strategic Decision
Resources Resources Resources
Enter a new overseas Staff may be Marketing Products may

market required to budgets will need require
relocate to be increased adaptations to
Additional staff Investment in meet the needs of
with language overseas overseas
skills may be distribution and customers
required retail outlets may Increased output
More staff may be be required may require more
needed to achieve capital
increased output investment in
machinery
Withdraw an obsolete Fewer workers Finance spent on Capacity

product from the sale may be required the withdrawn utilisation is likely
as output is likely product can be to be lower,
to be lower and so used elsewhere increasing unit
redundancies may Redundancy costs of
be needed payments or production
The remaining retraining of staff The remaining
staff may need to may incur stocks of the
be retrained or significant short- withdrawn
redeployed to term costs product will
produce require disposal
alternative goods
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Merge with a Where staff roles Shared financial The production

YOUR NOTES
competitor are duplicated resources may process may be 
redundancies or lead to improved initially
redeployment cash flow and a incompatible and
may be required healthier Balance require
Staff may have Sheet reorganisation
greater Duplicated capital Techniques and
opportunities for equipment and knowledge can be
promotion in a property may be shared between
larger sold to create former rivals
organisation income
Examples of the Impact of Tactical Decisions on Resources

Tactical decisions are made to support the overall strategy and are usually short-term
Tactical decision-making will also have an impact on a business's human, financial and
production resources
The impact of the tactical decision to award production workers a one-off 25% bonus to
complete a last-minute order from a key customer
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YOUR NOTES

The impact of the tactical decision to decorate the business premises following a series of
negative secret shopper reviews
 Exam Tip
You should be able to distinguish between strategic and tactical decisions in a
business context and make judgements about whether the distinction is useful in
business. Strategy is more long term and relates to achieving an overall goal; tactics
are shorter-term actions that help to achieve the strategy.
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3.1.3 SWOT Analysis YOUR NOTES


Understanding SWOT Analysis
SWOT Analysis is an analytical tool used by businesses to identify
Internal strengths and weaknesses
External opportunities and threats
Effective SWOT analysis can help senior managers to understand the current business
position so that appropriate strategic decisions may be made
Examples of Factors Considered in a SWOT Analysis

STRENGTHS WEAKNESSES
What the business is good at What the business does poorly
For example: For example:
Qualities that separate the business Ways in which the business lags
from rivals behind competitors
Internal resources such as skilled staff Resource or capital limitations
or a particular innovation including labour and finance
Possession of assets such as capital, Lack of a competitive advantage
patents or intellectual property Lack of a unique selling proposition
A loyal customer base (USP)
Effective leadership Poor online presence
OPPORTUNITIES THREATS
Options a business may exploit to enjoy Hazards that have the potential to
further success damage business performance
For example: For example:

Developing markets for specific New or emerging competitors are
products become apparent gaining market share
Few competitors exist A changing legal or political
A changing legal or political environment negatively impacting on
environment positively impacts on business processes and decisions
business processes and decisions Social or technological developments
Social or technological threaten obsolescence of products
developments create an emerging Economic indicators becoming less
need for the businesses products favourable
Economic indicators becoming more Negative press coverage
favourable Changing customer attitudes
A potential for positive media towards the business
coverage of the business
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Once a SWOT Analysis has been completed by a business, appropriate decisions can be YOUR NOTES
made to improve performance 
Strengths should be harnessed
Weaknesses should be eliminated
Opportunities should be seized
Threats should be mitigated
An example of a SWOT Analysis for a small cafe business
 Exam Tip
A SWOT Analysis will vary significantly for businesses of different sizes, with different
objectives and operating in different sectors.
For example, a micro start-up business will face vastly different SWOT factors as
compared with a large multinational. Having conducted a SWOT analysis, you
should be able to make strategic and/or tactical decisions to achieve corporate
objectives (see sub-topic 3.1.2)
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3.1.4 Impact of External Influences YOUR NOTES


Understanding PESTLE Analysis
PESTLE analysis examines the external factors that are likely to impact the activities and
outcomes of a business
PESTLE is an acronym for:
Political
Economic
Social
Technological
Legal
Environmental
PESTLE analysis can support effective decision-making by senior managers who will
better understand the complex context within which the business operates
Managers can use the information gathered to understand the potential threats to the
businesses performance and identify future difficulties so that action can be taken to
help avoid and eliminate their effects
PESTLE External Factors
External Factor Explanation Examples
Political The extent to which local and national The UK’s decision to leave the
government is expected to influence EU in 2016 has led to the
the business including reintroduction of trading
Government stability and restrictions for businesses
relationships with key trading importing goods from
partners suppliers in Europe
Tax regulations
Trade restrictions The reduced level of threat
Political Ideology and attitude to from terrorism in the UK has
Business helped to boost tourism
Fiscal policy
National security status
Investment in public services
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Economic The extent to which economic High rates of fuel and food
YOUR NOTES
indicators are expected to directly inflation in the UK have 
impact business performance reduced the level of
including disposable income for most
Inflation households
Exchange rates
Cost of living A historically low
The stage of the Business Cycle unemployment level has made
and GDP growth recruitment more challenging
Unemployment levels for UK businesses
Social The extent to which personal Greater numbers of people

attitudes and values, culture and graduating from university
demographic change are expected have increased the quality of
to affect the business including workers available to UK
Social mobility businesses
Education
Ethics & Religion A more health-conscious
Migration population provides a
Health profile lucrative market for
Population growth and businesses selling fitness and
demographic structure lifestyle products
Technological The extent to which technological Developments in

change and innovation are expected communication technology
to impact the business including have reduced the need for
Research & development business travel
Production and distribution
processes and efficiency Rapid developments in
Quality and new materials technology have reduced the
Intellectual property length of product life cycles
Online presence and increased the need for
The technology used in businesses to carry out
communication ongoing research,
development and innovation
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Legal The extent to which changes in law Changes to the level of tax
YOUR NOTES
and regulations are expected to levied on high sugar products 
impact the business including (sodas) in the UK increased
Taxation selling prices and prompted
Employment some businesses to
Advertising redevelop their product to
Health & Safety reduce the sugar content
Compliance and ‘red tape’
created by regulatory bodies A rise in the level of the
such as the Health and Safety minimum wage increases
Executive business staffing costs
Environmental The extent to which changes in Increased interest in

attitudes and government policy environmentally responsible
towards environmental protection as and ethically-produced goods
well as the impact of global warming has created new markets for
expected to impact the business businesses to exploit
including
Changing infrastructure - for Strict rules on the disposal of
example in favour of green commercial waste have
transportation networks increased costs for
Energy availability & cost businesses
Disposal of materials
Changes in climate and weather
patterns
Air quality
 Exam Tip
When using PESTLE Analysis, you must focus on each factor's impact on business
activity rather than its origin. The cause is not so important, but the impact of the
factor is what needs to be considered.
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The Changing Competitive Environment YOUR NOTES

The structure of the market in which a business operates is likely to change over time 
Businesses have to respond to this changing competitive environment
Reasons for changes in the structure of markets over time
New businesses may enter the market and existing businesses may leave or integrate
with others
E.g. Until the early 2000's UK supermarkets were dominated by a small number of
giants including Tesco, Sainsburys and ASDA
The entry of businesses such as ALDI and LIDL has made the market more competitive
whilst takeovers involving leading brands such as that of Somerfield by Morrisons in
2004 have had the opposite effect
The legislation (laws) may change likely leading to fewer barriers to entry for new
businesses
E.g. Until the 1980s only local councils were permitted to operate local bus services in
the UK and following [popover id="m3EBva5yVI8EFRje" label="deregulation"], any
business with the financial resources to enter the market could run a bus service
The growth of the Internet has increased the number of competitors businesses face in
the majority of markets
E.g. UK booksellers have faced severe price competition largely from the online giant
Amazon
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Many smaller independent retailers have closed down as they were unable to YOUR NOTES
compete 
Remaining retailers such as Waterstones have needed to change their operations
significantly to survive
Consumer tastes and preferences are changing more rapidly leading to short product life
cycles and a requirement for businesses to innovate to compete
E.g. The growth in fast fashion has meant that many clothing retailers must now
constantly update their product ranges rather than rely on seasonally focused product
selections
Businesses such as Primark and Zara have been particularly successful in meeting
customer demand for fast fashion giving customers the chance to buy the latest
fashions in as little as thirteen days
Globalisation has increased competition with rivals from around the world
E.g. Between 1970 and 2010 trade barriers around the world were reduced and
customers were able to buy an increasing number of motor vehicle brands
By 2015 more than half of all cars sold in the UK were manufactured by Japanese
companies
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Porter’s Five Forces YOUR NOTES

Porter’s Five Forces identify the key pressures on an industry that impact the ability of a 
business to compete with rivals
Porter’s Five Forces Model
Porter argued that once a business fully understands these pressures in their context
they can take strategic decisions to achieve and sustain a competitive advantage
This will then increase their chances of success
An Explanation of Porter's Five Forces Model
Force Explanation Example
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1. Industry Rivalry When there are many The UK energy market has
YOUR NOTES
competitors selling similar experienced a significant 
products, the business will have reduction in the number of
little power rival firms in recent years as
Many rivals are trying to get a a result of numerous
more significant share of the takeovers
market Remaining energy suppliers
Customers have a lot of have been able to charge
choices and can shop high prices and make
around incredible levels of profit
When a business offers products

in an industry with little or no
competition it has more power,
can a [popover id="cQ-
e50vhC3v6N-uS"
label="premium price"] and
dominate the market
2. Threat of New Entry If new competitors can enter an As a result of deregulation in

industry quickly and without the 1980s UK consumers
investing a lot of money, then the can access an increasingly
barriers to entry is low and the wide selection of television
threat of new entrants is high channels, many of which
The market is likely to contain can operate at a very low
a large number of rival cost online
businesses
Individual businesses are Whilst a small number of
likely to have little power powerful firms such as the
BBC, Netflix and Sky
Where the barriers to entry are too dominate, it is relatively easy
high for new businesses to gain a for new niche channels to
foothold and compete in the enter the market
market the threat of new
entrants is low
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3. Buyer Power When a business sells to a small Boeing is an aerospace

YOUR NOTES
number of customers those company that sells 
customers have significant aeroplanes to airlines and
power to negotiate lower prices governments
The business has few Airlines that purchase large
options when it comes to numbers of planes from
customers Boeing have significant
It will have to price and sell buyer power due to their
products according to ability to negotiate lower
customer demands prices and favourable
contract terms
Where a business has a high
number of customers those
customers have less power
It is likely to be able to charge
a high price for a product that
is relatively inexpensive to
produce
4. Supplier Power Where a business has a lot of Large UK supermarkets

choices over the suppliers from wield significant power over
which it buys components small, local suppliers
It is likely to be able to shop
around for lower price On the other hand, in 2022
the giant food manufacturer
Where a supplier has significant Heinz refused to supply
power over a business as a result Tesco with any product
of offering a specialised unless they increased their
component or where there is a payments by 51%, which
small number of suppliers in the they were forced to do
market
The business has little choice
over the source of its
suppliers
It is likely to have to pay high
prices for its components
and accept suppliers’ terms
and conditions
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5. Threat of Where customers can easily Smartphones have become

YOUR NOTES
Substitution swap a businesses products for the substitute for a wide 
those of a rival the business has range of standalone goods
little power including calculators,
The business is likely to have cameras and even portable
to compete on price or invest computers
heavily in developing a USP In the case of cameras
many manufacturers have
Where substitution is unlikely a moved away from selling
business has significant market low price devices and now
power focus on high-end,
It is likely to be able to charge specialist products for
a high price for its products serious photography
and may be less inclined to enthusiasts
innovate
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3.2 Business Growth YOUR NOTES


3.2.1 Growth
Reasons to Grow
Many firms start small & will grow into large companies or even multi-national
corporations (Amazon started in a garage)
Reasons why Businesses grow
Owners/Shareholders/Managers Owners/shareholders The desire for

desire to run a large business & desire higher levels of stronger market
continually seek to grow it market share and power (monopoly)
profitability over its customers
and suppliers
Desire to reduce costs by Growth provides Larger firms often

benefitting from economies of opportunities for have easier access
scale product diversification to finance
 Exam Tip
One of the goals of growth is to improve profitability. It's important to remember the
distinction between profit and profitability. Profit is the absolute amount of money a
company makes, while profitability is a measure of how efficiently a company
generates profit relative to its revenue or investment. Profitability is usually
expressed as a percentage and is calculated by dividing the profit by the revenue.
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Explaining Economies of Scale YOUR NOTES

As a business grows, it can increase its scale of output generating efficiencies that lower 
its average costs (cost per unit) of production
These efficiencies are called economies of scale
Economies of scale help large firms to lower their costs of production beyond what
small firms can achieve
As a firm continues increasing its scale of output, it will reach a point where its average
costs (AC) will start to increase
The reasons for the increase in the average costs are called diseconomies of scale
Internal economies of scale occur as a result of the growth in the scale of production
within the firm
Economies of scale occur when average costs decrease with increasing output &
diseconomies of scale occur when average costs increase with increasing output
Diagram Analysis
With relatively low levels of output, the businesses average costs are high
As the business increases its output, it begins to benefit from economies of scale which
lower the average cost per unit
At some level of output, a business will not be able to reduce costs any further - this point
is called productive efficiency
Beyond this level of output, the average cost will begin to rise as a result of diseconomies
of scale
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Types of Internal & External Economies YOUR NOTES

Internal economies of scale occur as a result of the growth in the scale of production 
within the business
The firm can benefit from lower average costs (AC) generated by factors from inside
the business
External economies of scale occur when there is an increase in the size of the industry in
which the firm operates
The firm can benefit from lower average costs (AC) generated by factors outside of
the business
Types of Internal Economies of Scale
Type Explanation
Financial economies Large firms often receive lower interest rates on loans than
smaller firms as they are perceived as less risky
A cheaper loan lowers the cost per unit (average cost)
Managerial economies Occurs when large firms can employ specialist managers
who are more efficient at certain tasks and this efficiency
lowers the average cost (AC)
Managers in small firms often have to fulfil multiple roles and
are less specialised
Marketing economies Large firms spread the cost of advertising over a large
number of sales and this reduces the AC
They can also reuse marketing materials in different
geographic regions which further lowers the AC
Purchasing economies Occur when large firms buy raw materials in greater volumes
and receive a bulk purchase discount which lowers the AC
Technical economies Occur as a firm can use its machinery at a higher level of
capacity due to the increased output thereby spreading the
cost of the machinery over more units & lowering the AC
Risk bearing economies Occur when a firm can spread the risk of failure by increasing
its numbers of products i.e greater product diversification -
less failure lowers AC
Sources of External Economies of Scale

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YOUR NOTES
Source Explanation 
Geographic Cluster As an industry grows, ancillary firms move closer to major

manufacturers to cut costs & generate more business
This lowers the AC e.g. car manufacturers in Sunderland rely
on the service of over 2,500 ancillary firms
Transport Links Improved transport links develop around growing

industries to help get people to work & to improve the
transport logistics
This lowers the AC e.g. Bangalore is known as India's Silicon
Valley & transportation projects have been successful in
transforming the movement of people & goods
Skilled Labour An increase in skilled labour can lower the cost of skilled
labour, thereby lowering the AC
The larger the geographic cluster, the larger the pool of
skilled labour
Favourable Legislation This often generates significant reductions in AC as

governments support certain industries to achieve their
wider objectives
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Problems Arising from Growth YOUR NOTES

Rapid business growth may create challenges that can negatively impact a company's 
operations and financial performance
Three of these challenges are diseconomies of scale, internal communication issues, and
overtrading
1. Diseconomies of scale
Occurs when a company grows too large, making it difficult to manage and control its
operations. E.g It may face challenges in coordinating its various departments, managing
its workforce, or maintaining quality control. The cost per unit ends up increasing as a result
of these inefficiencies
2. Internal communication
Rapid growth may strain communication channels or result in miscommunication,
conflicting priorities and lack of coordination. This may result in delays, errors, missed
opportunities and impact on employee morale
3. Overtrading
Occurs when a company takes on more business than it can handle, leading to a strain on
its resources or an inability to meet its financial obligations (lack of liquidity). This may cause
cash flow problems or decreased customer satisfaction. E.g A company that expands too
quickly may struggle to hire and train enough staff to handle increased demand, leading
to a backlog of orders and dissatisfied customers
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3.2.2 Mergers & Takeovers YOUR NOTES


Reasons for Mergers & Takeovers
Firms will often grow organically to the point where they are in a financial position
to integrate with others
Integration in the form of mergers or takeovers results in rapid business growth and is
referred to as inorganic growth
A merger occurs when two or more companies combine to form a new company
The original companies cease to exist and their assets and liabilities are transferred to
the newly created entity
A takeover occurs when one company purchases another company, often against its will
The acquiring company buys a controlling stake in the target company's shares
(>50%) and gains control of its operations
There are several reasons why companies may choose to pursue mergers and takeovers
1. Strategic fit
A company may acquire another company to expand into new markets, diversify its
product offerings, or gain access to new technology E.g. in 2010 Kraft Foods
purchased Cadbury's to increase its product offering and expand business sales in the
United Kingdom
2. Economies of scale
Growth creates economies of scale by allowing companies to reduce costs and
increase efficiency through the consolidation of operations
3. Synergies
Synergies are the benefits that result from the combination of two or more
companies, such as increased revenue, cost savings, or improved product offerings
4. Elimination of competition
Takeovers are often used to eliminate competition and the acquiring company
increases its market share. E.g. Meta, the parent company of Facebook purchased
WhatsApp in 2014 and continued to run the messaging service alongside their own
Facebook Messenger
5. Shareholder value
Mergers and takeovers can also be used to create value for shareholders. By
combining companies, shareholders can benefit from increased profits, dividends
and stock prices
Page 30 of 138
Types of Integration YOUR NOTES

Inorganic growth usually takes place when firms merge in one of two ways 
Vertical integration (forward or backwards)
Horizontal integration
A diagram that illustrates how a firm can grow through forward or backward vertical
integration
Forward vertical integration involves a merger or takeover with a firm further forward in the
supply chain
E.g. A dairy farmer merges with an ice cream manufacturer
Backward vertical integration involves a merger/takeover with a firm further backwards in

the supply chain
E.g. An ice cream retailer takes over an ice cream manufacturer
An Explanation of the Advantages & Disadvantages of Each Type of Growth
Type of Growth Advantages Disadvantages
Page 31 of 138
YOUR NOTES
Vertical Integration Reduces the cost of Diseconomies of scale occur as 
(Inorganic growth) production as middleman costs increase e.g. unnecessary
profits are eliminated duplication of management
Lower costs make the firm roles
more competitive There can be a culture clash
Greater control over the supply between the two firms that have
chain reduces risk as access to merged
raw materials is more certain Possibly little expertise in
The quality of raw materials running the new firm results in
can be controlled inefficiencies
Forward integration adds The price paid for the new firm
additional profit as the profits may take a long time to recoup
from the next stage of
production are assimilated
Forward integration can
increase brand visibility
Horizontal The rapid increase of market Diseconomies of scale may

Integration share occur as costs increase e.g.
(Inorganic growth) Reductions in the cost per unit unnecessary duplication of
due to economies of scale management roles
Reduces competition There can be a culture clash
Existing knowledge of the between the two firms that have
industry means the merger is merged
more likely to be successful
The firm may gain new
knowledge or expertise
Page 32 of 138
The Financial Risks & Rewards of Mergers/Takeovers YOUR NOTES

Inorganic growth carries both risks and rewards for a business 
The Financial Risks & Rewards
Financial Risks Financial Rewards
Overpayment: If the acquiring company Increased Market Share: By acquiring

pays too much for the target company, it another company an increase in market
may not be able to recoup the investment share may lead to increased sales revenue
through increased revenue or cost savings and profitability
Integration Challenges: Integrating two Synergy: Mergers may result in cost

companies can be complex and costly savings through the elimination of
(with potential disruptions to operations duplicate functions and increased
and loss of key personnel) efficiency, leading to increased
profitability
Cultural Differences: Mergers can result in Diversification: Selling a wider variety of

clashes of company cultures leading to goods/services reduces the risks
decreased productivity and loss of associated with selling a single product
valuable employees
Regulatory Hurdles: Mergers may face Access to New Markets: Acquiring a

opposition from regulators or other company with a strong presence in a new
stakeholders market may result in a higher customer
base and sales revenue
Debt: Acquiring companies may take on Increased Value: Mergers may increase
debt to finance the merger which can the overall value of the combined
increase the financial risk and reduce company for shareholders
flexibility
Page 33 of 138
Problems of Rapid Growth YOUR NOTES

Inorganic growth often increases the size of the business significantly - and in a very short 
period
Whenever growth occurs rapidly, a business will face challenges to its survival
The business has to effectively respond to the challenges of rapid growth to maximise the
potential growth opportunity
Problems caused by rapid and inorganic growth
Rapid business growth can put a strain on cash flow

The merger/takeover may require investment in new equipment or staff to support the
growth which may cause financial strain if the revenue growth does not keep up with
the expenses
Both product quality and the quality of customer service may deteriorate as existing
systems are strained
Diseconomies of scale may increase the cost per unit and are commonly caused by
cultural and communication diseconomies when two firms merge
Managers may be overloaded with new responsibilities and this may decrease their
motivation, productivity and output
Page 34 of 138
3.2.3 Organic Growth YOUR NOTES


Organic Business Growth
Organic growth is growth that is driven by internal expansion using reinvested profits or
loans
Organic growth (internal) is usually generated by

gaining greater market share
product diversification
opening a new store
International expansion
investing in new technology/production machinery
Firms will often grow organically to the point where they are in a financial position
to integrate with others
Integration speeds up growth but also creates new challenges
An Explanation of the Advantages & Disadvantages of Organic Growth
Advantages Disadvantages
The pace of growth is manageable The pace of growth can be slow and
Less risky as growth is financed by profits frustrating
and there is expertise in the industry Not necessarily able to benefit from
Avoids diseconomies of scale economies of scale
The management knows & understands Access to finance may be limited
every part of the business
Ansoff's Matrix (see sub-topic 3.1.2) is a strategic planning tool that helps businesses
identify potential organic growth opportunities by analysing their product and market
strategies
Page 35 of 138
YOUR NOTES

The Ansoff Matrix considers the firm's product and market strategy
The matrix consists of four growth strategies - market penetration, market development,
product development, and diversification
Examples of Organic Growth Using Ansoff's Matrix
Business Example
Apple Market Development

Apple expanded into new markets by opening its stores in new
countries, such as China and India, and by partnering with telecom
providers to sell its products. This helped them to organically increase
their market share, sales revenue and profitability
Google Product Development

Google introduced new products such as Google Drive and Google
Maps to complement its search engine and advertising businesses. This
helped them to organically increase their market penetration, sales
revenue and profitability
Page 36 of 138
Disney Diversification
YOUR NOTES
Disney has diversified into several areas such as theme parks, cruise 
lines, television networks, and movie studios. The brand strength has
helped them to organically increase market penetration in each of
these markets resulting in higher sales revenue and profitability
Page 37 of 138
3.2.4 Reasons for Staying Small YOUR NOTES


Small Business Survival in Competitive Markets
Many firms start small & will grow into large companies or even multi-national
corporations (Amazon started in a garage)
While many firms grow, others do not or they intentionally choose to remain small
Reasons Why Small Firms Exist
They offer a more They are unable to access They provide a product
personalised service and finance for expansion that is in a niche market -
focus on building smaller market size but can
relationships with their be very profitable
customers (excellent
customer service)
By remaining small, there Rapid growth can cause Owners goal is not profit
is a high ability to respond diseconomies of scale maximisation but rather
quickly to changing which can be difficult to an acceptable quality of
customer deal with and so many life (satisficing)
needs/preferences owners choose to avoid
these
Many changes in technology favour large scale operations but others can work to the
advantage of small firms
The Internet offers low cost access to market for many firms
With effective use of technology to cater for the precise needs of small market niches,
small firms can thrive
This is especially true where technology reduces the cost differential between the mass
produced and the niche product
Thus modern technology can work in favour of the small-scale and personalised rather
than the mass produced and impersonal
Niche markets can be targeted profitably by small firms that have relatively small
overheads and do not need to achieve the volume of sales required by larger competitors
Page 38 of 138
3.3 Decision-making Techniques YOUR NOTES


3.3.1 Quantitative Sales Forecasting
Introduction to Quantitative Sales Forecasting

The sales forecast is an important business planning tool
It provides an estimation of future sales figures using past data and considering
predictable external factors
Sales forecasts can be used to identify trends in product sales which can then be
compared with the market as a whole
Main Methods used in Quantitative Sales Forecasting
Method Explanation
Moving A series of averages calculated from successive segments of a

Averages series of data
These averages smooth data so that trends may be more easily
identified
Extrapolation The prediction of future sales from past data

Extrapolation can often be done simply by extending a line of
best fit
Correlation Where there is a link between two variables there is a correlation

Correlations may be positive or negative
Page 39 of 138
Calculation of Time-series Analysis YOUR NOTES

Moving Averages 
Sometimes past sales data is too erratic for clear trends to be identified
A moving average smoothes raw data and allows analysts to spot patterns even when
sales are subject to seasonal variations
Four-month or twelve-month moving averages are used where seasonality is a key factor
in sales
Steps to calculate the moving average
The moving total is calculated by adding together sales figures for a specified number of
periods
E.g. A three-month moving total is calculated by adding the first three months,
followed by the second three months, and the third three months etc.
The centred average is calculated by dividing the moving total by the specified number
of periods
E.g. A three-month centred average is calculated by dividing the three month
moving total by three
A series of centred averages is known as the moving average
Page 40 of 138
YOUR NOTES
 Worked Example

RJ Inflatables is a manufacturer of novelty celebration balloons. Its monthly sales
from January to July are shown in Table A.
Rachel Jameson, the managing director, is concerned that sales are declining but is
struggling to identify a trend with the sales data she has available. Rachel’s
financial administrator has suggested using a moving average so that she can
forecast future sales with greater accuracy.
Table A
Calculate a three-month moving average using RJ Inflatables January to July sales

data. (6)
Step 1 - Calculate a three-month moving total of sales for each group of three
months:
Step 2 - Calculate the three-month centred average for each group of three
months
Page 41 of 138
YOUR NOTES
When plotted on the same graph the 3-month centred average provides a smoother curve 
which makes extrapolation of the data for forecasting relatively straightforward
A comparison of raw sales data and 3-month centred average data
Page 42 of 138
Interpreting Scatter Graphs YOUR NOTES

Scatter graphs allow businesses to compare two variables such as sales volume and 
advertising to establish if there is any correlation between them
An example of a scatter graph showing the number of sales managers employed by a

business and the volume of Items sold
Types of correlation
A correlation exists where there is a relationship or connection between two variables
A positive correlation means as one variable increases, so does the other variable
A line of best fit that slopes upwards can be identified
A negative correlation means as one variable increases, the other variable decreases
A line of best fit that slopes downwards can be identified
No correlation means there is no connection between the two variables
It is not possible to identify a line of best fit
The main types of correlation between two variables
Correlation does not always indicate a relationship or causation between two sets of
variables so businesses need to conduct research to establish whether a relationship
exists as well as the strength of that relationship
Where a line of best fit can be identified and when causation is determined, a business
can extrapolate the data to make predictions around changes to either of the variables
E.g. extrapolation the line of best fit in the example below, the business could predict
that employing seven sales managers would be result in likely sales of 46 units
Extrapolation assumes that what has happened in the past will be the same as what will
happen in the future
Page 43 of 138
YOUR NOTES

An example of a scatter graph with a line of best fit showing the number of sales managers
employed by a business and the volume of items sold
 Exam Tip
When drawing a line of best fit you should try to include as many data points above
the line as below the line.
Watch out for outlying data - if there is more than one outlier above the line, adjust
your line of best fit upwards. Similarly, if there is more than one outlier below the line,
adjust your line of best fit downwards. Just one outlier should not influence your line
of best fit.
Page 44 of 138
Limitations of Quantitative Sales Forecasting YOUR NOTES

Quantitative sales forecasting techniques are useful where the future is expected to reflect 
what has happened in the past
It is especially effective in the short term
In the longer term, uncertainties - especially in the external environment - can make simple
extrapolation of past data unreliable
Examples of external factors that may influence the accuracy of the sales forecast
In many cases the sales forecast can provide little more than an estimate of future
performance
As long as it is approximately accurate businesses can use the sales forecast to plan
resources such as staff, finance and production and to produce budgets
Businesses can improve the accuracy of sales forecasts by

Conducting detailed market research
Page 45 of 138
Employing experts with excellent market knowledge YOUR NOTES

Revising the sales forecasts frequently 
Forecasting for the short- to medium-term
Page 46 of 138
3.3.2 Investment Appraisal YOUR NOTES


An Introduction to Investment Appraisal
Investment appraisal involves comparing the expected future cash flows of an
investment with the initial outlay for that investment
A business may want to analyse

How soon the investment will recoup the initial outlay
How profitable the investment will be
Before an investment can be appraised key data will need to be collected, including
Sales forecasts
Fixed and variable costs data
Pricing information
Borrowing costs
The collection and analysis of this data is likely to take some time
It requires significant experience to interpret the data appropriately before the
investment appraisal can take place
Different methods are used to appraise the value of an investment, including:

The simple payback period
The average rate of return (ARR)
The net present value of discounted cash flow
Page 47 of 138
Simple Payback Period YOUR NOTES

The payback period is a calculation of the amount of time it is expected an investment will 
take to pay for itself
Where net cash flows are expected to be constant over time the payback period can be
calculated using the formula
Initial Outlay
= Years / Months
Net Cash Flow per Period
 Worked Example
1. Simple Payback Calculation
Gomez Carpets is considering an investment in a new storage facility at a cost of
£200,000. It expects additional net cash flow of £30,000 per year as a result of
the investment.
Calculate the Payback period for the investment. (3)
Step 1 - Divide the initial outlay by the additional expected net cash flow
£ 200,000
= 6 . 67 years (1 mark)
£ 30,000
Step 2 - Convert the outcome to years and months
6 years
0.67 years = 8.04 months (1 mark)
Payback period = 6 years and 8 months (3 marks for the correct answer)
Page 48 of 138
YOUR NOTES
 Worked Example

2. Payback calculation for varying cash flow over time
Hammer and Son provides a household repairs service that has recently employed
a new handywoman who requires her own van. The new van will be purchased for
£32,000
The net cash flows are expected to vary over the five years following its purchase
and are shown in the table below.
Cumulative Cash
Year Net cash Flow (£)
Flow (£)
0 (32,000) (32,000)
1 14,000 (18,000)
2 10,000 (8,000)
3 6,000 (2,000)
4 3,000 1,000
5 2,000 3,000
Calculate the payback period for the van (4)
Step 1 - Identify the final year where the cumulative cash flow is negative
In this case the cumulative cash flow figure is -£2,000 at the end of Year 3
This is the remaining amount (outlay) outstanding. (1 mark)
Step 2 - Calculate the monthly net cash flow for the next year
£3,000 ÷ 12 (months) = £250 (1 mark)
Step 3 - Divide the remaining outlay outstanding by the monthly net cash flow
£2000 ÷ £250 = 8 months (1 mark)
Step 4 - Identify the payback period

In this case the Payback period is 3 years and 8 months (1 mark)
Benefits and Drawbacks of the Using the Payback Method
Benefits Drawbacks
Page 49 of 138
It is a simple method to calculate and It provides no insight into the profitability

YOUR NOTES
understand of investments 
It is particularly useful for businesses Payback only considers the total length of
where the cash flow management is vital time to recover an investment
Businesses can identify the point at Neither the timing nor the future value of
which an investment is paid back and cash inflows is considered
contributing positively to cash flow
It may encourage a short-termism
It is also useful where new technology is approach
introduced regularly
Potentially lucrative investments may be
Businesses purchasing equipment can dismissed as they take longer to pay back
calculate whether an investment ‘pays than alternatives
back’ before an upgrade is available
Page 50 of 138
Average Rate of Return (ARR) YOUR NOTES

The Average Rate of Return compares the average profit per year generated by an 
investment with the value of the initial outlay
The average rate of return is calculated using the formula
average annual return
× 100
iInitial outlay
The outcome of the formula is expressed as a percentage which makes it easy to compare
different investment options
 Worked Example
Creative Frames, a small artwork framing business, is considering an investment of
£40,000 in new machinery. Megan, the business owner, believes that total cash
inflows over a 6-year period will be £140,000 and total cash outflows will be
£92,000.
Calculate the Average Rate of Return of the proposed investment. (4 marks)
Step 1 - Calculate the total profit over the lifetime of the investment
Total cash inflows - Total cash outflows = Total profit
£140,000 - £92,000 = £48,000 (1 mark)
Step 2 - Divide the total profit by the number of years of the investment project
to find the average annual profit
£48,000 ÷ 6 year = £8,000 (1 mark)
Step 3 - Divide the average annual profit by the initial outlay

£8,000 ÷ £40,000 = 0.2 (1 mark)
Step 4 - Multiply the outcome by 100 to find the percentage

0.2 x 100 = 20% (1 mark)
The Advantages & Disadvantages of Using the Average Rate of Return (ARR)
Advantages Disadvantages
Page 51 of 138
YOUR NOTES
It considers all of the net cash flows As it depends on an average of cash flows it
generated by an investment over time ignores the timing of those cash flows 
It is easy to understand and compare the The opportunity cost of the investment is
percentage returns with each other ignored as values are nether expressed in
real terms nor adjustments made for the
impact of interest rates and time
Page 52 of 138
Net Present Value of Discounted Cash Flow YOUR NOTES

Net Present Value (NPV) is a financial metric used to evaluate the value of an investment or 
a project
The NPV of an investment takes into account the effects of interest rates and time
It represents the present value of the future cash inflows minus the present value of
the future cash outflows
To get the present value, the future value has to be discounted (reduced)
This discounting method takes into account the:

The fact that that money received in the future is worth less than money received today
due to inflation
The opportunity cost of not having the money available for other uses
To calculate the Net Present Value of an investment the value of all future net cash flows in
today’s terms need to be calculated first - and then discounted using a table
The cost of the initial investment is deducted from the total of the discounted net
cash flows
If future net cash flows minus the initial investment is positive, then the
investment is likely to be worthwhile
If the sum of future net cash flows minus the initial investment is negative, then
the investment is unlikely to be worthwhile
Discounted cash flows are calculated using discount tables which allow future cash flows
to be expressed in today’s terms
Page 53 of 138
YOUR NOTES
 Worked Example

Brownsea Sightseeing Tours Ltd is considering purchasing a new pleasure craft at
a cost of £325,000. It expects the investment to achieve the following net cash
flows over five years of operation
Year Net cash Flow (£) 10% Discount Factor

0 (325,000) 1.00
1 110,000 0.91
2 90,000 0.83
3 75,000 0.75
4 65,000 0.68
5 60,000 0.62
Using the 10% discount factor calculate the NPV of the leisure craft investment. (4
marks)
Step 1 - Calculate the discounted cash flow for each year by multiplying the net
cash flow by the discount factor
(2 marks)
Step 2 - Add together the discounted cash flow values for each year, including
Year 0 £325,000 + £100,100 + £74,400 £56,250 + £44,200 + £37,200
= (12,550)
The Net present Value of the investment is -£12,550. This suggests that the
investment in the new pleasure craft is not financially worthwhile. (1 mark)
Advantages and Disadvantages of the Net Present Value Method
Page 54 of 138
YOUR NOTES
Advantages Disadvantages 
It considers the opportunity cost of money It is more complicated to calculate and

interpret than other methods of
Discount tables are used to calculate investment appraisal
forecast future values of net cashflows
One of the primary challenges of using the
Businesses may choose different NPV method is accurately forecasting
discount tables (20%, 10%, 5% etc) to future cash flows
adjust the level of risk involved in a project
allowing a range of scenarios to be Selecting an appropriate discount rate
considered can be challenging, and even small
changes in the discount rate can
significantly impact the calculated NPV
The NPV method only considers the

financial costs and benefits of a project
and does not account for non-financial
benefits or costs e.g environmental
damage
 Exam Tip
A common error made by students is the assumption that discounted cash flow
takes into account the effects of inflation on investment decisions. To account for
inflation, the discount rate used in the NPV calculation should be adjusted to reflect
the expected inflation rate.
Page 55 of 138
Limitations of Investment Appraisal Techniques YOUR NOTES

Each of the investment appraisal techniques relies upon forecasted future cash flows 
which may lack accuracy
Managers compiling cash flow forecasts may lack experience or may be biased
towards a particular investment
Incomplete past data may make forecasting imprecise or mean that [popover
id="UaXQo1jBo2na8uf~" label=confidence"] in the data used to compile the forecast is
limited
Longer-term cash flow forecasts are particularly prone to inaccuracy for a variety of
reasons
Unexpected increases in costs
The arrival of new competitors
Changes in consumer tastes
Uncertainties arising as a result of economic growth or recession
Factors other than the cost of investment and the return on investment are not considered
Business finances and availability of external finance to fund the investment
The overall corporate objectives
Potential for positive public relations or meeting social responsibilities
Page 56 of 138
3.3.3 Decision Trees YOUR NOTES


Decision Tree Diagrams
A decision tree is a quantitative method of tracing the outcomes of a decision so that the
most profitable decision can be identified
Research-based estimates and probabilities are used to calculate likely outcomes
The net gain from a decision can be identified and used to consider whether an
investment is worthwhile
Using decision trees provides several key advantages to the decision making process
Constructing a decision tree diagram may reveal options that haven't previously been
considered
Managers are forced to consider the risks associated with their choice, ahead of
implementation
The quantitative approach requires deep research to be carried out
Decision Tree Diagrams

The key elements in a decision tree diagram are
Decision points
Outcomes
Probabilities
Expected monetary values
A simple decision tree based on a choice of whether to invest in opening a new store or
expand its website
Points where decisions need to be made are represented by squares
Square A represents the fact that a choice is required on opening a new store or
expanding the website
Points where there are different outcomes are represented by circles called nodes
Circles B and C represent points at which the different options have a range of
outcomes - success or failure
The probability or likelihood of each outcome is shown on the diagram

Page 57 of 138
A certain outcome has a probability of 1 YOUR NOTES

An impossible outcome has a probability of 0 
Opening a new store has a 0.7 probability of success and a 0.3 probability of
failure
Expanding the website has a 0.6 probability of success and a 0.4 probability of
failure
The monetary value of each decision is based on the expected profit or loss of the
outcome
If opening a new store is successful a £420,000 profit is expected
If opening a new store is unsuccessful a £24,000 loss is expected
If expanding the website is successful a £480,000 profit is expected
If expanding the website is unsuccessful a £32,000 loss is expected
Calculating Expected Monetary Values

To compare the options a business should take into account the expected values of each
decision presented in the decision tree diagram
To calculate the expected monetary value of a decision, the following formula is used
(Expected value of success x Probability) + (Expected value of failure x Probability)
Using the example above the expected value of opening a new store is
(£420,000 x 0.7) + (-£24,000 x 0.3)
= £294,000 + -£7,200
= £286,800
Using the example above the expected value of expanding the website is
(£480,000 x 0.6) + (-£32,000 x 0.4)
= £288,000 + -£12,800
= £275,200
As the expected value of opening a new store is higher at £286,800, than that of
expanding the website at £275,200, based purely on financial terms the business should
choose the option to open a new store
Page 58 of 138
YOUR NOTES
 Worked Example

Caramelac is a lactose-free chocolate product manufactured by a large
multinational confectionery business. In recent years increased competition from
other well-known brands has started to impact on sales of the product and
managers are determined to maintain Caramelac’s market share.
Market research has shown that the business has two options:
a) Redevelop the product
b) Create a new advertising campaign
The expected outcomes and the probabilities of success and failure are shown in
the decision tree below
Calculate the expected values of each option and decide, on financial grounds,
which option the Caramelac's brand managers should choose. 6 marks)
Step 1 - Calculate the expected value of redeveloping the product

(£840,000 x 0.5) + (-£84,000 x 0.5)
= £420,000 + -£42,000
= £462,000 (2 marks)
Step 2 - Calculate the expected value of the advertising campaign
(£660,000 x 0.6) + (-£76,000 x 0.4)

= £396,000 + -£30,400
= £365,600 (2 marks)
Page 59 of 138
YOUR NOTES
Step 3 - Interpret the outcomes and make a decision 
As the expected value of redeveloping the product is higher at £462,000 than

that of the advertising campaign at £365,600 (1 mark), the business should
choose the option to redevelop the product (1 mark).
Page 60 of 138
YOUR NOTES
 Worked Example

In some cases the decision tree diagram provides expected revenues rather
than profit or loss for the range of outcomes
In these diagrams the costs related to each outcome are also provided
To calculate the expected value of each outcome costs must be deducted
from expected revenues
A decision tree based on a decision whether to launch a new product or improve

an existing product
To calculate the expected monetary value of a decision where revenues and

costs are included in the diagram
(Expected value of success x Probability) + ( Expected value of failure x
Probability) - Cost
The expected value of launching a new product is

(£520,000 x 0.6) + (-£54,000 x 0.4) - £280,000
= £312,000 + -£21,600 - £280,000
= £290,400 - £280,000
= £ 10,400
The expected value of improving the existing product is

(£225,000 x 0.9) + (-£22,000 x 0.1) - £190,000
= £202,500 + -£2,200 - £190,000
= £200,300 - £190,000
= £ 10,300
As the expected value of launching a new product is marginally higher at

£10,400 than that of improving the existing product at £10,300, the business
Page 61 of 138
should choose the option to launch a new product YOUR NOTES


In this case the decision tree has demonstrated that there is little between the
two options and the business should look at other factors that may inform
their decision
 Exam Tip
Expected values are not the same thing as profit or revenues generated by a choice.
In the above example, launching a new product is expected to either generate a
positive revenue figure of £520,000 or generate a negative revenue figure of
£54,000. It is never forecast that a revenue figure of £200,300 will be achieved.
This is purely a figure used in making the choice between this option and the
alternative and does not represent the actual amount of revenue that is expected to
be achieved.
Limitations of Using Decision Trees

Constructing decision trees that can support effective decision-making require skill to
avoid bias and take significant amounts of time to gather reliable data
A decision tree is constructed using estimates which rarely take full account of external
factors and cannot include all possible eventualities
Qualitative elements such as human resource impacts are not considered which may
affect the probability of success of a decision
The time lag between the construction of a decision tree diagram and the implementation
of the decision is likely to further affect the reliability of the expected values
Page 62 of 138
3.3.4 Critical Path Analysis YOUR NOTES


The Nature & Purpose of Critical Path Analysis
Critical path analysis is a project management tool that uses network analysis to plan
complex and time-sensitive projects
Critical Path Analysis involves the construction of a visual model of the project that includes
key elements
A list of all activities required to complete the project
The time (duration) that each activity will take to complete
How each project activity depends on others
Critical Path Analysis shows

The order in which activities must be completed
The longest path of project activities to the completion of the project
The earliest and latest that each project activity can start and finish without delaying
completion of the project as a whole
Activities within a project that can be carried out simultaneously are identified
The critical project activities which if delayed will cause the project as a whole to
over-run
Those project activities where some delay is acceptable without delaying the project
as a whole
The shortest time possible to complete the project
It allows managers to identify the relationships between the activities involved and to
work out the most efficient way of completing the project
Resources such as raw materials and components can be ordered or hired at precisely
the right time they are needed
Working capital may be managed efficiently
Where delays occur managers can identify the implications for the project’s
completion and redirect resources if required
Page 63 of 138
Drawing Critical Path Analysis Diagrams YOUR NOTES

The Main Components of Network Analysis Diagrams 
Element Description
A node is a circle that represents a point in time where an activity is

Node started or finished
The node is split into three sections
The left half of the circle is the activity number
The top right section shows the earliest start time (EST) that
an activity can begin based on the completion of the
previous activity
The bottom right section shows the latest finish time (LFT) by
which the previous activity must be completed
Activities An activity is a process or task within a project that takes time

Activities are shown on the network diagram as a line which link nodes
A description of the activity or a letter representing the activity is usually
shown above the line
Duration The duration is the length of time it takes to complete an activity

The duration is shown as a number of time units such as hours or days
below the activity line
An example of a simple network diagram showing key elements
A network diagram must always start and end on a single node

Lines must not cross and must only be assigned to activities
Page 64 of 138
Critical Path Calculations YOUR NOTES

Calculating Earliest Start Times 
An example of a simple network diagram showing Earliest Start Times

Working forwards from Node 1 it is possible to calculate the Earliest Start Time for each
activity by adding the duration of each task
The EST for each activity is placed in the top right of each node
Node 1 is the starting point of the project and where both Activity A and Activity B begin
Activity A and Activity B are independent processes
Activity A has a duration of 2 days and its earliest start time (EST) is 0 days
Activity B has a duration of 3 days and its EST is also 0 days
Activity C and Activity D both begin at Node 2 and are dependent upon the completion
of Activity A but are independent from each other
Activity C has a duration of 3 days and its EST is 2 days
Activity D has a duration of 5 days and its EST is also 2 days
Activity E begins at Node 3
Activity E has a duration of 4 days and its EST is 3 days
Activity F begins at Node 4
Activity F has a duration of 2 days and its EST is 5 days
Activity G begins at Node 5
Activity G has a duration of 1 day and its EST is 7 days
Activity H begins at Node 6
Activity H has a duration of 3 days and its EST is 7 days
Node 7 is the end point of the project
Calculating Latest Finish Times
Page 65 of 138
YOUR NOTES

An example of a simple network diagram showing Earliest Start Times and Latest Finish
Times
Working backwards from Node 7 it is now possible to calculate the Latest Finish Time for
each activity by subtracting the duration of each task
The LFT for each activity is placed in the bottom right of each node
Node 7 is the end point of the project which has a latest finish time of 10 days
Activity H has a duration of 3 days
The LFT in Node 6 is 7 days (10 days - 3 days)
Activity G has a duration of 1 day
The LFT in Node 5 is 9 days (10 days - 1 day)
Activity F has a duration of 2 days
Activity E has a duration of 4 days
Activity D has a duration of 5 days
Activity C has a duration of 3 days
The LFT in Node 3 is 4 days because Activity D is the more time-critical of the two
activities that are dependent upon the completion of Activity A and so its LFT is
recorded
Activity B has a duration of 3 days
Activity A has a duration of 2 days
The LFT in Node 1 is 0 days because Activity B is the more time-critical of the two
starting activities and so its LFT is recorded
The LFT in Node 1 is always 0
Identifying the Critical Path
The critical path highlights those activities that determine the length of the whole project
If any of these critical activities are delayed the project as a whole will be delayed
The critical path follows the nodes where the EST and LFT are equal
In the diagram below nodes 1 3 6 and 7 have equal ESTs and LFTs
Activities that determine these nodes are B E and H
These activities are marked with two short lines
Page 66 of 138
The critical path is therefore BEH YOUR NOTES


An example of a simple network diagram showing the critical path BEH
Identifying and Calculating Float Time

Float time exists where there is a difference between the Earliest Start Time (EST and the
Latest Finish Time (LFT)
Where float time is identified managers may
Transfer resources such as staff or machinery to more critical activities
Allow extra time to complete tasks to improve quality or allow for creativity
An example of a simple network diagram showing float nodes (4 and 5) and a critical node (6)
The total float refers specifically to spare time that is available so that the overall project
completion is not delayed
The total float for a specific activity is calculated by
LFT for the activity - Duration of the activity - EST for the activity
Using the diagram above the following total float times can be calculated for Activities A to
H
Page 67 of 138
YOUR NOTES
Activity LFT - Duration - EST = Total Float 
A 4 2 0 2
B 3 3 0 0
C 8 3 2 3
D 9 5 2 2
E 7 4 3 0
F 10 2 5 3
G 10 1 7 2
H 10 3 7 0
The critical activities B E and H each have a total float of 0 days
Page 68 of 138
YOUR NOTES
 Worked Example

The network diagram below shows the activities involved in a new promotional
campaign for a small fashion accessories business as well as the time (in weeks) it is
expected that each activity will take to complete.
Calculate
a) The earliest start times and latest finish times for each node. (4 marks)
b) The total float time for activity G. (3 marks)
Step 1 - Calculate the Earliest Start Times (EST)
Node 1 EST = 0
Node 2 EST = 0 + 3 = 3 but 0 + 4 = 4 so 4
Node 3 EST = 4 + 5 = 9
Node 4 EST = 4 + 2 = 6
Node 5 EST = 9 + 3 = 12
Node 6 EST = 6 + 4 = 10
Node 7 EST = 4 + 6 = 10
Node 8 EST = 12 + 2 = 14 but 10 + 4 = 14 and 10 + 5 = 15 so 15
Step 2 - Calculate the Latest Finish Times (LFT)

Node 8 = 15
Node 7 = 15 - 5 = 10
Node 6 = 15 - 4 = 11
Node 5 =15 - 2 = 13
Node 4 =11 - 4 = 7
Node 3 =13 - 3 = 10
Node 2 = 10 - 6 = 4
Page 69 of 138
Node 1 = 4 - 4 = 0 YOUR NOTES


Step 3 - Calculate the total float time for Activity G

Total float = LFT for the acitvity - Duration of the activity - EST for the
activity
= 11 weeks - 4 weeks - 6 weeks
= 10 weeks
Limitations of Using Critical Path Analysis
Limitations Explanation
Very lengthy or complex projects involve a Specialist network planning software

very large number of activities that have may be required
numerous dependencies
Layers of supervision may be required to
manage different groups of activities
within the project
Network analysis often relies on estimates Significant research is required prior to

and forecasts the completion of network analysis
Close and honest working relationships
with suppliers are essential
Network analysis does not guarantee the Project managers will need to be highly
success of a project skilled and will need experience of
working with complicated plans
Resources may not prove to be as flexible Employees may require additional

as hoped when managers identify float training in order to transfer to critical tasks
periods
Machinery and other capital resources
may require adaptation
Page 70 of 138
3.4 Influences on Business Decisions YOUR NOTES


3.4.1 Corporate Influences
Corporate Timescales: Short-termism Versus Long-termism

Business decisions can have long-term and short-term implications
Long-term decisions are likely to affect the long-term mission and vision of the
business over a period of anything up to ten years
Short-term decisions are more likely to impact on objectives and tactics over the next
few years at most
Many businesses focus on decision-making for the short-term
This is especially influenced by pay structures, e.g. where executives' pay is linked to
short-term success such as increase in the share price
Strategies likely to be adopted by a business with a short-termist approach to decision-

making
Businesses that adopt a short-termist approach may face a range of problems
Loss of profitability and competitive edge as lucrative long-term opportunities are
ignored in favour of short-term priorities
The need to produce and analyse very regular financial reports means that managers
lack time to consider longer-term corporate strategic direction
Reliance on short-term contracts with suppliers and workers is likely to lead to higher
than necessary costs as benefits such as bulk buying discounts cannot be achieved
Page 71 of 138
It is argued that short-termism is an entrenched feature in British businesses and some YOUR NOTES
commentators consider that it is a key reason for sluggish productivity and a lack of 
willingness to invest in research, training and skills
Some businesses are more likely to engage in those activities that will allow them to take
advantage of opportunities that improve productivity and provide a competitive edge
in the future
This long-term approach may include a business

Conducting ongoing investment in research and development, innovation and new
product development
Adopting a long-term outlook with less emphasis on frequent financial reporting
Valuing and investing significant resources into the recruitment, training and
retention of staff
Establishing and nurturing meaningful and lasting relationships with suppliers
Page 72 of 138
Evidence-based Versus Subjective Decision Making YOUR NOTES

Evidence-based decision-making involves taking a systematic and facts-based 
approach when determining objectives, strategy and tactics
The evidence-based approach to business decision making
Firstly a business identifies the measurable objective it wants to achieve and determine the
criteria against which success will be measured
Data is then gathered and analysed to consider the range of available decisions
Internal data may be gathered from sales records and market research
External market data and economic forecasts are also often used
The appropriate evidence-based strategic and tactical decision is made and
communicated with those required to carry out the range of tasks involved
The decision is implemented and carefully monitored and reviewed
The outcome of the decision can be used to inform future decision-making
Subjective decision making is guided principally by the personal opinions and experience
of key decision-makers
Subjective decision-making is often more risky than an evidence-based approach
but there are some circumstances where it may be more appropriate
Page 73 of 138
Situations where Subjective Decision Making may be Appropriate YOUR NOTES


Situation Explanation
Where quick decisions need to be Sometimes a swift decision needs to be made

made to counter rapidly-changing market
conditions
E.g. the entry of a new competitor may require
an immediate response to avoid losing sales
Where the nature of the industry In some industries subjective decision-making

means that subjective decisions are provides the key element of competitive
normal advantage
E.g. the fashion industry relies on the instincts
and personal style choices of designers and
buyers who are likely to have a 'gut feeling' that
guides their decisions
Where there is a lack of data to In some instances there may be a lack of up to

support evidence-based decision- date and accurate data to support an
making or where data conflicts evidence-based decision so a well-placed
'hunch' may be the best option a business has
E.g. choosing a new supplier with whom a
business has no previous trading relationship
may rest upon the instinct of the purchasing
manager
Where a persuasive and single- Some businesses are dominated by powerful

minded leader runs the business leaders who make key strategic decisions
without consultation and with limited data
This is an appropriate decision-making
approach where leaders are experienced and
trusted and have a good track record
Page 74 of 138
Exam Tip YOUR NOTES

 A businesses approach to decision making can provide an excellent basis for

analysis and evaluation.
Look out for clues in the case study that identify whether the business takes an
evidence-based or subjective approach and weigh up how this may affect both
the quality of the decision and likelihood of the business achieving its objective.
Explore the skills, experience and characteristics of the key decision makers and
state your concerns.
Consider whether their approach is appropriate given the timescales available and
the level of risk involved in the decision.
Evaluate the sources of information used to make decisions and make a judgement
about whether it is sufficient.
Page 75 of 138
3.4.2 Corporate Culture YOUR NOTES


Strong & Weak Cultures
A strong company culture exists where factors such as attitudes values and beliefs are
easily-recognised and embedded into the way that a business operates
Businesses with strong cultures are likely to possess a range of visual features and norms
Visual Features & Norms Visible in a Business with a Strong Culture
Visual Features Norms
Business specific artefacts e.g. uniforms Core organisational values e.g. staff
A well know figurehead as a role model wellbeing
Ceremonies, rituals and customs e.g. Workplace procedures e.g meeting
awards evenings etiquette
Layout of business premises e.g. open Business specific language e.g. calling
plan offices workers 'team members' or 'partners'
The training culture e.g induction and on- Repeating stories that focus on business
going values and history
Decision making approach
In businesses with a strong culture it is likely that employees

Have a 'can do' attitude and are enthused by their work
Have a strong belief that the business is a force for good
In a business with a weak culture, these signs may be difficult to identify

A 'them and us' attitude may exist between workers and management
Employees may doubt the sincerity of the corporate mission
High levels of staff turnover and low commitment amongst staff may exist
Page 76 of 138
Classification of Company Cultures YOUR NOTES

Charles Handy identifies four types of organisational culture 
Charles Handy's classification of organisational cultures
In a power culture decision-making is carried out by one or a small number of powerful

individuals usually at the top of the business hierarchy
Few rules exist to determine decision-making procedure
A competitive atmosphere between workers vying for power
Most communication is by personal contact
It is argued that Alan Sugar's Amstrad adopted a power culture with Sugar as its
powerful decision-maker
In a role culture key decisions are made by those with specific job roles
Power lies with those with particular job titles rather than those with desirable skills
There is usually a very clear hierarchical structure
Employees are expected to adhere to rules and understand their place in the
hierarchy
Businesses with role cultures may find it difficult to adapt to rapidly changing market
conditions
Very large organisations in the public sector such as the NHS are usually considered to
have a highly structured role culture
In a task culture decisions are made by teams made up of employees with specific skills
Power lies with those with task-related skills (e.g. a finance specialist may make
decisions related to funding within the group)
Page 77 of 138
Teams are created and dissolved as projects are started and completed YOUR NOTES
There is an emphasis on adaptability and team-working 
PepsiCo is in example of a business that has a task culture
In a person culture individuals with extensive experience and skills are loosely brought
together
These individuals have significant levels of power to determine their own decision-
making procedures and often work autonomously
Organisations with person cultures are very common in professional services such as
accountancy and law
Page 78 of 138
How Corporate Culture is Formed YOUR NOTES

Corporate culture generally forms over time especially as a business grows 
A range of factors contribute to the formation of a corporate culture
Factors contributing towards the formation of business culture
A leader's attitude can have a significant impact upon the culture that forms within an
organisation
E.g. the founder of Superjam developed his business idea with his grandmother and he
has been determined to contribute to the wellbeing of senior citizens as his business
has grown
Some businesses adopt particular human resources policies that shape the makeup of its
workforce
E.g. Timpsons actively recruits prisoners approaching the end of their custodial
sentence
The provide extensive training and support and in return there is a culture of
loyalty amongst its staff, grateful at being given a 'second chance'
The ownership type of a business can influence the business culture
Large public limited companies are likely to adopt a stakeholder approach, focusing
on meeting the short-term profit maximisation needs of shareholders
Family-owned businesses are more likely to take a longer-term approach, focused
on the longevity of the business and perhaps a wider range of stakeholder needs
Factors such as the type of product, the environmental factors the business faced when
it was created and the market in which it operates can all influence the corporate culture
Page 79 of 138
that develops YOUR NOTES


Page 80 of 138
Difficulties in Changing an Established Culture YOUR NOTES

From time to time it may be appropriate and desirable for a business to make changes to its 
culture so as to:
Increase productivity
Improve innovation and creativity
Face a particular challenge
Follow the direction of a new leader
Changing an established culture is a very difficult task for a number of reasons
Factors that Cause Difficulties in Changing Established Organisational Cultures
Difficulty Explanation Example
Identifying Identifying the various UK train companies plan to

contributing factors elements of an remove guards to save salary
organisation's culture can costs
take time and significant A change like this is likely to
insight to fully understand negatively impact
passenger wellbeing and
lead to weaker customer
service
Train guards have been
recognised as positively
contributing to company
culture
The existence of sub Changes to visual elements New headteachers often

cultures such as uniforms logos and change uniforms or policies
mission statements is a
relatively straightforward They may not be aware of staff
task attitudes towards
management and these may be
The impact of unofficial much harder to recognise and
subcultures such as always change
undermining management
decisions can be harder to
change
Page 81 of 138
Overcoming resistance Any change process is Executives at Royal Mail have

YOUR NOTES
to change uncomfortable and requires been hampered in their 
employee buy in attempts to change working
practices and norms within the
This requires careful business as they have not
communication in order for gained employee buy in to the
commitment to that change process and their approach
to be achieved and communication to
employees has been poor
 Exam Tip
Case studies contain lots of clues about a firm's culture
Look for signs of a strong or weak culture - for example
Does the business have a clear figurehead?
Is there a particular way that the business carries out its activities?
Are there obvious guiding principles?
Are there visible signs of a culture - e.g branding, uniforms?
The more clues you can identify, the more likely the business has a strong culture -
but
Do negative subcultures exist?
Is communication effective?
Is everyone 'on board'?
Page 82 of 138
3.4.3 Shareholders Versus Stakeholders YOUR NOTES


Internal & External Stakeholders
Stakeholders are individuals or groups that affect or are affected by the actions of a
business
A business needs to take into account the needs and interests of its stakeholders in
order to operate successfully and ensure long term success
Internal stakeholders are individuals or groups inside the business

Employees
Managers and Directors
Business owners
External stakeholders are individuals or groups outside of a business

Customers
Shareholders
Creditors
Suppliers
The local community
Local and national government
Pressure groups
Page 83 of 138
Stakeholder Objectives YOUR NOTES

Stakeholders can have different objectives based on their different roles and 
perspectives
A business needs to take into account the needs and interests of its stakeholders in order
to operate successfully and ensure long term success
The Different Objectives of Internal Stakeholders
Stakeholder Objective Example
Owners Owners may be sole traders, a E.g the owner of a small building
partner in a business or a business may want it to provide a
shareholder in a private limited job and income
company The owner may also have the
Owners are likely to work within the aim of passing the business on
business as well as own it and so to a family member on
will be relying on the business to retirement
provide an income
They will want all, or a share of the
profit and will want the business to
be succeed
Employees Employees are individuals who E.g. Google employees in California

work for a company have some of the best working
Their primary objective is to earn a conditions in the world, with the
living, have job security and be Company offering sleeping pods,
compensated fairly for their work games rooms and free speciality
and have a safe working coffee all day
environment
Management Managers are individuals who are E.g. a manager of McDonald's may
responsible for the day-to-day want the restaurant to increase
operations of a company sales and reduce costs by
Their primary objective is to meet improving efficiency
the company's goals and
objectives
They want to maximise profits and
minimise costs while ensuring that
the company operates efficiently
The Different Objectives of External Stakeholders
Page 84 of 138
YOUR NOTES
Stakeholder Objective Example 
Customers Customers are individuals or E.g. a customer of Nike may want

businesses who purchase the company to provide high-
goods/services from a business quality shoes at a reasonable price -
Their primary objective is to and to deal promptly with any
receive high-quality products or customer concern issues
services at a fair price
Customers also want good
customer service and a positive
experience with the company
Shareholders Shareholders are individuals or E.g. a shareholder of Apple may

entities who own a portion of a want the company to release new
company's stock products and increase sales to
They invest in the company with increase the value of their shares
the goal of making a profit
Shareholders' primary objective is
to maximise their returns on
investment
They want the company to be
profitable and generate a high
return on their investment
Suppliers & Suppliers and creditors are likely to E.g. an egg supplier is likely to value
creditors be one and the same a long-term supply contract with a
Their primary objective is for the leading supermarket even if the
business to pay what it owes price it receives for its eggs is low
promptly and in full because sales are guaranteed
Suppliers often want to be able to
establish long-term
arrangements with customers to
improve business stability
Page 85 of 138
The local The local community includes For example, Burnley Savings &
YOUR NOTES
community individuals and organisations that Loans Ltd (Bank of Dave) donates 
live or operate in the area where a all of their profits to local charities
business operates and good causes
Their primary objective is for the
business to have a positive
impact on the community
This may include the business
being environmentally
responsible, providing jobs,
and contributing to local
causes
Local and The government is responsible for E.g. the government may want a
national creating and enforcing laws and company to pay taxes, comply
government regulations that affect businesses with environmental regulations, and
Their primary objective is to create jobs
promote the public good and
protect the interests of citizens
The government wants companies
to operate within the law and
contribute to the economy
Pressure Pressure groups are organisations E.g. an animal rights group may
groups that seek to influence the policies want a clothing company to stop
and actions of businesses or using animal products in their
governments clothing
Their primary objective is to
promote a specific cause or
agenda
Pressure groups want the
company to support their cause or
take action on an issue
Page 86 of 138
Stakeholder & Shareholder Influences YOUR NOTES

A business can take a shareholder approach or a stakeholder approach in its business 
strategy
A stakeholder approach focuses on interdependencies between stakeholder groups and

take steps to ensure that the benefits and drawbacks of its operations are shared equally
amongst them
This is likely to decrease profits as competing stakeholder needs may require
solutions that involve increased costs (e.g. meeting employees' needs by paying
higher wages will increase salary costs)
The shareholder approach has often been used by large corporations and it is focused on
meeting the needs of shareholders
Maximising profits in order to increase dividends and improve the share price
The Stakeholder Approach

Increased media scrutiny of business operations has meant that it has become good
business practise to be socially responsible
A business that adopts a stakeholder approach
Recognises the impact it has on a range of stakeholder groups
Understands the impacts stakeholder groups can have on its operations
Communicates effectively with stakeholder groups
Tries to minimise the negative impacts of business operations on stakeholder
groups where possible
The Influence on Stakeholders and by Stakeholders
Examples of Business Influences on Examples of Stakeholder Influences on

Stakeholders Business
Page 87 of 138
If a business experiences financial Customers can influence product

YOUR NOTES
difficulties, shareholders may lose value in development and pricing through their 
their investments and employees may purchasing decisions and feedback
face job losses or pay cuts Employees can impact business activity
If a business is profitable, shareholders through their productivity, skills, and job
may benefit from increased dividends and satisfaction
employees may receive bonuses or Shareholders can impact business activity
promotions through their investment decisions and
Customers can be affected by business demands for returns
activity in terms of product availability, The local community can impact business
quality, and pricing activity through regulations and permits
The local community can be impacted by (from the local council), and social
the environmental and social impact of pressure
business operations, such as pollution or Pressure groups can impact business
job creation activity by lobbying for changes in policy
The government can be affected by or boycotting products
business activity in terms of tax revenue The government can impact business
and regulatory compliance (following the activity through taxes, regulations (laws),
laws) and subsidies
Page 88 of 138
The Potential for Conflict Between Stakeholders & Shareholders YOUR NOTES
There is significant potential for conflict between different stakeholders within a business 
and the shareholders
Shareholder Conflict Explanation Example
Shareholders & Shareholders aim to maximise the E.g. in 2022 postal

Employees return on their investment which workers were engaged in
usually requires the business to strike action against their
make as much profit as possible employer Royal Mail as
Employees aim for higher wages they objected to a range
and better conditions which is of changes being made
likely to increase costs and reduce to their pay and working
profits conditions intended to
boost profits
Shareholders & Customers aim for fair (or low) E.g. customers of UK
Customers prices as well as good customer energy suppliers have
service been concerned that
As shareholders demand high record-breaking
profits to achieve maximum shareholder dividends in
dividends there is pressure on a 2022 occurred at the
business to raise prices same time as consumer
prices rose by more than
60%
Shareholders & Management aims to run the E.g. in early 2023 large
Management business effectively and ensure it numbers of shareholders
pleases its shareholders of Boohoo voted against
Management may recommend management plans to
the decision to retain profits to boost executive pay at
invest and grow the business the same time as
rather than issue it to shareholders dividends fell by 85%
as dividends
Shareholders & Governments want businesses to E.g. large corporations

Government create good quality jobs, whilst such as Amazon and Shell
complying with laws and tax have been accused of tax
contributions avoidance through the
Shareholders are less interested offshoring of profit,
in job creation and more reducing the amount of
interested in profit maximisation corporation tax paid to
the UK government
Page 89 of 138
Exam Tip YOUR NOTES

 This topic is central to most of the other sections of the specification

The impact on stakeholders of any type of business decision provides an excellent

opportunity to develop chains of analysis and is also key to evaluation using MOPS
(Market, Objectives, Product, Situation)
Page 90 of 138
3.4.4 Business Ethics YOUR NOTES


Understanding Business Ethics
Ethics relates to the rights or wrongs of making a strategic decision that are beyond legal
requirements and in accordance with a businesses corporate responsibility principles
Some ethical businesses adopt an ethical code of practice which informs decision-
making and may set out how a they
behave responsibly with regards to the environment (for example, using recycled
materials in packaging)
avoids negative impacts on animals (e.g animal testing)
adopts fair working practices (e.g. paying a real living wage)
implements robust and equitable supply chains (e.g. using sustainably-sourced raw
materials in production)
takes steps to eliminate corruption (e.g. ensuring appropriate tax is paid in the
countries in which the business operates)
avoids controversial products or take steps to minimise their impact or access to
them (e.g. having strict verification procedures in place prior to cosmetic surgery
procedures being carried out)
ceases trading with questionable suppliers or customers (e.g. cancelling a supply
contract with a supplier that uses child labour)
Trade-offs between profit and ethics

Businesses will embed their ethical code of practice into every aspect of their operations
and ethical priorities will feature heavily in
Recruitment documentation and HR procedures
Induction and training programmes
Performance management cycles and rewards systems
Promotional literature and other communications
Page 91 of 138
YOUR NOTES

An extract from Intel's ethical code of conduct

(Source Intel)
Businesses that choose to adopt ethical principles usually attract long-term loyalty from
employees and customers and may find that their approach provides a useful
competitive advantage
Taking an ethical approach costs more and may reduce the overall level of profits if the
business is not able to raise their prices to compensate
Ethics in pay and rewards

Salaries, wages and other forms of financial reward (e.g. performance-related bonuses)
play an important role in
rewarding and motivating existing staff
attracting new employees
maximising productivity levels
Current Ethical Concerns with Regard to pay
The Gender Pay Gap Minimum Wages Executive Bonuses
Page 92 of 138
In the UK the gender pay Many businesses pay In 2022 the pay of CEOs of
YOUR NOTES
gap stands at around 10% workers the legally FTSE 100 companies 
which means on average required minimum wage jumped by an average of
women earn 10% less than To supplement their 25% largely as a result of
men per hour, despite 50- earnings many low-paid record bonus payments
year old Equal Pay workers are entitled to At the same time many
legislation benefits such as Tax businesses were
Unilever and Evans Credits which are a restricting pay increases
Cycles have taken steps significant cost to the for employees to help
to successfully eliminate economy them cope with increasing
the gender pay gap In 2015 more than levels of inflation
though Easyjet and £1bn in benefits was
fashion retailer Phase paid to workers of the
Eight have gender pay four largest UK
gaps of more than 50% supermarket chains
leading to
accusations that the
government
subsidises the profits
of big businesses
Ethics and corporate social responsibility

Corporate social responsibility involved conducting business activity in an ethical way
and balancing the interests of shareholders with those of the wider community
Examples of Socially Responsible Activities
Socially Responsible
Example
Activity
Sustainable sourcing of High street retailer H&M has a goal of using only recycled or
raw materials and sustainably sourced materials by 2030
components It also publishes a list of the majority of their supplier’s
information which is updated regularly, allowing stakeholders
to verify and hold the company responsible for their suppliers’
conduct
Page 93 of 138
Responsible marketing Marks and Spencer ensures that it never actively directs any
YOUR NOTES
marketing communications to children under the age of 12 
and does not directly advertise any products high in fat,
sugar or salt to children under the age of eighteen
Protecting the Cafe chain Prêt à Manger offers discounts to customers who
environment bring their own coffee cup, reducing the number of single-use
plastic containers it dispenses
Responsible customer John Lewis's famous 'Never Knowingly Undersold' slogan

service refers to the company's commitment to checking
competitor prices regularly to ensure that the price its
customers pay is the lowest available in the local area at that
time
It is now common practice for large companies to publish annual Corporate Responsibility
Reports which provide an audit of the steps being taken to meet their commitments to a
range of stakeholders alongside annual financial reports
Extra costs are involved in operating in a socially responsible way and these costs must be
passed on to consumers
The Benefits of CSR

CSR can enhance the business image and reputation
CSR is attractive to many stakeholders
CSR can be very profitable as it adds value for many stakeholders
CSR may improve employee motivation and productivity
CSR can help to recruit strong candidates for jobs advertised
CSR may help to solve social problems e.g. resource depletion
 Exam Tip
When assessing the value of an ethical approach to CSR, make sure you include an
assessment of the disadvantages too
Increases business costs as making the right decision is usually considered
above less expensive yet questionable options
Ethical businesses face high levels of media scrutiny and are likely to receive
particularly damaging criticism if they fall short
As much as leaders express a commitment to 'doing the right thing', their
ethical principles are very likely to be watered-down or dismissed in favour
of making as much profit as possible
Page 94 of 138
3.5 Assessing Competitiveness YOUR NOTES


3.5.1 Interpretation of Financial Statements
Using The Statement of Comprehensive Income

The Statement of Comprehensive Income is also known as the Profit and Loss Account
It shows the income and expenditure of a business over a period of time - usually a year -
and calculates the amount of profit made (see sub-topic 2.3.1)
An Example of a Statement of Comprehensive Income for Head to Toe Wellbeing Ltd
The extract from the statement of comprehensive income for Head to Toe Wellbeing Ltd
shows figures for both 2022 and the previous year allowing comparison over time
Stakeholder Interest in the Profit & Loss Account
The profit and loss account is a very useful source of information for stakeholders to
evaluate the performance of a business
1. Shareholders
Interested in profits earned, business growth and dividend payments
2. Employees
Interested in profits earned and potential for wage increases and job stability
3. Managers & Directors

Interested in key performance data such as an improvement in sales revenue and net profit
4. Suppliers
Interested in the continued success of the company the are supplying and this infromation
is also used by suppliers to determine the level of trade credit offered to businesses
Page 95 of 138
5. Government YOUR NOTES

Used to determine how much tax is payable 
6. Local community
Interested in the stability of the business and what this may mean for jobs in the community.
Another interest is to see if the firm is generating enough profit to perhaps approach them
for local sponsorship
Page 96 of 138
Using the Statement of Financial Position YOUR NOTES

The Statement of Financial Position contains the financial information required to draw 
conclusions about the liquidity of the business
Liquidity is the ability of a business to meet its short term commitments (e.g.
payments to creditors) with its available assets
A business that cannot pay its bills will usually fail very quickly, even if they are
profitable
Managing liquidity is a key way to manage risk in a business - and helps a business to
prepare for the unexpected
The Statement of Financial Position shows the financial structure of a business at a

specific point in time
It identifies a businesses assets and liabilities and specifies the capital (money) used
to fund the business
The Statement of Financial Position is also known as the Balance Sheet
An Example of a Statement of Financial Position for Packer Sports Ltd
Stakeholder Interest in the Balance Sheet
Page 97 of 138
Stakeholders will use the Balance Sheet alongside the profit and loss account to perform YOUR NOTES
ratio analysis and compare performance over time or with other businesses 
How Stakeholders use the Balance Sheet
Stakeholder Interest in the Balance Sheet
Shareholders Used to identify the asset structure of the business and how their
investment has been put to use
Used to calculate the working capital of the business and
determine its solvency
Used to determine the rough value of a business which helps a
judgement on whether their investment is growing
Managers & Used to identify the financial position of the business at a given
Directors point in time
Useful to assess the working capital position of the business and
determine if there are enough liquid current assets to pay its bills
Provides information on the capital structure of the business which
helps guide decisions on whether to raise further funds through
borrowing or via other means (e.g. share issue)
Suppliers & Used to judge the solvency of the business to determine the risk
Creditors when offering firms trade credit
Businesses with low levels of working capital may find it difficult to
pay short-term debts and so suppliers may offer trade credit, but
with stricter terms
Employees Is the business financially stable or are jobs at risk?

Has the businesses performance improved or worsened?
What is the business spending its money on?
How much are senior executives paid?
How much tax is the business paying?
 Exam Tip
Information found in the profit and loss account and balance sheet can be used in a
range of answers.
For example, if you are answering a question about sources of finance you might be
able to use the capital structure of the business to recommend whether a business
should borrow or look at an alternative source.
If a business already relies heavily on borrowing, it may be more sensible to
recommend seeking to raise more share capital.
Page 98 of 138
3.5.2 Ratio Analysis YOUR NOTES


An Introduction to Ratio Analysis
Ratio analysis involves extracting information from financial accounts to assess
business performance and answer key questions including
Why is one business more profitable than another in the same industry?
Is a business growing?
How effectively is a business using assets and capital invested?
What returns on investment are expected?
How risky is the financial structure of the business?
Information Extracted from the Profit & Loss Account and Balance Sheet for Ratio Analysis
Profit & Loss Account Balance Sheet
Revenue Current Assets

Cost of Sales Current Liabilities
Gross Profit Inventory (stock)
Operating Profit Trade Receivables
Profit for the Year (Net profit) Trade Payables
Long-term liabilities
Capital & Reserves
Ratio analysis supports evidence-based decision making, as it provides measurable data

that can be used to support judgements and compare performance against objectives
Page 99 of 138
YOUR NOTES

The Ratio Analysis Process
Page 100 of 138
Types of Ratios YOUR NOTES

The Gearing Ratio 
The gearing ratio shows the long-term financial structure of the business
It shows the balance of non-current liabilities (e.g. long-term loans) to shareholder
capital used to fund a business
The outcome is expressed as a percentage
The Gearing Ratio is calculated using the formula
Non Current Liabilities
Gearing Ratio = x 100
Capital Employed
Capital employed can be calculated by subtracting current liabilities from total assets
 Worked Example
The table shows an extract from the company accounts of Keals Cosmetics.
Current Assets £6.2 million
Current Liabilities £3.4 million
Non-current
£9.6 million
Liabilities
Capital Employed £43.3 million
Calculate the gearing ratio of Keals Cosmetics. (2 marks)
Step 1: Identify the data required to calculate the gearing ratio

Non-current liabilities = £9.6 million
Capital employed = £43.3 million
Step 2: Divide non-current liabilities by capital employed

£43.3 million ÷ £9.6 million = 0.22 (1 mark)
Step 3: Multiple the outcome by 100 and express the result as a percentage
0.22 x 100 = 22% (1 mark)
22% of Keals Cosmetics capital structure is made up of long-term loans
Return on Capital Employed (RoCE)

The Return on Capital Employed is also known as the Primary Ratio
Page 101 of 138
It compares the profit made by a business to the amount of capital invested in the YOUR NOTES
business 
It is a measure how how effectively a business uses the capital invested in the business
to generate profit
Return on Capital Employed is a key performance indicator that can be compared over
time and also with competitors and other potential capital investments
Return on Capital Employed is expressed as a percentage and can be calculated using the
formula
Operating Profit
Return on Capital Employed = × 100
Capital Employed
Page 102 of 138
YOUR NOTES
 Worked Example

The table shows an extract from the company accounts of Keals Cosmetics.
Non-current Liabilities £1.5 million
Revenue £7 million
£15.4
Total Assets
million
Operating Profit £2.2 million
Calculate Keals Cosmetics' Return on Capital Employed. (3 marks)
Step 1: Calculate the capital employed

Capital employed = Total assets − noncurrent liabilities
Capital employed = £ 15 . 4m − £ 1. 5m (1 mark)
Capital employed = £ 13 . 9m
Step 2: Divide Operating Profit by Capital Employed

Operating Profit
Return on Capital Employed =
Capital Employed
£ 2. 2m
Return on Capital Employed = (1 mark)
£ 13 . 9m
Return on Capital Employed = 0. 16
Step 3: Multiply the result by 100 and express the outcome as a percentage
0.16x 100 = 16% (1 mark)
The capital employed in Keals Cosmetics has generated a return of 16%
Page 103 of 138
Interpreting Ratios to make Business Decisions YOUR NOTES

The Gearing Ratio 
The Gearing Ratio is used to examine the capital structure of a business
It compares the amount of capital raised from shareholders with capital raised from
loans and other forms of long-term borrowing to show the proportion of business assets
that are financed by long-term borrowing
In short it shows how reliant a business is upon borrowed money
Highly geared business

In a highly-geared business more than 50 per cent of its capital employed are long-term
loans
The outcome of the gearing ratio calculation will be greater than 50 per cent
Substantial levels of interest will need to be paid on this high level of borrowing which
means
The level of profit available to pay as dividends to shareholders is reduced
Profit available to retain within the business is limited
The business is likely to be considered a risk for further investment
It is also likely to face difficulties in raising further loan capital
Steps to reduce the gearing

A highly-geared business may take steps to lower its ratio by
Issuing more ordinary shares to create further share capital
Retaining more profits to avoid further borrowing
Repaying loans to lower interest costs for the business
Low geared business

A low-geared business has less than 50 per cent of its capital employed as long-term
loans
The outcome of the gearing ratio calculation will be less than 50 per cent
The business may be missing out on the opportunity to access finance without the
need to dilute existing shareholders' control
This is especially true when interest rates are very low as has been the case in the UK
over the last 15 years
Lenders such as banks are more likely to approve loan applications from low-geared
businesses
An unwillingness to access loan capital may indicate a risk-averse business which
may deter investors
Steps to increase the gearing

A low-geared business may take steps to increase its ratio by
Buying back ordinary shares to reduce share capital in relation to borrowing
Issue more preference shares with limited loss of control
Page 104 of 138
Obtain more loans YOUR NOTES


 Worked Example
Catseye Pressings Ltd is considering making an application for a long-term loan to
purchase a new storage facility.
The table shows extracts from its balance sheet.
Non-current Assets £16.40m£
Current Assets £3.62m
Current Liabilities £2.18m
Non-current Liabilities £5.75m
Calculate Catseye Pressings Ltd's gearing ratio and advise whether an application
for a loan is likely to be approved on this basis. (5 marks)
Step 1: Calculate the capital employed

Capital employed = Total assets − current liabilities
Capital employed = ( £ 16 . 40 m + £ 3. 62 m ) − £ 2. 18 m (1 mark)
Capital employed = £ 17 . 84 m
Step 2: Apply the formula to calculate gearing

Non Current Liabilities
Capital Employed
£ 5. 75 m (2 marks)
£ 17 . 84 m
Gearing Ratio = 32 . 23 %
Step 3: Identify whether the loan application is likely to be approved

The loan application is likely to be approved as Catseye Pressings Ltd is a low-
geared business and thus a relatively low-risk to lenders. (2 marks)
Interpreting Return on Capital Employed (RoCE)

RoCE measures how well a business generates profit from the funds invested in the
business
The rate differs between industries so comparison across sectors is not recommended
However it can be compared with other forms of return such as interest rates on savings
and with other businesses within the same industry
Page 105 of 138
RoCE can be used to support strategic decisions (e.g. investment or divestment YOUR NOTES
decisions) to determine the most profitable option given the level of capital employed 
With RoCE the higher the rate the better as it indicates that the business is profitable and
using its capital efficiently
Investors prefer businesses with stable and rising levels of RoCE as this indicates
low-risk growth is being achieved
A ROCE of at least 20 per cent is usually a good sign that the company is in a good
financial position
To increase the RoCE level a business can

increase the level of profit generated without introducing new capital into the
business
maintain the level of profit generated whilst reducing the amount of capital in the
business
Page 106 of 138
YOUR NOTES
 Worked Example

Faced with increasing costs Kent & Medway Properties Ltd is looking to close one
of its three high street estate agency branches.
The table below shows some key data for each of the branches.
Capital Operating
Branch
Employed Profit
Sevenoaks £2.4m £0.37m
Whitstable £3.1m £0.57m
Rochester £2.9m £0.51m
Calculate the Return on Capital Employed (RoCE) for each branch and recommend
which branch, on profitability terms, should close. (5 marks)
Step 1: Apply the formula to calculate the RoCE for each branch
Operating Profit
Return on Capital Employed = × 100
Capital Employed
£ 0. 37 m
Return on Capital Employed Sevenoaks = × 100 = 15 . 42 % (1 mark )
£ 2. 4m
£ 0. 57 m
Return on Capital Employed Whitstable = × 100 = 18 . 39 % (1 mark )
£ 3. 1m
£ 0. 51 m
Return on Capital Employed Rochester = × 100 = 17 . 59 % (1 mark )
£ 2. 9m
Step 2: Identify the least profitable branch for closure

Sevenoaks is the least profitable branch with a RoCE of 15.42% and should be
the branch selected for closure. (2 marks)
Page 107 of 138
Exam Tip YOUR NOTES

 When calculating financial ratios check that you are using the correct units.

In some cases financial data is presented as raw figures (e.g. £14,520) but in most
cases you will be working in thousands (£000) or millions (£m).
Ensure that you convert correctly e.g. £0.39m is equal to £390,000 and £34.9
(000) is equal to £34,900
Make sure the decimal place is in the correct place
Calculate to two decimal places unless stated otherwise
Page 108 of 138
The Limitations of Ratio Analysis YOUR NOTES

There are some drawbacks of using ratio analysis which businesses need to be aware of 
The Limitations of Ratio Analysis
Limitation Explanation
Making Comparisons It is important to compare like for like

Over time the nature of a business can change affecting the
desired level of ratio
E.g. a business may diversify into a less competitive
industry where higher levels of RoCE may be expected
Comparisons between firms are only meaningful where

significant similarities exist (e.g. same industry, similar size,
comparable products)
E.g. a high street jewellery business will have very
different working capital needs to those of a fast food
outlet and their profit margins will differ
Quality of Accounts Accounts may have been legally window dressed

(manipulated) to present a particular financial picture.
Examples of this include
Bad debts can be written off
Property can be revalued
Income and costs may be reported during an earlier or
later reporting period (e.g. payments to suppliers may be
delayed to maximise the level of current assets
Window dressing will have an impact on the quality of ratio

analysis calculations
Balance Sheet Limitations As a 'snapshot' of a businesses assets, liabilities and capital

at a specific point of time the balance sheet may not be
representative of its usual circumstances
E.g. a balance sheet may be completed one day before a
business sells a large amount of stock or buys a new
property, rendering current and non-current assets
figures invalid almost immediately
Page 109 of 138
Qualitative Information As ratios only use numerical data from a businesses

YOUR NOTES
accounts key qualitative factors that affect its performance 
are ignored
E.g. the collapse of a competitor may lead to increased
sales revenue and profit
Increased profit increases the RoCE without any strategic

decisions being made
Despite these limitations, ratio analysis is used by a wide range of internal and external
analysts to assess the performance of companies
Venture capitalists and other investors use ratios to support their analysis when they
consider investing in or lending to businesses
Banks and insurance providers will use ratios to determine the level of risk a business
presents and determine the products to which it may be suited
Investment analysts and journalists make use of ratio analysis to report to clients
and the media in easy-to-digest terms
 Exam Tip
Calculating ratios is straightforward - the real skill is in the interpretation of results
and making recommendations.
If a business is highly-geared, further borrowing is likely to be neither attractive nor
possible in most cases. That's quite a simple analytical point.
However, it may be possible to further develop this analysis
For example, in a time of very low interest rates, maximising borrowing to take
advantage of cheap finance may be preferable to diluting the control of existing
shareholders by issuing further share capital. Now you have evaluation because
you've considered both sides of the argument.
If you find evidence in the case study that indicates that shareholders would be
unhappy with this dilution of control then you have a balanced, applied piece of
evaluation.
Page 110 of 138
3.5.3 Human Resources YOUR NOTES


An Introduction to Human Resources
In common with all resources a businesses employees - its human resources - need to be
managed
Staff costs can make up a large proportion of a businesses costs so objective monitoring
of employee performance is a key element of effective financial and operational control
Businesses commonly monitor the following human resources metrics

Labour productivity
Labour turnover
Labour retention
Absenteeism
Page 111 of 138
Labour Productivity YOUR NOTES

Labour productivity is a measure of output per employee 
It is calculated using the formula
Total Output
Labour Productivity =
Average number of employees
Figures used in this formula are for a specific time period (e.g. a week, month or year)
Businesses aim to increase the level of labour productivity to improve competitiveness
Higher labour productivity improves businesses competitiveness
Page 112 of 138
YOUR NOTES
 Worked Example

Last year Marinka Homewares made 424,000 lava lamps with a production
workforce of 350 employees. This year it forecasts that 480,000 lava lamps will be
made with a production workforce of 365 employees.
Calculate the percentage increase in annual labour productivity per worker
between last year and this year's forecast. (4 marks)
Step 1: Apply the labour productivity formula to calculate the labour

productivity for both years
Total Output
Labour roductivity =
Average number of employees
424 ,000
Labour Productivity last year = = 1,211 units per employee (1 mark )
350
480 ,000
Labour Productivity last year = = 1,315 units per employee (1 mark )
365
Step 2: Calculate the percentage increase between last year and this year
( new value − old value )
Percentage change = x 100
old value
( 1,315 − 1,211 )
Percentage change = x 100 (1 mark )
1,211
104
Percentage change = x 100 = 8. 59 % (1 mark )
1,211
Page 113 of 138
Labour Turnover and Retention YOUR NOTES

Labour turnover measures the proportion of employees leaving a business during a 
specific time period
It is expressed as a percentage and is calculated using the formula
Number of Staff Leaving

Labour Turnover = × 100
Average Number of Staff
A rising rate of labour turnover can signal internal human resource management problems
such as
Poor management leading to workers losing commitment
A poor recruitment and selection approach leading to staff leaving soon after
starting their job
Low wage levels compared to those that could be earned elsewhere
External factors can also increase labour turnover in a business

A buoyant local economy where workers are attracted to employment
opportunities elsewhere
Improved transport links that provide an opportunity for workers to seek work across
a wider geographical area
The Consequences of high Labour Turnover
Problems Opportunities
Increased recruitment and selection Workers with existing skills can be

costs recruited to reduce the need for training
Increased induction and training costs New ideas and creativity introduced to the
business
Lower productivity levels as workers settle
into new roles New perspective and approaches to
problem-solving can improve business
performance
Page 114 of 138
YOUR NOTES
 Worked Example

In 2022 Domus Construction Ltd employed an average of 7,200 workers, six per
cent of whom worked at the head office.
During 2022 fifty-four head office employees left the business.
Calculate the labour turnover of Domus Construction's head office in 2022. (3
marks)
Step 1: Calculate the number of head office workers

0.06 x 7,200 = 432 workers (1 mark)
Step 2: Apply the labour turnover formula
Number of Staff Leaving

Labour Turnover = × 100
54
Labour Turnover = = 0. 125 × 100 = 12 . 5 % (2 marks )
432
Labour Retention
Labour retention measures the proportion of employees remaining with a business
during a specific time period
Number of Staff Remaining

Labour Retention = × 100
A high level of labour retention means that few staff are leaving the business during a
given period
Page 115 of 138
YOUR NOTES
 Worked Example

In 2022 the University of West Surrey employed an average of 4,240 employees,
265 of whom left the university during the year.
Calculate the University of West Surrey's staff retention rate in 2022. (2 marks)
Step 1: Calculate the number of employees not leaving

4,240 - 265 = 3,975 (1 mark)
Step 2: Calculate the retention rate using the formula

Number of Staff Remaining
Labour Retention = × 100
(1 mark)
3,975
Labour Retention = = 0. 9375 × 100 = 93. 75%
4,240
Page 116 of 138
Absenteeism YOUR NOTES

The absenteeism rate is a measure of the proportion of staff were absent from work 
during a specific period of time (e.g. a day, week or month)
Number of staff absent

Absenteeism rate = × 100
Number of staff employed
High levels of absenteeism can cause several problems for a business, including
Absence due to illness requires sick pay to be paid
Hiring temporary staff to cover for those absent increases costs
Output is likely to be temporarily reduced if staff are key to production process
Other staff may become demotivated if they have to constantly cover for absent
workers
A wider culture of absenteeism may develop
 Worked Example
On January 16th twenty-two of Belling Stoneworks Ltd's 189 employees were
absent.
Calculate Belling Stoneworks Limited's absenteeism rate on January 16th. (2
marks)
Step 1: Substitute the values into the formula

Number of staff absent
Absenteeism rate = × 100
Number of staff employed
22
Absenteeism rate = × 100 (1 mark )
189
22
Absenteeism rate = × 100 (1 mark )
189
Page 117 of 138
Human Resources Strategies to Improve Employee Performance YOUR NOTES

Raising the labour productivity rate as well as reducing staff turnover and absenteeism 
rates are key human resource management objectives
Increased labour productivity will lower the labour cost per unit and contribute to
improved competitiveness
More output will be produced so there is more output to sell - potentially increasing
revenue
Money is saved on recruitment, selection and training costs and a positive group
spirit may emerge
Strategies to Improve Employee Performance
Strategy Explanation
Offering financial rewards such as Paying workers more or sharing profits may
Increased pay rates increase commitment and effort leading to
Profit share schemes higher output and productivity
Bonuses and Commissions
Performance-related pay If financial rewards are greater than those of other
Attendance rewards employers staff are less likely to want to leave
Loyalty bonuses Bonuses and commissions are only paid when
they have been earned or if targets have been
met
Attendance and loyalty rewards may improve the

intrinsic motivation of workers as they feel valued
Offering employees shares in the Rewarding senior executives and managers with
company shares may increase their commitment to
achieving objectives
Employees who own shares in the business may

work harder and take less time off as they have a
financial stake in the success of the business
Consultation Consultation involves managers obtaining the

views of employees when making decisions
Workers are likely to feel more involved within the

business and may be less likely to take days off
work or leave the business
Page 118 of 138
Empowerment Empowerment involves providing employees with

YOUR NOTES
autonomy and responsibility to make their own 
decisions and work on their own behalf
Employee are encouraged to make use of their

own knowledge and experience and develop
their own solutions
Workers must be properly trained and equipped

with the necessary resources to be properly
empowered
Leaders need to be prepared to hand over

authority and focus on providing encouragement
praise and feedback
Page 119 of 138
3.6 Managing Change YOUR NOTES


3.6.1 Causes & Effects of Change
Causes of Change
Businesses operate in a continuously changing business environment
Changing internal factors such as business growth, new business ownership or
internal restructuring
Changing external factors such as changes to the market or technological
advancements
Whilst consistency or a lack of change might be an easy option most businesses will find it
difficult to maintain a competitive edge without planning for and responding to change
Internal Causes of Change
Cause Explanation
A change in business size Businesses are likely to grow organically as they sell
more products
They may create or expand functional areas, open new
premises or introduce new levels of supervision
An increase in size may also come about when a firm

merges or takes over another business
Workforces, resources and capital will need to be
integrated and systems are likely to need to be
streamlined
A business may also become smaller as a result of

divestment or as a result of market pressures
Redundancies and the sale of assets may be required
or workers may need to transfer to other parts of the
business
Page 120 of 138
Poor performance A period of poor performance may mean that a business

YOUR NOTES
makes changes to its leadership team in order to pursue a 
new direction
E.g. after a run of 11 defeats in 14 games Frank Lampard
was sacked as the manager of Everton Football Club
in early 2023. The team went on to win its next game
against league leaders Arsenal
Change following poor performance needs to be swift to

avoid problems setting in such as the potential loss of
customers and reputational damage
New ownership A change in ownership can bring significant change to the

overall aim and objectives of the business
A new owner is likely to bring new policies, attempt to
make changes to a businesses culture and is likely to
bring key personnel to implement these changes
Transformational leadership In some cases change can only be brought about by a

transformational leader with a new strategic direction
and vision for the business
Extensive changes are likely to be made to the
businesses aims, objectives, structure and culture
Business restructuring Changes to the structure of a business may be required as

a result of expansion or contraction of the business
Restructure may also be needed when a business enters a

new market, changes its scope of operations or when it
integrates with another business
E.g. as Frasers Group Plc has taken over a string of
struggling high street brands such as Debenhams and
Missguided, significant changes have been made to
the managerial and operational structures of the
business to reduce functional duplications and costs
External change happens all the time and in many cases businesses can make plans to
respond if they keep a close eye on PESTLE factors (see sub-topic 3.1.4)
External Causes of Change
Page 121 of 138
YOUR NOTES
Cause Explanation 
Changes in the market A new competitor may enter the market or existing
competitors may change their strategy
E.g. in the UK established supermarkets such as Tesco
and Sainsbury have responded to new discount
entrants Aldi and Lidl by focusing on low prices and the
opening of smaller stores
Social change Long-term changes to consumption habits as a result of

social change can require a business to refocus business
strategy
E.g. as the UK has an increasingly diverse population
food retailers now sell a wide range of world foods and
related products
Political change Periodic change in political leadership can require both

short-term and longer-term business response
E.g. the Conservative's government's 2015 election
pledge to hold a referendum on the UK's membership
of the EU has had a significant impact on business,
especially for those involved in the import and export
of goods to and from the EU
Economic Change Economic growth or contraction can impact on demand

for goods and services and can be difficult to predict
E.g. poor UK growth in recent years combined with
more recent high inflation has squeezed household's
disposable income and led to significant change in
consumers' purchasing priorities
Technological Change Technological change has been particularly rapid over the
last few decades, creating significant opportunities but,
also, a need for businesses to adapt
E.g. the growth in online retailing has allowed even the
smallest of businesses to reach a larger number of
customers though traditional high street retailers have
needed to adapt supply chains and invest significantly
in logistics to be able to meet demand
Page 122 of 138
Legal Change Changes to the laws affecting businesses often

YOUR NOTES
accompany political change and require adaptation and 
compliance
E.g. the 2007 law banning smoking in indoor public
spaces meant that many hospitality businesses such
as pubs and restaurants were required to make
adaptations to their premises such as constructing all-
weather outdoor facilities
Environmental Change Environmental change is increasingly associated with

political change and subsequent changes to the law
In recent years numerous environmental issues have
emerged and, increasingly, consumers expect businesses
to respond to their concerns, even if they are short-lived
E.g. in response to environmental concerns about the
impact of single-use plastics the UK government
introduced the 'bag tax' in 2015 leading to a 97%
reduction in their use and the development of a wide
range of innovative alternatives such as the corn
starch bags provided by The Cooperative Group to
shoppers
Page 123 of 138
Possible Effects of Change YOUR NOTES

Change can have significant effects in the business on the following: 
competitiveness
productivity
financial performance
stakeholders
Possible effects of change on competitiveness

Change as a result of some internal factors (e.g. following poor performance or the arrival of
a new leader) can be rapid and can lead to swift improvements in competitiveness
Change as a result of external factors is more likely to be gradual and involve a business
carefully selecting and pursuing an appropriate long-term competitive strategy ( see
Porter sub-topic 3.1.2)
Research suggests that change has an overall positive effect on business

competitiveness when it brings management and engaged employees together and their
efforts are coordinated
Possible effects of change on productivity

In the short-term, as change is being implemented and employees get used to new
processes, surroundings, leadership or a new product, productivity is likely to be reduced
Once changes are embedded, productivity is likely to return to earlier levels and possibly
improve - especially if new technology is part of the change
During periods of external change businesses may endure a period of unstable levels of
productivity and must take steps to manage capacity utilisation and unit costs
Possible effects of change on financial performance

In the short-term, the implementation of change can be very expensive for several
reasons
Organisational restructure may involve significant redundancy payments as well as
recruitment and training costs
Market research and product development require investment
Attracting transformational leadership to key roles will require attractive salaries to
be offered
Public relations and promotional activity may be needed, especially where change is
implemented a result of poor performance
New strategies are likely to involve capital expenditure
In the longer term, financial performance is likely to improve as change becomes the new
way of working and teething problems are overcome
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Possible effects of change on stakeholders YOUR NOTES

Change can have predictable as well as less obvious impacts on the range of 
stakeholders
Some changes such as seasonal fluctuations or cyclical economic factors can often be
planned-for and their impacts on stakeholders considered in advance
E.g. increased orders for barbecue products are very likely to be placed during the
warmer summer months which a supermarket will be able to liaise with suppliers
ahead of time
A sudden 'cold snap', on the other hand, is likely to be difficult for many fashion
retailers as they operate on a seasonal basis - customers may well be disappointed if
they are unable to source warm clothing
Significant long-term change is likely to involve a wide range of stakeholders at some
level
E.g. following its takeover by Frasers Group Plc, Debenhams stores were closed and
the brand moved online
This had far-reaching impacts on Debenhams' product range, organisational structure
and supply chain
Thousands of employees were made redundant, rapid change made to the
management structure, existing supply agreements were cancelled and new
suppliers appointed
Local councils were faced with large empty premises in prominent high street
locations, impacting on the retail environment in their towns as well as reducing
income from business rates
 Exam Tip
The concept of change is rarely examined as a topic in its own right, yet
understanding its implications and understanding how businesses and their
stakeholders plan and respond to change is vital.
Some of the following questions may be useful when considering changing external
factors or strategic change coming from within the business
Does the change pose a threat or present an opportunity to the business?
What can the business do to manage the threat or exploit the opportunity?
How can competitive advantage be retained or created as a result of change?
How are stakeholders likely to respond to the change?
How may the problems changes cause to stakeholders be mitigated?
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3.6.2 Key Factors in Change YOUR NOTES


An Introduction to Change Management
Effective change management involves the identification, organisation and
implementation of new methods of working to a business
Several factors will have an impact on how successful change can be implemented
Factors affecting business change
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Organisational Culture YOUR NOTES

To successfully implement change leaders must understand the culture of their 
organisation and work to align it with the desired changes
The way employees and leaders perceive change and their willingness to embrace it can
be heavily influenced by the organisational culture within a business
If the culture is one of routine and predictability employees may be hesitant to
embrace new processes and procedures
An innovative and flexible culture may mean that employees are more receptive to
change
How effectively change is communicated to employees is related to a businesses culture
In an open culture communication channels are more likely to be clear frequent and
effective
In a hierarchical culture communication may be limited and information may not be
easily accessible to all employees
A strong organisational culture can support employee engagement and ownership of

change
When employees feel valued and are part of a supportive culture they are more likely to
embrace change and work together to implement it successfully
Organisational culture can affect the adaptability of a business

A culture that values continuous learning and improvement is more likely to adapt
quickly to changes in the external environment
A culture that is resistant to change may struggle to adapt to new circumstances
Size of the Organisation

The size of a business can affect its ability to implement change
Larger organisations usually have complex structures which can make change more
difficult to implement
Communication is often more challenging due to the sheer number of people
involved
The larger the organisation, the more difficult it can be to communicate changes
effectively and ensure that everyone is on the same page
Larger organisations may have complex decision-making processes that can slow
down the implementation of change
With more layers of hierarchy, there may be more people involved in decision-making
which can lead to delays
There may be many people who are resistant to change and it can be more difficult to
address their various concerns
Larger businesses often have more resources available to support change initiatives such
as financial resources, technology and experienced staff
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Pace of Change YOUR NOTES

It's important to find a pace for change that is appropriate for the situation and which 
takes into account the needs and concerns of all stakeholders involved
If the pace of change is too fast

It can create resistance from overwhelmed workers who feel unprepared and that they
don't have enough time to adjust
It may not be properly thought through or planned, resulting in poor execution
It may be difficult to communicate effectively to all stakeholders leading to
misunderstandings and confusion
If the pace of change is too slow it can result in

A lack of adaptability and innovation
A loss of momentum leading to delays or even the abandonment of the change
Communication efforts becoming stagnant leading to disinterest and disengagement
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Resistance to Change YOUR NOTES

Businesses attempting to implement change are likely to face resistance from a range of 
stakeholders
Stakeholder Resistance to Change
Stakeholder Reasons for Resistance
Employees Employees may worry about how the change will affect their job
security or work environment
Employees may not understand why the change is needed or what the
expected outcomes are
Employees may be used to doing things a certain way and may be
reluctant to learn new skills
Owners Owners may fear that changing their current processes may cause
disruption to their daily operations and affect productivity
Owners may be reluctant to agree to these costs especially if they

involve a personal financial or time commitment
They may prefer to maintain the status quo rather than taking risks that
could potentially harm their business
They may not fully understand the benefits of the proposed changes or
lack the knowledge or expertise to implement them effectively
Customers Customers may be hesitant to try something new or unfamiliar

Changing to something new can be uncomfortable or even
intimidating
They may fear losing something they value
For example, if a new product or service replaces an existing
one, customers may worry that the new one won't be as good
or that they will lose features they like
Sometimes customers may simply be used to buying certain products

or accessing a service in a particular way and don't want to make the
effort to change
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Suppliers Suppliers may be reluctant to change their processes or systems

YOUR NOTES

They may be worried that the change will lead to a decrease in
quality or additional costs
They may have invested a significant amount of time, money and
resources in their current systems and are hesitant to abandon them
Suppliers may not have the necessary expertise or knowledge to
implement new systems or processes
Managing resistance to change
Managing resistance to change requires a thoughtful and strategic approach that takes
into account the concerns of key stakeholders
Clear communication is essential when introducing change in a business

The reasons behind the change and the benefits that the change will bring
Communicated in multiple ways such as emails meetings presentations and one-on-
one conversations
Involving stakeholders in the change process can help to build buy-in and support for the
change
Employees who are involved in the process are more likely to embrace the change and
feel a sense of ownership over it
Open dialogue and feedback throughout the process with all key stakeholders is
essential
Providing training and support will help employees adapt to the new changes and learn
new skills and technologies
Identifying and address stakeholder concerns is vital
Realistic expectations about the change should be set
Successes and milestones should be celebrated along the way
 Exam Tip
Try to consider the following when answering questions about organisational
change
What is driving the need for change? Internal factors? External factors?
How is the change to be implemented?
What outcome is expected or hoped-for as a result of the change?
Which factors will have the greatest impact upon the success of the change?
All of these questions should be answered with explicit reference to the scenario
provided. Every organisation approaches, implements and experiences change in
different ways as a result of the unique set of influencing factors they face.
Page 130 of 138
3.6.3 Scenario Planning YOUR NOTES


Using Risk Assessment to Identify Risks
Scenario planning is the process of anticipating possible changes in a business’s situation
and devising ways of dealing with them
This risk assessment is where a business identifies, evaluates and prioritises risks
and the precautions that may be taken to protect against them
Hazards commonly covered by business risk assessments
Natural disasters
Natural disasters are often unpredictable but impact can be so devastating to business
operations that they are a common element of risk assessment
Identify the types of natural disasters that could be expected to occur in a particular
area
Assess the potential extent of the impact of a natural disaster on the business and its
assets
Estimate the likelihood of a natural disaster occurring and the potential magnitude of
its impact
Identify and implement measures to reduce the risk (e.g. evacuation plans)
For example 2022's Storm Eunice caused significant disruption to transport networks and
damage to commercial property across England and was followed by a period of flooding
that closed hundreds of businesses
IT systems failure
Information technology systems are used extensively by most businesses and an IT
systems failure can have a devastating effect on a businesses ability to carry on operating
normally
Business IT systems are at risk for a variety of reasons, such as
Page 131 of 138
Malware (e.g. viruses) can infect a business's IT system and cause significant YOUR NOTES
damage including loss of data and system downtime causing financial loss 
Phishing involves cybercriminals tricking employees into giving away sensitive
information such as login or financial details
A data breach occurs when sensitive or confidential data is lost due to a cyberattack,
human error or negligence
Downtime is when a system or application is unavailable as a result of hardware or
software failures, power outages or cyberattacks
Insider threats come from within an organisation and can include

Employees who intentionally or unintentionally cause harm to the business's IT
systems
Stealing sensitive information or causing a system outage
Employees who are not properly trained or aware of cybersecurity best practices
can pose a significant risk to the security and integrity of a business's IT systems
Loss of key staff

Losing key members of staff can cause difficulties especially if they are unplanned (e.g. as
a result of sudden illness or incapacity)
Loss of experience and knowledge can impact on a businesses competitive edge
Losing a figurehead or influencer can affect the morale of remaining employees as well as
the culture and direction of the business
Business contacts and relationships with customers and suppliers may be lost
 Exam Tip
As well as carrying out detailed risk assessments, many businesses also plan for
those uncertain events that can bring opportunities in a wider exercise known as
scenario planning.
These businesses are in a good position to respond swiftly to external factors that
operate in their favour as they have weighed up the various options in advance.
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3. Business Decisions & Strategy

3.1 Business Objectives & Strategy YOUR NOTES

Developing Corporate Objectives

The Hierarchy of Objectives

Components of the Hierarchy Explained

Component Explanation Example

Aim What the business is looking to Macmillan Cancer Support

Mission Statement An expression of a business's Age UK

Corporate Objective The specific performance goals Mind UK

Functional Objective The day to day goals of functions Scope UK

An example of a SMART sales objective YOUR NOTES

Critical Appraisals of Mission Statements & Corporate Aims YOUR NOTES

3.1.2 Theories of Corporate Strategy YOUR NOTES

Ansoff’s Strategic Matrix

Porter’s Generic Strategic Matrix YOUR NOTES

Aim of Portfolio Analysis YOUR NOTES

The Boston Matrix

The Boston Matrix

Achieving Competitive Advantage Through Distinctive Capabilities

Examples of Distinctive Capabilities

Distinctive Capability Explanation

Operational skills and expertise A business may have an outstanding and

Relationships and networks A business may have developed close trading

Reputation and image of the business A business may develop an excellent

Innovation and the ability to change

The Effects of Strategic Decisions on Resources YOUR NOTES

Strategic decision-making will have an impact on a business's human, financial and

Examples of the Impact of Strategic Decisions on Resources

Impact on Human Impact on Financial Impact on Production

Enter a new overseas Staff may be Marketing Products may

Withdraw an obsolete Fewer workers Finance spent on Capacity

Merge with a Where staff roles Shared financial The production

Examples of the Impact of Tactical Decisions on Resources

3.1.3 SWOT Analysis YOUR NOTES

Examples of Factors Considered in a SWOT Analysis

For example: For example:

An example of a SWOT Analysis for a small cafe business

3.1.4 Impact of External Influences YOUR NOTES

PESTLE External Factors

External Factor Explanation Examples

Social The extent to which personal Greater numbers of people

Technological The extent to which technological Developments in

Environmental The extent to which changes in Increased interest in

The Changing Competitive Environment YOUR NOTES

Reasons for changes in the structure of markets over time

Porter’s Five Forces YOUR NOTES

Porter’s Five Forces Model

An Explanation of Porter's Five Forces Model

Force Explanation Example

When a business offers products

2. Threat of New Entry If new competitors can enter an As a result of deregulation in

3. Buyer Power When a business sells to a small Boeing is an aerospace

4. Supplier Power Where a business has a lot of Large UK supermarkets

5. Threat of Where customers can easily Smartphones have become

3.2 Business Growth YOUR NOTES

Reasons why Businesses grow

Owners/Shareholders/Managers Owners/shareholders The desire for

Desire to reduce costs by Growth provides Larger firms often

Explaining Economies of Scale YOUR NOTES

Types of Internal & External Economies YOUR NOTES

Types of Internal Economies of Scale

Sources of External Economies of Scale