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1.6 External Influences on Business Activity

International Trade: International trade is an exchange involving a good or service conducted between at least
two different countries. The exchanges can be imports or exports.
An import refers to a good or service brought into the domestic country.
An export refers to a good or service sold to a foreign country.
Adv: Foreign trade fosters the production of various items in different nations and leads to specialization. Because
of the advantages of division of labor, goods may be produced at a relatively low cost.

Free trade: no restrictions or trade barriers exist that might prevent or limit trade between countries.
Some benefits include:
- Imports of raw materials allow a developing economy to increase its rate of industrialization.
- Imports offer consumers a much wider choice of goods and services.

Trade barriers

Tariffs: taxes imposed on imported goods to make them more expensive than they would otherwise be.
Quotas: limits on the physical quantity or value of certain goods that may be imported.
Voluntary export limits: an exporting country agrees to limit the quantity of certain goods sold to one country
Protectionism: using barriers to free trade to protect a country’s own domestic industries.
Globalization: the increasing freedom of movement of goods, capital and people around the world.
Multinational business: business organization that has its headquarters in one country, but with operating
branches, factories and assembly plants in other countries.
Benefits on host country Drawbacks on host country
The investment will bring in foreign currency Exploitation of the local workforce might take place

Employment opportunities will be created and training Local competing firms may be squeezed out of business
programmes will improve the efficiency of local due to inferior equipment and resources
people

Privatization: selling state-owned and controlled business organisations to investors in the private sector.
Arguments for Arguments against
The profit motive of private-sector businesses will lead With competing privately run businesses it will be much
to much greater efficiency than when a business is more difficult to achieve a coherent and coordinated
supported and subsidized by the state. policy for the benefit of the whole country
Decision-making in state bodies can be slow and Many strategic industries could be operated as ‘private
bureaucratic. monopolies’ if privatized and they could exploit
consumers with high prices
Private businesses will have access to the private The state should take decisions about essential
capital markets and this will lead to increased industries. These decisions can be based on the needs
investment in these industries. of society and not just the interests of shareholders.

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This may involve keeping open business activities that

private companies would consider unprofitable.

What are the external influences that impact a business performance?

1) Technological Factors
Information technology: the use of electronic technology to gather, store, process and communicate
information.
Innovation: creating more effective processes, products or ways of doing things in a business.
Computer-aided design: using computers and IT when designing products.
Computer-aided manufacturing: the use of computers and computer-controlled machinery to speed up the
production process and make it more flexible

Benefit of IT: Managers can obtain data quickly and frequently from all departments
Drawback of IT: The ease of transferring data electronically can lead to so many messages and communications
that ‘information overload’ occurs.
2) Political and Legal Factors
Labor Protection: These are laws that safeguard the rights of workers in a certain economy. These laws include
minimum wage regulations, etc.
Health and safety laws: These aims to protect workers from discomfort and physical injury at work.
Adv: Workers will feel more secure and more highly valued.
Disadv: Employment of more staff to avoid overlong hours for existing workers
Consumer Protection: Consumer protection entails providing legal protection, as well as ensuring consumers
health and safety when purchasing goods or services. These laws are against overpricing, false advertisements
etc.
Monopoly: theoretically a situation in which there is only one supplier, but this is very rare: for government policy
purposes this is usually redefined as a business controlling at least 25% of the market. Adv: lower prices if large-
scale production by a monopolist reduces average costs of production. Dis: limited choice of products.
Uncompetitive or restrictive practices: These practices are attempts by firms – often acting or colluding together
– to interfere with free market forces and so limit choice for customers or drive up prices. Examples of such
practices are:
1) Refusal to supply a retailer if they do not agree to charge the prices determined by the manufacturer.
2) Full-line forcing: This is when a major producer forces a retailer to stock the whole range of products from
the manufacturer.
3) Market sharing agreements and price-fixing agreements: This form of collusion involves forming a cartel
between the firms concerned. They agree to fix prices and divide the market between them and not to
compete for new business.
4) Predatory pricing: When a major firm in an industry tries to block new competitors by charging very low
prices for certain goods, then this is called predatory pricing.
3) Social Influences
Social audit: a report on the impact a business has on society – this can cover pollution levels, health and safety
record, sources of supplies, customer satisfaction and contribution to the community.
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An ageing population: This means that the average age of the population is rising.
Adopting environmentally friendly business strategies:
Arguments in favour Arguments against
Businesses that reduce pollution by using the latest There might be a marketing advantage from
‘green’ equipment or use recycled material rather keeping costs as low as possible, even though the
than scarce natural products can have a real marketing environment is damaged as a result. Lower prices
and promotional advantage. may increase sales.
Environmental audits: assess the impact of a business’s activities on the environment.
Pressure groups: organisations created by people with a common interest or aim who put pressure on businesses
and governments to change policies so that an objective is reached.
4) Competitors
Competitors are firms that can provide your clients with the same or similar goods and services as you. By keeping
track of their competition, businesses may expand their market share and remain relevant to their customers.

1.7 External Economic Influences on Business Activity

Economic objectives of governments
 economic growth – the annual percentage increase in a country’s total level of output (known as gross
domestic product or GDP)
 low price inflation – the rate at which consumer prices, on average, increase each year
 low rate of unemployment
 a long-term balance of payments between the value of goods and services bought from other countries
(imports) and the value of the goods and services the country sells to other countries (exports)
 exchange rate stability – the government will try to prevent wild swings in the external value of the
currency in terms of its price compared with other currencies
 wealth and income transfers to reduce inequalities.

Gross domestic product (GDP): the total value of goods and services produced in a country in one year – real GDP
has been adjusted for inflation.
Economic growth is important because:
 Higher real GDP increases average living standards if the population increases at a slower rate.
 Higher levels of output often lead to increased employment, which will increase consumer incomes.

Recession: a period of six months or more of declining real GDP.

How business strategy could adapt to either economic growth or recession:
Type of producer Period of economic growth Period of recession
Producers of luxury increase the range of goods and service offer promotions
goods and services
raise prices to increase profit margins widen product range with lower-priced
models
Producers of normal add extra value to product – better lower prices
goods and services ingredients/improved packaging
promotions

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do nothing – sales not much affected do nothing – sales not much affected
anyway anyway
Producers of inferior attempt to move product up market promote good value and low prices
goods and services
add extra value to the product – e.g. free consumer tests
higher quality

Inflation: an increase in the average price level of goods and services – it results in a fall in the value of money.
There are two types:
 Cost-Push: When businesses face higher costs of production, they will attempt to maintain profit margins,
and one way of doing this is to raise selling prices.
 Demand-Pull: When consumer demand in the economy is rising, usually during an economic boom,
producers and retailers will realize that existing stocks can be sold at higher prices.
Impact of Inflation: Cost increases can be passed on to consumers more easily if there is a general increase in
prices, Consumers are likely to become much more price sensitive and look for bargains rather than big brand
names.
Deflation: A general drop in the price of goods and services is referred to as deflation. It occurs when consumers
just forgo spending in the hope of reduced pricing in the future.
Unemployment: this exists when members of the working population are willing and able to work, but are unable
to find a job.
There are three main causes or categories of unemployment:
 Cyclical unemployment: unemployment resulting from low demand for goods and services in the
economy during a period of slow economic growth or a recession.
 Structural unemployment: unemployment caused by the decline in important industries, leading to
significant job losses in one sector of industry.
 Frictional unemployment: unemployment resulting from workers losing or leaving jobs and taking a
substantial period of time to find alternative employment.

Exchange rate: the price of one currency in terms of another

Exchange rate depreciation: a fall in the external value of a currency as measured by its exchange rate against
other currencies.
Exchange rate appreciation: a rise in the external value of a currency as measured by its exchange rate against
other currencies.
domestic firms that gain from an domestic firms that lose from domestic businesses that gain e home-based businesses that are
appreciation of the country’s an appreciation are from a depreciation are likely to lose from a depreciation
currency are are
Importers of Importers of Exporters Businesses Home- Businesses Manufacturers Retailers that
foreign raw foreign of goods that sell goods based that sell in the who depend purchase
materials and manufactured and and services to exporters domestic heavily on foreign
components goods services to the domestic market will imported supplies supplies,
foreign market and experience of materials, especially if
markets have foreign less price components or there are
competitors competition energy sources close
from domestic
importers – substitutes
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Factors, other than product prices, that can determine the international success of a business:
 Product design and innovation:
 Quality of construction and reliability
 Effective promotion and extensive distribution
 After-sales service
 Investment in trained staff and modern technology

Macro-economic policies: These are policies that are designed to impact on the whole economy – or the
‘macro-economy’. They mainly operate by influencing the level of total or aggregate demand in the economy.
Fiscal policy: concerned with decisions about government expenditure, tax rates and government borrowing –
these operate largely through the government’s annual budget decisions.
 Expansionary Fiscal Policy/ Government budget deficit: the value of government spending exceeds
revenue from taxation.
 Contractionary Fiscal Policy/ Government budget surplus: taxation revenue exceeds the value of
government spending.

Monetary policy: is concerned with decisions about the rate of interest and the supply of money in the
economy.
Supply Side Policies
Government policies and business competitiveness: Government policies that aim to increase industrial
competitiveness are often referred to as supply-side policies because they aim to improve the supply efficiency
of the economy.
Three examples of policies that could have this effect are:
1) Low rates of income tax
2) Low rate of corporation tax
3) Increasing labor market flexibility and labor productivity

Market failure: when markets fail to achieve the most efficient allocation of resources and there is under- or
overproduction of certain goods or services.

1.8 Business Strategy

Strategic management: the role of management when setting long-term goals and implementing cross
functional decisions that should enable a business to reach these goals.
Corporate strategy: a long-term plan of action for the whole organization, designed to achieve a particular goal.
Tactic: short-term policy or decision aimed at resolving a particular problem or meeting a specific part of the
overall strategy.

Corporate strategy will be influenced by four main factors: Resources available, Other strengths of the business
(for example in researching heart-disease), Competitive environment, Objectives

Competitive advantage: a superiority gained by a business when it can provide the same value product/ service
as competitors but at a lower price, or can charge higher prices by providing greater value through
differentiation.
According to Michael Porter, there are two main factors leading to a significant competitive advantage:
Business managers must decide whether they want the business to focus on
1. competitiveness gained through low costs (and prices)
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2. differentiated products that would allow higher prices to be charged

Strategies to increase competitive advantage: Automation, Rationalization, Research and development (R&D)

Strategic analysis: the process of conducting research into the business environment within which an
organization operates, and into the organization itself, to help form future strategies.
The following techniques and approaches are used by senior managers to identify, develop and choose between
new business strategies.

1) Blue ocean strategy

Red ocean strategy: focus on existing customers Blue ocean strategy: focus on potential customers
Compete in existing markets Create uncontested markets to enter
‘Out-compete’ the competition Make the competition irrelevant
Exploit existing demand Create and exploit new demand
High value to customer = high costs to business High value to customer but low cost to business
Product differentiation or low cost Product differentiation and low cost

2) Scenario planning: In scenario planning, a group of senior managers begin by identifying a limited number of
possible outcomes or situations, called scenarios. They then discuss what strategy the business could adopt if
each scenario actually occurred.
Adv: forces managers to consider the main risks that affect their business, makes managers adopt a flexible
approach, as different scenarios will require different strategies
Disadv: managers try to consider too many uncertainties and become confused, less effective if only short-term
risks are considered

3) SWOT analysis: a form of strategic analysis that identifies and analyses the main internal strengths and
weaknesses and external opportunities and threats that will influence the future direction and success of a
business.
Strengths: These are the internal factors about a business that can be looked upon as real advantages.
Weaknesses: These are the internal factors about a business that can be seen as negative factors.
Opportunities: These are the potential areas for expansion of the business and future profits.
Threats: These are also external factors gained from an external audit.

4) PEST analysis: the strategic analysis of a firm’s macro environment, including political, economic, social and
technological factors. They are considered as either being opportunities or threats. PEST is complementary to
SWOT, not an alternative.
Example:
Political: Stability of the government
Economic: Rate of economics growth
Social: Demographic changes
Technology: Rapidly changing technology allowing products to be made more cheaply

5) Business vision/Mission statement and objectives

Mission statement: a statement of the business’s core purpose and focus, phrased in a way to motivate
employees and to stimulate interest by outside groups.
Vision statement: a statement of what the organization would like to achieve or accomplish in the long term.

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Mission statements outline the overall purpose of the organization. A vision statement, on the other hand,
describes a picture of the ‘preferred future’ and outlines how the future will look if the organization achieves its
mission

4) Porter’s Five Forces analysis

Barriers to entry: the ease with which other firms can join the industry and compete with existing businesses
The power of buyers: the power that customers have on the producing industry.
The power of suppliers: Suppliers will be relatively powerful compared with buyers when the cost of switching is
high, e.g. from PC computers to Macs, when the brand being sold is very powerful and well-known, etc.
The threat of substitutes In Porter’s model, ‘substitute products’ does not mean alternatives in the same industry,
such as Toyota for Honda cars. It refers to substitute products in other industries.

Competitive rivalry: This is the key part of this analysis – it sums up the most important factors that determine
the level of competition or rivalry in an industry.

6) Core competencies: The concept of core competencies was first analyzed in the work of Hamel and Prahalad.
They argued that if a business develops core competencies, then it may gain competitive advantage over other
firms in the same industry. To be of commercial and profitable benefit to a business, a core competence should:
■ provide recognizable benefits to consumers
■ not be easy for other firms to copy, e.g. a patented design
■ be applicable to a range of different products and markets.

Core product: product based on a business’s core competences, but not necessarily for final consumer or end
user.
Core competence: an important business capability that gives a firm competitive advantage

Strategic choice: Strategic decision-making encompasses the entire process of selecting a specific option from a
variety of possibilities. It is a component of the strategic management framework that assists managers in
evaluating multiple possibilities and selecting the most advantageous one.

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Ansoff ’s matrix: a model used to show the degree of risk associated with the four growth strategies of market
penetration, market development, product development and diversification.

Market penetration: achieving higher market shares in existing markets with existing products.
Product development: the development and sale of new products or new developments of existing products in
existing markets.
Market development: the strategy of selling existing products in new markets.
Diversification: the process of selling different, unrelated goods or services in new markets.

Force-field analysis: technique for identifying and analyzing the positive factors that support a decision (‘driving
forces’) and negative factors that constrain it (‘restraining forces’).

Decision tree: a diagram that sets out the options connected with a decision and the outcomes and economic
returns that may result. how they are constructed:
 It is constructed from left to right.
 Each branch of the tree represents an option together with a range of consequences or outcomes and the
chances of these occurring.

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 Decision points are denoted by a square – these are decision nodes.

 A circle shows that a range of outcomes may result from a decision – a chance node.
 Probabilities are shown alongside each of these possible outcomes. These probabilities are the numerical
values of an event occurring – they measure the chance of an outcome occurring.
 The economic returns are the expected financial gains or losses of a particular outcome.

Expected value: the likely financial result of an outcome obtained by multiplying the probability of an event
occurring by the forecast economic return if it does occur.

1.9 Corporate planning and implementation

Strategic implementation: the process of planning, allocating and controlling resources to support the chosen
strategies.

Business plan: a written document that describes a business, its objectives and its strategies, the market it is in
and its financial forecasts.

Corporate plan: this is a methodical plan containing details of the organization’s central objectives and the
strategies to be followed to achieve them. They include:
1) The overall objectives of the organization within a given time frame
2) The strategy or strategies to be used to attempt to meet these objectives.
3) The main objectives for the key departments of the business derived from the overall objective.

Adv: provides clear focus and sense of purpose, the original objectives can be compared with actual outcomes to
see progress
Disadv: The best-laid plans of any business can be made obsolete by rapid and unexpected internal or external
changes.

Corporate culture: the values, attitudes and beliefs of the people working in an organization that control the way
they interact with each other and with external stakeholder groups.

The main types of corporate culture

 Power culture: This is associated with autocratic leadership. Power is concentrated at the center of the
organization.

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 Role culture: This is most associated with bureaucratic organisations. People in an organization with this
culture operate within the rules and show little creativity.
 Entrepreneurial culture: this encourages management and workers to take risks, to come up with new
ideas and test out new business ventures.
 Person culture: when individuals are given the freedom to express themselves fully and make decisions
for themselves.
 Task culture: based on cooperation and teamwork.

Change management: planning, implementing, controlling and reviewing the movement of an organization from
its current state to a new one
1) Understand what change means
2) Recognize the major causes/types of change
3) Understand the stages of the change process
4) Lead change, not just manage it

Transformational leadership is of most importance during periods of significant corporate change. Aim include:
- Influence employees with their own (the leader’s) behaviour and qualities. Setting the right example is so
important.
- Demonstrate a genuine concern for the needs and feelings of employees

Promoting change
According to John Kotter, a leading writer on organizational change, the best way to promote it in any organization
is to adopt the following eight-stage process:
1) establish a sense of urgency
2) create an effective project team to lead the change
3) develop a vision and a strategy for change
4) communicate this change vision
5) empower people to take action
6) generate short-term gains from change that benefit as many people as possible
7) consolidate these gains and produce even more change
8) build change into the culture of the organization so that it becomes a natural process.

Resistance to strategic change

The managers and workforce of a business may resent and resist strategic change for any of the following reasons:
■Fear of the unknown
■Fear of failure
■Inertia: Many people suffer from inertia or reluctance to change and try to maintain the status quo

Contingency planning and crisis management: This is also known as ‘business continuity planning’ or ‘disaster-
recovery planning’. Effective contingency planning allows a business to take steps to minimize the potential impact
of a disaster – and ideally prevent it from happening in the first place.
Contingency plan: preparing an organization’s resources for unlikely events.
Adv: reassures staff, minimizes negative impact on customers and suppliers
Disadv: costly and time consuming

The key steps in contingency planning are:

1) Identify the potential disasters that could affect the business
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2) Assess the likelihood of these occurring

3) Minimize the potential impact of crises
4) Plan for continued operations of the business

2.4 Organizational structure

Organizational structure: the internal, formal framework of a business
What is shows:
- who has responsibility of decision making
- formal relationship between people and departments
- number of subordinates under each manager
- formal channels of communication

Types of structures
Flexible Organizational Structure: Workers in a readily adjust to their clients' needs, finish their work efficiently

The hierarchical (or bureaucratic) structure: includes different layers of the organization with fewer and fewer
people on each higher level

Chief
Executive
Directors

Line Workers
Adv: role of each individual will be clear, clearly identifiable chain of command
DisAdv: managers are often accused of tunnel vision (they only see the perspective of their own dept), and few
horizontal links between the departments leading to a lack of coordination

Functional Structure: a sort of corporate structure that divides a corporation into sections depending on
specialization, such as marketing, HR, etc
Adv: departmental loyalty and pride in the work of their department exists in employees, encourages employees
to become specialists, and this can increase efficiency and productivity
Disadv: coordination between departments is difficult, there might be unhealthy competition between
department

Flat Structure/Delayering: Delayering is the process of removing a management layer

Business Unit Structure: This permits specialized managers to concentrate on the demands of various divisions.
Adv: is that it helps in decision making
Disadv: it might lead to rivalry between different departments.

Geographical Structure: organizes people within an organization by geographic location, like countries or
continents.
Adv: is that there is close communication with local customers.
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Disadv: is that some economies of scale may be lost.

Product Structure: when corporation is divided into groups with people from different department to work on a
product.
Adv: helps your business focus on specific market segments and meet customer needs more effectively.
Disadv: duplicating functions and resources, e.g a different sales team for each division

Matrix structure: an organizational structure that creates project teams, it is task/project oriented
Adv: allows total communication between all members of the team, crossover of ideas between people with
specialist knowledge in different areas tends to create more successful solution
Disadv: there is less direct control from the ‘top’ as the teams may be empowered to undertake and complete a
project, this passing down of authority to more junior staff could be difficult for some managers to come to terms
with

Chain of command: this is the route through which authority is passed down an organization

Span of control: the number of subordinates reporting directly to a manager. Two types:
wide – with a manager directly responsible for many subordinates
narrow – a manager has direct responsibility for a few subordinates.

Delegation: the passing down of authority from higher to lower levels in the organization.
Adv: gives senior managers more time to focus on important tasks, trains staff for more senior positions
Disadv: managers may only delegate the boring jobs that they do not want to do – demotivating

Centralization: keeping all of the important decision-making powers within the center of the organization.
Adv: fixed set of rules and procedures in all areas of the firm should lead to rapid decision-making

Decentralization: decision-making powers are passed down the organization to empower subordinates and
Regional / product managers.
Adva: More junior managers can develop and this prepares them for more challenging roles.

Factors that could determine the internal structure of a business: The style of management, or the culture of the
managers, If the business were to grow, another manager or supervisor might be required, Retrenchment caused
by economic recession or increased competition might lead to delayering to reduce overhead costs, Corporate
objectives, Adopting new technologies

Important links between organizational principles

1) The greater the number of levels of hierarchy, the longer the chain of command
2) Problems associated with a tall structure – is delayering the answer?
3) Delegation: conflicts that can arise and potential benefits
4) Accountability, authority and responsibility
5) Centralization and decentralization
6) Line and staff relationships

Delayering: removal of one or more of the levels of hierarchy from an organizational structure
Advantage: reduces business costs
Disadvantage: fear that redundancies might be used to cut costs could reduce the sense of security of the whole
workforce
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Line managers: managers who have direct authority over people, decisions and resources within the hierarchy of
an organization.

Staff managers: managers who, as specialists, provide support, information and assistance to line managers.

2.5 Business Communication

Communication: It is the transmission of a message from a sender to a recipient who understands it.
Effective communication: communication with feedback.

Key features of effective communication: sender (or transmitter) of the message, clear message, appropriate
medium (way in which the message is sent), receiver, feedback to confirm receipt and understanding.

Importance of effective communication: staff motivation, reduces the risk of errors, effective coordination
between departments

Communication media: the methods used to communicate a message.

Oral communication: one-to-one conversations, interviews, appraisal sessions, group meetings or team briefings.
Adv: direct, can be questioned quickly, easy to understand
Disadv: affected by noise, no permanent accurate record, can be quickly forgotten

Written communication: letters, memos, notices on boards, reports, minutes of meetings and diagrams.
Adv: recorded – permanent record, easy to distribute, more structured
Disadv: no body language, may be misinterpreted, costly and time-consuming

IT and web-based media (electronic media): internet and email use, Intranets (internal computer links), fax
messages, video/web conferencing and smart phones.
Adv: great speed, overcomes global boundaries, interactive
Disadv: expensive in hardware, security issues, risk of communication overload

Visual communication: diagrams, pictures, charts and pages of computer images can be presented by using
overhead projection, interactive white boards, data projectors, downloads.
Adv: more interactive, often easier to remember
Disadv: needs close attention, interpretations by receivers can vary

Factors influencing choice of appropriate media: The importance of a written record, The advantages to be
gained from staff input or two-way communication, Cost, Speed, Quantity of data to be communicated, Size and
geographical spread of the business

Communication barriers: consists of factors and reasons to why communication fails within a business
Three broad reasons why barriers to communication occur:
1) Failure in one of the stages of the communication process
2) Poor attitudes of either the sender or the receiver
3) Physical reasons

Formal communication networks: the official communication channels and routes used within an organization.
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One-way communication: When the methods of communication do not allow for or encourage feedback from
the receiver of the message. Example: messages pinned on noticeboards.
Two-way communication: When the methods of communication allow for and encourage feedback from the
receiver of the message. Example: one to one conversations.
Vertical communication: is when people from different levels of hierarchy communicate with each other.
Horizontal communication: occurs along an organization chart – between people who have approximately the
same status but different areas of responsibility.
Informal communication: unofficial channels of communication that exist between informal groups within an
organization.

2.6 Leadership
Leadership: is the ability of an individual or a group to influence and guide followers and other members of the
organization. Qualities of a leader include: Confident, Creative, Multitalented, incisive mind, Commitment and
Passion, Good Communicator, Decision Making Ability

Leadership positions

Directors: These senior managers are elected into office by shareholders in a limited company.

Managers: They have some authority over other employees below them in the hierarchy. They direct, motivate and praise, and discipline workers.

Supervisors: These are appointed by management to watch over the work of others.

Workers’ representatives: These are elected by the workers to discuss with managers the concern of the workers.

Informal leadership: Informal leaders are people who have the ability to lead without formal power, perhaps because of their experiences, personality or
special knowledge.

Theories of Leadership
Great man (Great person) theory
According to this theory, some people are naturally born with leadership qualities and those qualities cannot be
taught.
Trait theory
It believes that people are either born with the personality characteristics (or traits) required for leadership, or
they are not.
Behavioral theory
It assumes that capable leaders can learn the skills needed rather than having inherent qualities.
Contingency theory
This theory suggests that the most successful leaders adapt their leadership style to different situations.
Changing situations that can create a need for a different approach to leadership include:
 Levels of experience and maturity of the subordinates
 The relationship between leader and followers
 Amount of time needed to complete the task
 The level of power of the leader’s position

Power and influence theories

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These theories of leadership are based on the different ways in which leaders use power and influence to get
things done.
Two sources of personal power:
 Expert knowledge of the leader
 Charm of the leader

Transactional leadership
This assumes that employees will only undertake tasks in exchange for reward.
Transformational leadership
This style of leadership has much greater focus on leading, rather than managing workers, which is the main
feature of transactional leadership.
By concentrating on the needs of employees, the transformational leader demonstrates the importance of:
• charisma in influencing subordinates
• inspiring workers towards achieving the leader’s vision
• stimulation in the working environment by offering new challenges for employees
 understanding individual needs of each team member.

Emotional Intelligence/Emotional Quotient: The ability of managers to understand their own emotions, and
those of the people they work with, to achieve better business performance. There are four main EI competencies:
1) Self-awareness
2) Self-management
3) Social awareness
4) Social skills

2.7 Further Human Resource Management Strategy

Human resource management (HRM): the strategic approach to the effective management of an organization’s
workers so that they help the business gain a competitive advantage.

Hard HRM: this focuses on cutting costs, e.g. temporary and part-time employment contracts
Adv: you gain complete control over your company, you can make more cost-effective policies
Disadv: it could increase recruitment and induction training costs in the long term, bad publicity regarding the
treatment of workers, ignores the research findings of Maslow, Mayo and Herzberg
Soft HRM: this focuses on developing staff so that they reach self-fulfillment and are motivated to work hard
Adv: can assist a company in establishing a reputation as a "good" employer, encourages employees to be more
innovative
Disadv: Decision-making can become much more difficult as everyone needs to be consulted

Flexible Workforce: A flexible workforce expands in size to meet changing needs and then shrinks down to a
baseline size when the extra size is no longer required.
Several methods to employ flexible contracts: Part-time employment contract, hours, Temporary employment
contract, Flexi-time contract, Outsourcing, Zero hour, Annualized Hours
Measuring and monitoring employee performance

Labor productivity: the output per worker in a given time period. It is calculated by:
total output in time period/total workers employed
Absenteeism: measures the rate of workforce absence as a proportion of the employee total. It is measured by:
absenteeism (%) = no. of employees absent/Total no of employees x 100
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Management by objectives (MBO): This system is designed to motivate and coordinate a workforce by dividing
the organization’s overall aim into specific targets for each division, department and individual.
Adv: Each manager and subordinate will know exactly what they have to do, by using the corporate aim and
objectives as the key focus to all departmental and individual objectives,
Disadv: The process of dividing corporate objectives into divisional, departmental and individual targets can be
very time consuming, objectives can become outdated very quickly

Labor legislation: All governments have passed laws to control working conditions and the relationship between
employer and employee.
The state intervenes in industrial relations in a number of ways: through industrial-relations laws, through
agencies set up to improve industrial relations, such as arbitration councils, through its own policies as a major
employer.

1) ‘Hard’ or autocratic management style: some managers have a ‘take it or leave it’ attitude to the
workforce. Workers might be employed on very short-term contracts – even on a daily basis – offering no
security at all.
2) Collective bargaining between trade unions and major employers and their associations: collective
bargaining is when representatives of unions and national employers negotiate wage levels and working
conditions for the whole industry or for large sections of it.
3) Cooperation between labor and management: this approach is based on the recognition that successful
competitive businesses will benefit all parties.

Workforce planning: analyzing and forecasting the numbers of workers and the skills of those workers that will
be required by the organization to achieve its objectives.

Workforce audit: a check on the skills and qualifications of all existing workers/managers.
Reasons for and role of a workforce plan
If the overall business plan is to expand production and develop products for foreign markets, then this must be
reflected in the workforce plan. Once this has been done, the next stage is to calculate the number of employees
and the skills needed by the business.

Recent IT applications in HRM

Recruitment: web portals allow employers to post details of vacant positions and the qualifications and
experience required of applicants.
Training and development: Training programmes can be uploaded on IT, such as essential induction training
programmes.

The future of IT and AI in HRM

The use of AI, which learns how to perform tasks that usually need human intelligence, is particularly likely to
transform HRM within the next 20 years.
- AI can read hundreds of job applicants’ details very rapidly. It can then evaluate these candidates without
human bias or error.
- Virtual reality (VR) is breaking away from its computer gaming image and is being used to develop realistic
and interactive training courses.

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3.5 Marketing Analysis

Price elasticity of demand: measures the responsiveness of demand following a change in price.
percentage change in quantity demanded/percentage change in price x 100

Factors that will determine the PED of a product:

1) How necessary the product is: The more necessary consumers consider a product to be, the less they will react
to price changes: inelastic demand, e.g., salt
2) How many similar competing products or brands there are: If there are many competitors, then there are a
large number of substitutes, and consumers will quickly switch to another brand if the price of one manufacturer’s
product increases: elastic demand, e.g., fruit
3) The level of consumer loyalty: If a firm has successfully branded its product to create a high degree of loyalty
among consumers, like Coca-Cola, then the consumers will be likely to continue to purchase the product following
a price rise: inelastic demand
4) The price of the product as a proportion of consumers’ incomes: A cheap product that takes up a small
proportion of consumers’ incomes, such as matches: inelastic demand
Business uses of PED: Making more accurate sales forecasts, assisting in pricing decisions

PED Value Classification

Zero Perfectly inelastic demand
between 0 to 1 Inelastic Demand
between 1 to infinity Elastic Demand
Unitary Unit elasticity
Infinity Perfectly Elastic demand

Income elasticity of demand: measures the responsiveness of demand for a product following a change in
consumer incomes.
Percentage change in demand for a product/Percentage change in consumer incomes
Promotional elasticity of demand: measures the responsiveness of demand for a product following a change in
the amount spent on promoting it.
Percentage change in demand for a product/Percentage change in promotional spending

Integrated marketing strategy: Integrating with other departments of the business, The four elements of the
marketing mix must be mutually supportive and integrated with each other.

New product development (NPD): the design, creation and marketing of new goods and services.

Research and development: is the set of innovative activities undertaken by corporations or governments in
developing new services or products and improving existing ones.
Importance
- New product innovations allow businesses to survive and grow in rapidly changing marketplaces.
- They may have a considerable unique selling point or proposition over rivals so that the business can charge
premium prices – earning higher profit margins.
Limitations
- Expenditure on R&D can be a risky investment, as the success of such scientific enquiry can never be foreseen
with great accuracy.
Some factors that influence the level of R&D expenditure by a business
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1. The nature of the industry

2. The R&D spending plans of competitors
3. Government policy towards grants to businesses and universities for R&D

Adv: results in innovation over time, competitive edge

Disadv: research takes time, costly

Sales forecasting: the process in which several methods are used to predict future sales levels and sales trends.
Benefits: production department would know how many units to produce and how many materials to order,
distribution would hold just the correct level of stocks, finance could plan cash flows with much greater accuracy

Sales-force composite: a method of sales forecasting that adds together all of the individual predictions of future
sales of all of the sales representatives working for a business.
Adv: quick and cheap to administer.
Disadv: sales representatives may not be aware of macro-economic developments or competitors’ actions

Delphi method: a long-range qualitative forecasting technique that obtains forecasts from a panel of experts.
Adv: Tests have proven that this Delphi is more accurate than unstructured group experts giving their opinions
and forecasts.
Disadv: Can be too time consuming and heavy on the budget

Consumer surveys: These are a form of market research and the questions may either be quantitative in nature
(e.g. asking for likely future levels of demand) or qualitative (e.g. asking for reasons behind future demand
choices).

Jury of experts: The jury of experts uses senior managers within the business, who meet and develop forecasts
based on their knowledge of their specific areas of responsibility.

Quantitative sales forecasting methods

Correlation – establishing causal relationships
This method attempts to explain the most important factors causing changes in sales data. Similar causal links
might exist between sales and prices, competitors’ promotional activity, changes in commission payments to sales
staff, levels of disposable income, or the weather.

Time-series analysis: This method of sales forecasting is based entirely on past sales data. They are sale records
kept overtime, presented in date order.

Extrapolation: The most basic method of predicting sales based on past results is termed extrapolation.
Extrapolation means basing future predictions on past results.

Moving averages: It allows the identification of underlying factors that are expected to influence future sales,
such as the trend, seasonal fluctuations, cyclical fluctuations, random fluctuations, seasonal variation, and
predicted sales.

Adv: useful for identifying and applying seasonal variation, reasonably accurate short-term predictions, assist
future planning.
Disadv: complex calculations, less accurate future predictions.

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3.6 Marketing Strategy

Marketing plan: a detailed, fully researched written report on marketing objectives and the marketing strategy to
be used to achieve them.

Purpose and mission: The first part of the plan is to provide the reader with the necessary information to
understand the purpose of it, including background information and the mission statement.

Situational analysis: To take a business forward with new marketing strategies, it is important to know its current
strengths, existing product range and market shares, existing and potential competitors, consumer tastes and
trends, the state of the market the business operates in and the external problems and opportunities.

Situational analysis should cover five main areas: current product analysis, target market analysis, competitor
analysis, economic and political environment, a swot analysis of the internal attributes of the business

Marketing objectives: All plans need targets to focus attention and to direct effort. Marketing objectives will form
a key part of the marketing plan, where targets should ideally be specific, measurable and time limited.

Marketing strategy: This section outlines how the company intends to achieve its marketing objectives,
considering the overall approach to be taken by the business. Some significant strategic decisions include:

 Should we pursue a mass-marketing approach with high market penetration, or a niche marketing
strategy with more limited penetration, but higher profit margins?
 Should we sell more to the same market or find markets that the business is not currently targeting?
 Should we develop new products for existing customers or new products for new customers?

The final strategy decided upon will depend greatly on the company’s missions and objectives, situational analysis,
and the resources of the business.

Some constraints on the Marketing Strategy: non-financial resources, business and marketing objectives,
financial resources, and market conditions including competitors’ actions.

Marketing-mix tactics: Having explained the marketing strategy, the marketing plan can now focus on the
product, price, promotion and place tactics.

1) Product: Summarize existing products and outline planned changes or additions.

2) Price: Outline significant factors behind pricing decision based on marketing objectives and strategy for
different markets.
3) Promotion: Explain decisions taken on how the product will be promoted. Promotion decisions cover four
areas: advertising, sales, promotion, public relations, and personal selling.
4) Place or distribution decisions: This area lays out the distribution plan for the product, it should include
details of the channels, the range and number of outlets that will sell the product and linkage to target
market segments.

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Marketing budget: A marketing budget outlines all the money a business intends to spend on marketing related
projects over the quarter or year, including paid advertising, sponsored web content, etc.

Benefits:

1) A marketing plan is an essential part of an overall business plan, providing evidence to potential investors
that the proposed venture is both sound and potentially profitable.
2) Specific marketing plans might help introduce a new strategy that could determine a business’s future
success. They would greatly reduce the risk of failure if such new business directions were taken.
3) Planning forces marketing personnel to look at the current position of the business, its products and the
markets it operates in to allow the setting of achievable goals, providing direction and purpose to future
marketing decisions. The integration of departments such as finance, human resources, sales staff, and
production are involved to gain substantial benefits for the whole business.

Potential limitations:

1) Detailed marketing plans are complex, costly, and time-consuming, especially for small businesses.
2) Marketing managers may become wedded or attached to their plan, causing inflexibility towards business’
prospects and changes in the external environment.

The changing role of IT in marketing:

1) Internet: Websites are business necessities for the marketing of products. Businesses use the internet to
promote and sell their products to customers worldwide.
2) Email: This marketing allows businesses to reach out to customers added onto their opt-in email lists, who
are already interested in their products.
3) Mobile: This marketing reaches customers on mobile phones or devices through text messaging and
applications.
4) In-store: Digital signage allows businesses to grab the attention of customers and market specific products
to them.

Potential AI applications in marketing:

1) Monitor consumers on what they’re buying, reading, watching, or commenting on via social media to
modify messages or make special offers based on their preferences.
2) Analyze consumer word searches, social profiles, and online data to run effective digital advertising
campaigns.
3) Create detailed consumer profiles to send the right message to an individual at the right time, using the
right media.
4) Based on trends, interaction with consumers in real-time online at the moment of purchase or decision-
making can influence which product is bought.

Possible limitations of AI applications in marketing:

1) Consumer resistance to data collection and its use can lead to pressure-group activity against businesses
dependent on big data.
2) Management supervision and control is still required.

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3) Significant investments in data collection, IT expertise, and computing power.

4) At present, AI computing systems lack human creativity and imagination.

Globalization: the growing trend towards worldwide markets in products, capital and labor, unrestricted by
barriers. The key features of globalization that have an impact on business strategy are: increased international
trade as barriers to trade are reduced, growth of multinational businesses in all countries as there is greater
freedom for capital to be invested from one country to another, freer movement of workers between countries.

Benefits: greater opportunities of selling goods in foreign countries, wider choice of locations
Limitations: increased competition, international competition forces other firms to become more efficient

Multinational companies: businesses that have operations in more than one country.

Free international trade: international trade that is allowed to take place without restrictions such as
‘protectionist’ tariffs and quotas.

Tariff: tax imposed on an imported product.

Quota: a physical limit placed on the quantity of imports of certain products.

International marketing: selling products in markets other than the original domestic market.

Why sell products in other countries? Saturated home markets, profits, spreading risks, poor trading conditions
in the home market, legal difference creating opportunities abroad.

Why international marketing is different: difference in business practices and politics, economics, social, legal,
and cultural differences.

International markets – methods of entry: exporting, international freelancing, joint ventures, licensing, direct
investment in subsidiaries, globalization, localization.

Exporting: A product or service that is produced in one country but sold to a buyer in another one is known as
export. Directly is when order is placed through a website from a foreign customer, indirectly is when an agent is
involved.

Exporting Directly:
Adv: complete control over international marketing of product, agents/traders might not give priority to new
exporting business, no commission is taken by intermediaries.
Disadv: need dedicated sales personnel to deal with foreign buyers

Exporting Indirectly:
Adv: agent will have local market knowledge and contacts aiding marketing of product, agent is responsible for
transport and administrative procedures, may be cheaper as fewer staff involved.
Disadv: commission/payment to be paid to agent, agent will also focus on selling other firms’ products.

International Franchising: is a form of expansion that can be used by new or existing franchises to expand into
new geographic areas and markets.

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Joint Venture: it is when two or more businesses pool their resources in order to complete a certain goal. The
profit, losses and costs associated are shared.

Licensing: Obtaining authorization from a firm (licensor) to manufacture and sell one or more of its products
within a specific market area.

Globalization: It is selling a same standardized product with same quality standards all over the world.

International marketing – alternative strategies:

Direct investment in subsidiaries: A subsidiary is an incorporated enterprise in which the foreign investor controls
directly or indirectly.
Adv: employment will increase, support from foreign government.
Disadv: high costs, decisions could be unfavorable for the local community.

Foreign subsidiary: A foreign subsidiary is a company operating overseas that is part of a larger corporation with
headquarters in another country, often known as a parent company or a holding company.
Adv: head office has control of operations, all profits after tax belong to the company, foreign governments could
offer financial support.
Disadv: expensive to set up operations in foreign countries, might be subject to changes in government policy,
decentralized foreign subsidiaries could take decisions that damage the reputation of the entire business.

Localization: adapting the marketing mix, including differentiated products, to meet national and regional tastes
and cultures.
Adv: could lead to higher sales and profits, no attempt to impose foreign brands on regional markets, will likely
meet local national legal requirements, less local opposition to multinational business activity.
Disadv: scope for economies of scale is reduced, international brand could lose power and become less
population, additional cost of adapting products, store layouts, adverts etc. to specific local needs.

Two broad approaches of selling goods and services internationally:

Pan Global Marketing: marketing a standardized product across the globe, as if the entire world were a single
market, selling the same product in the same way everywhere.
Adv: standard identity for product which aids consumer recognition, cost reductions and substantial economics
of scale, recognizes that difference between consumer in different countries are reducing.
Disadv: might be necessary to develop different products to suit cultural/religious variations, lost market
opportunities, legal restrictions can vary, brand names don’t translate effectively into other languages

Global Localization: adapting the marketing mix, including differentiated products and adjusting for national and
regional tastes and cultures, in order to maintain local differences.
Adv: could lead to higher sales and profits, no attempt to impose foreign brands on regional markets, will likely
meet local national legal requirements, less local opposition to multinational business activity.
Disadv: scope for economies of scale is reduced, international brand could lose power and become less
population, additional cost of adapting products, store layouts, adverts etc. to specific local needs.

4.4 Location and Scale

Optimal Location: a business location that gives the best combination of quantitative and qualitative factors.
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Optimal Location Decision: An optimal location decision is one that selects the best site for expansion of the
business or for its relocation, given current information. It is likely to be a compromise that balances high fixed
costs of the site/buildings, balances the low costs of a remote site with limited supply of qualified labor, balances
quantitative factors with qualitative ones, balances the opportunities of receiving government grants.

Location decisions have three key characteristics: strategic in nature, difficult to reverse if an error of judgement
is made, taken at the highest management levels.

Potential drawbacks of poor, non-optimal location decisions are: high fixed site costs, high variable costs, low
unemployment rate , high unemployment rate, poor transport infrastructure

Factors influencing location decisions:

Quantitative factors: these are measurable in financial terms and will have a direct impact on either the costs of
a site or the revenues from it and its profitability.

Labor costs: The relative importance of these as a locational factor depends on whether the business is capital or
labor intensive.

Transport costs: Businesses that use heavy and bulky raw materials will incur high transport costs if suppliers are
at a great distance. Service industries need to be conveniently located for customers, and transport costs will be
of less significance.

Sales revenue potential: The level of sales made by a business can depend directly on location.

Government grants: Governments across the world are very keen to attract new businesses to locate in their
country.

Once these quantitative factors have been identified and costs and revenues estimated, the following techniques
can be used to assist in the location decision:

1) Profit estimates: By comparing the estimated revenues and costs of each location, the site with the
highest annual potential profit may be identified.
Limitation: annual profit forecasts alone are of limited use.

2) Investment appraisal: This method can be used to identify locations with the highest potential returns
over a number of years.
Limitation: require estimates of costs and revenues for several years for each potential location.

3) Break-even analysis: It calculates the level of production that must be sold from each site for revenue to
just equal total costs.
Limitation: this analysis should be used with caution and the normal limitations of this technique apply
when using it to make location decisions

Qualitative factors: non-measurable factors that may influence business decisions.

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Safety: To mitigate the risk to public safety and damage of the company’s reputation, certain industrial plants may
be located in remote areas, despite increase in transport or other costs.

Room for further expansion: It is expensive to relocate a site if too small to accommodate expanding business,
therefore if a location has room, then this might be an important long-term consideration.

Managers’ preferences: In small businesses, managers’ personal preferences influence location decisions of the
business. In large organizations, they prioritize profits and shareholder returns in their location decisions.

Ethical considerations: The relocation of a business

Environmental concerns: A business might be reluctant to set up in an area that is particularly sensitive from an
environmental viewpoint, as this could lead to poor public relations and action from pressure groups.

Infrastructure: The quality of the local infrastructure, especially transport and communication links, will influence
the choice of location.

Other locational issues: The pull of the market, Planning restrictions, External economies of scale
Multi-site location: a business that operates from more than one location.
Adv: convenience for consumers, lower transport costs
Disadv: coordination problems between locations, potential lack of control of senior management

Off shoring: the relocation of a business process done in one country to the same or another company in another
country.

Multinational: A multinational company is a corporate organization that owns or controls the production of goods
or services in at least one country other than its home country

Reasons for international location decisions: to reduce costs, to access global (world) markets, to avoid
protectionist trade barriers, other reasons – substantial government financial support to relocate businesses,
good educational standards, highly qualified staff, avoidance of problems resulting from exchange rate
fluctuations.

Issues and potential problems with international location:

1) Language and other communication barriers – company suppliers/employees might use different
language to communicate
2) Cultural differences – differences in consumer tastes and religious factors
3) Level-of-service concerns – off-shoring of services led to inferior customer service
4) Supply-chain concerns – loss of control over quality and reliability of delivery
5) Ethical considerations – loss of jobs when a company relocates its operations abroad

Scale of operation: the maximum output that can be achieved using the available inputs (resources) – this scalecan
only be increased in the long term by employing more of all inputs.

Factors that influence the scale of operation of a business include: owners’ objectives, capital available, size of
the market the firm operates in, number of competitors, scope for scale economies
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Economies of scale: reductions in a firm’s unit (average) costs of production that result from an increase in the
scale of operations.

Types of economies of scale:

1) Purchasing economies – suppliers will most likely offer discounts for large orders as they’re cheaper to
process and deliver will also want to keep customer happy due to large profits made on this sale.
2) Technical economies - Large firms are more likely to be able to justify the cost of flow production lines.
Such expense can only be justified when output is high so that fixed costs can be spread ‘thinly.’
3) Financial economies - Banks and other lending institutions often show preference for lending to a big
business with a proven track record and a diversified range of products.
4) Marketing economies - Marketing costs obviously rise with the size of a business, but not at the same
rate. These costs can be spread over a higher level of sales for a big firm.
5) Managerial economies - As a firm expands, it should be able to afford to attract specialist functional
managers who should operate more efficiently than general managers.

Diseconomies of scale: factors that cause average costs of production to rise when the scale of operation is
increased.

Types of Diseconomies of a scale:

1) Communication problems- Large-scale operations will often lead to poor feedback to workers,
communication overload with the sheer volume of messages being sent, and distortion of messages
caused by the long chain of command.
2) Alienation of the workforce - The bigger the organization, the more difficult it becomes to directly involve
every worker and to give them a sense of purpose and achievement in their work.
3) Poor coordination - Business expansion is often associated with a growing number of departments,
divisions and products. The number of countries a firm operates in often increases too. A major problem
for senior management is to coordinate and control all of these operations.

How to overcome the impact of potential diseconomies: Management by objectives, Decentralization, Reduce
diversification

Sustainability: production systems that prevent waste by using the minimum of non-renewable resources so that
levels of production can be sustained in the future

4.5 Quality Management

Quality product: a good or service that meets customers’ expectations and is therefore ‘fit for purpose’.

Quality standards: the expectations of customers expressed in terms of the minimum acceptable production or
service standards.

Advantages of producing quality products and services are: easier to create customer loyalty, saves on the costs
associated with customer complaints, longer life cycles, less advertising may be necessary, a higher price – a price
premium – could be charged for such goods and services

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Quality can be achieved using 2 ways.

Quality control: this is based on inspection of the product or a sample of products.

Quality assurance: a system of agreeing and meeting quality standards at each stage of production to ensure
consumer satisfaction.

Quality-control techniques: Prevention, Inspection, Correction and improvement

Inspecting for quality

The quality-assurance department will need to consider all areas of the firm. Agreed standards must be
established at all stages of the process from initial product idea to it finally reaching the consumer. These stages
include: Product design, Quality of inputs, Production quality, Delivery systems, Customer service including after-
sales service.

There are several problems related to this approach to quality: It is looking for problems and is, therefore,
negative in its culture, the job of inspection can be tedious, so inspectors become demotivated and may not carry
out their tasks efficiently.

Total quality management (TQM): This approach to quality requires the involvement of all employees in an
organization. It is based on the principle that everyone within a business has a contribution to make to the overall
quality of the finished product or service.

The aim is to make all workers at all levels accept that the quality of the work they perform is important. In
addition, they should be empowered with the responsibility of checking this quality level before passing their work
on to the next production stage.

Limitations: only works effectively if everyone in the firm is committed to the idea, cannot be introduced into one
section of a business if defective products coming from other sections are not reduced

Benefits of quality systems: good publicity, allows the brand to be built around a quality image

Potential costs of quality systems: market research to establish expected customer requirements, inspection and
checking costs.

Quality circles: It is based on staff involvement in improving quality, using small groups of employees to discuss
quality issues.
Benefits: Improves quality through joint discussion of ideas and solutions, Improves motivation through
participation

Conditions determining success: Full support from management, Training given in holding meetings and problem
solving.

Benchmarking: involves management identifying the best firms in the industry and then comparing the
performance standards – including quality – of these businesses with those of their own business.

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Stages in the benchmarking process:

1) Identify the aspects of the business to be benchmarked

2) Measure performance in these areas
3) Identify the firms in the industry that are considered to be the best
4) Use comparative data from the best firms to establish the main weaknesses in the business
5) Set standards for improvement
6) Change processes to achieve the standards set
7) Re-measurement

4.6 Operation Strategy

Operational flexibility: the ability of a business to vary both the level of production and the range of products
following changes in customer demand

How can operational flexibility be achieved? increase capacity by extending buildings and buying more
equipment, hold high stocks, have a flexible and adaptable labor force

Process innovation: the use of a new or much improved production method or service delivery method.

Enterprise Resource Planning (ERP): is software that manages and integrates fundamental company activities
such as finance, human resources, supply chain, and inventory management into a unified system.
Adv: Cost Saving, Improved Process Efficiency
Disadv: Cost, Time

CAD – computer aided design: the use of computer programs to create two- or three-dimensional (2D or 3D)
graphical representations of physical objects.
Adv: increased productivity, great accuracy, so errors are reduced
Disadv: complexity of the programs, need for extensive employee training

CAM – computer aided manufacturing: the use of computer software to control machine tools and related
machinery in the manufacturing of components or complete products.
Adv: faster production, more flexible production allowing quick changeover from one product to another
Disadv: hardware failure – breakdowns can and do occur and they can be complex and time-consuming to solve

Outsourcing: using another business (a ‘third party’) to undertake a part of the production process rather than
doing it within the business using the firm’s own employees.
Benefits: Reduction and control of operating costs, improved company focus
Drawbacks: Loss of jobs within the business, customer resistance

Business-process outsourcing (BPO): a form of outsourcing that uses a third party to take responsibility for certain
business functions, such as HR and finance

Lean production: producing goods and services with the minimum of wasted resources while maintaining high
quality.
Adv: Waste of time and resources is substantially reduced or eliminated, New products launched more quickly

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Simultaneous engineering: This is a method of developing new products by ensuring that essential design, market
research, costing and engineering tasks are done at the same time as each other (simultaneously) – not one after
the other (sequentially).

Cell production: Cell production is a form of flow production, but instead of each individual worker performing a
single task, the production line is split into several self-contained mini production units – known as cells.

Just-in-time: this inventory-control method aims to avoid holding inventories by requiring supplies to arrive just
as they are needed in production and completed products are produced to order
Adv: Capital invested in inventory is reduced and the opportunity cost of inventory holding is reduced.
Disadv: Delivery costs will increase as frequent small deliveries are an essential feature of JIT

Kaizen – continuous improvement: The philosophy behind this idea is that all workers have something to
contribute to improving the way their business operates and the way the product is made. The kaizen philosophy
suggests that, in many cases, workers actually know more than managers about how a job should be done or how
productivity might be improved.
The following conditions are necessary for kaizen to operate: Management culture must be directed towards
involving staff and giving their views and ideas importance, team-working, empowerment, all employees should
be involved

Limitations of the kaizen approach: Some changes cannot be introduced gradually and may need a radical and
expensive solution, At least in the short term there may be tangible costs to the business of such a scheme

Project: a specific and temporary activity with a start and end date, clear goals, defined responsibilities and a
budget.

Project management: using modern management techniques to carry out and complete a project from start to
finish in order to achieve pre-set targets of quality, time and cost.
The four basic elements of any project: Resources, Time, Money, Scope

The key elements of project management include: defining the project carefully, including the setting of clear
objectives, dividing the project up into manageable tasks and activities, controlling the project at every stage to
check that time limits are being kept to, giving each team member a clear role, providing controls over quality
issues and risks.

Projects fail mostly because of: customers were not involved in the planning and development process, poor
planning, poor management and poor communication, the project had inadequate or no resources that were vital
for its completion

Critical path analysis: a planning technique that identifies all tasks in a project, puts them in the correct sequence
and allows for the identification of the critical path.

Critical path: the sequence of activities that must be completed on time for the whole project to be completed by
the agreed date.

Network diagram: the diagram used in critical path analysis that shows the logical sequence of activities and the
logical dependencies between them – so the critical path can be identified

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The process of using critical path analysis involves the following steps:

1) Identify the objective of the project, e.g. building a factory in six weeks.
2) Put the tasks that make up the project into the right sequence and draw a network diagram.
3) Add the durations of each of the activities.
4) Identify the critical path – those activities that must be finished on time for the project to be finished in
the shortest time.
5) Use the network as a control tool when problems occur during the project.

Rules of drawing: Diagram starts with zero node, Node represents the starting and ending of an activity, Line
represents the activity itself, First check the next activity and then close an activity, There should be no open
activity, if there is any then connect it with the last node

earliest start time: the earliest time each activity can begin, taking into account all of the preceding activities.

latest finish time: the latest time an activity can finish without delaying the whole project.

1) Total float: The amount of time an activity can be delayed without delaying the whole project duration
Total float = LFT – duration – EST

2) Free float: The length of time an activity can be delayed without delaying the start of the following activities.
Free float = EST (next activity) – duration – EST (this activity).

Adv of critical path analysis: allows businesses to give accurate delivery dates, Customers may insist on a particular
completion date and the critical time shows whether the firm can make this date or not
Disadv of critical path analysis: When project plans change or resources shift, it can become costly and ineffective,
For large projects it becomes unsuitable.

5.6 Financial Statements

Financial accounting is the process of recording, summarizing and reporting a company's business transactions
through financial statements. These statements are: the income statement, the balance sheet, the cash flow
statement and the statement of retained earnings.

Management accounting is the process of preparing reports about business operations that help managers
make short-term and long-term decisions.

Income statement: records the revenue, costs and profit (or loss) of a business over a given period of time.
Some uses include:

 It can be used to measure and compare the performance of a business over time or with other firms –
and ratios can be used to help with this form of analysis
 The actual profit data can be compared with the expected profit levels of the business.

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Dividends: the share of the profits paid to shareholders as a return for investing in the company.

Retained earnings (profit): the profit left after all deductions, including dividends, have been made, this is
‘ploughed back’ into the company as a source of finance.

Operating profit (formerly referred to as net profit): gross profit minus overhead expenses.

Profit for the year (profit after tax): operating profit minus interest costs and corporation tax.

Statement of financial position (balance sheet): an accounting statement that records the values of a business’s
assets, liabilities and shareholders’ equity at one point in time.

Shareholders’ equity: total value of assets – total value of liabilities.

Asset: an item of monetary value that is owned by a business.

Liability: a financial obligation of a business that it is required to pay in the future.

Share capital: the total value of capital raised from shareholders by the issue of shares.

Non-current assets: assets to be kept and used by the business for more than one year. Used to be referred to
as ‘fixed assets’.

Intangible assets: items of value that do not have a physical presence, such as patents, trademarks and current
assets.

Current assets: assets that are likely to be turned into cash before the next balance-sheet date.

Inventories: stocks held by the business in the form of materials, work in progress and finished goods.

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Trade receivables (debtors): the value of payments to be received from customers who have bought goods on
credit.

Current liabilities: business debts that will usually have to be paid within one year.

Accounts payable (creditors): value of debts for goods bought on credit payable to suppliers; also known as
‘trade payables’.

Non-current liabilities: value of debts of the business that will be payable after more than one year.

Non-current or fixed assets: The most common examples of fixed assets are land, buildings, vehicles and
machinery.

Intellectual capital or property: the amount by which the market value of a firm exceeds its tangible assets less
liabilities – an intangible asset.

Goodwill: arises when a business is valued at or sold for more than the balance-sheet value of its assets.

Working capital: it can be calculated from the Statement of financial position by the formula: current assets –
current liabilities. It can also be referred to as net current assets.

Shareholders’ equity: sometimes referred to as shareholders’ funds. It represents the capital originally paid into
the business when the shareholders bought shares (share capital) or the retained earnings/profits of the
business that the shareholders have accepted should be kept in the business. T

Cash-flow statement: record of the cash received by a business over a period of time and the cash outflows
from the business.

Liquidity: the ability of a firm to pay its short-term debts.

Ratios

Profit margin ratios

Gross profit margin compares gross profit with revenue, good indicator gross profit/revenue x 100
of how effectively managers have ‘added value’ to
the cost of sales.
Operating profit This ratio compares operating profit revenue operating profit/ revenue x
margin/Net profit Margin 100
Liquidity ratios
Current ratio Many accountants recommend a result of around current assets/current
1.5–2, but much depends on the industry the firm liabilities
operates in and the recent trend in the current
ratio.

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Acid-test ratio/Quick ratio By eliminating the value of inventories from the liquid asset/current
acid-test ratio, the users of accounts are given a liabilities
clearer picture of the firm’s ability to pay short-
term debts. current assets – inventories
(stocks) = liquid assets.

Some limitations of ratio analysis: Poor ratio results only highlight a potential business problem, The four ratios
studied give an incomplete analysis of a company’s financial position

Ways to increase profit margins:

1) Increase gross profit margin and operating profit margin by reducing costs
2) Increase gross profit margin and operating profit margin by increasing price
3) Increase operating profit margin by reducing overhead costs

Ways to increase liquidity for a business:

1) Sell off fixed assets for cash

2) Sell of inventories for cash (this will improve acid-test ratio but not current ratio)
3) Increase loans to inject cash into the business and increase working capital

Internal and external users of accounting information

Business managers to measure the performance of the business to compare against

(Internal) targets, previous time periods and competitors
Banks (External) to decide whether to lend money to the business
Suppliers/Creditors to assess whether the business is a good credit risk
Customers to assess whether the business is secure
Government and tax to assess whether the business is in danger of closing down, creating
authorities economic problems
Investors, such as if they are actual investors, to decide whether to consider selling all
shareholders in the or part of their holding.
company
Workforce to find out whether, if profits are rising, a wage increase can be
afforded
Local community to determine whether the business is making losses and whether this
could lead to closure.

5.7 Analysis of published accounts

Types of ratios

1) Profitability ratios: These compare the gross and operating profits of the business with sales revenue.
(covered in 5.7)
2) Liquidity ratios: These give a measure of how easily a business could meet its short-term debts or
liabilities. (covered in 5.7)
3) Financial efficiency ratios: These give an indication of how efficiently a business is using its resources
and collecting its debts.
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4) Shareholder ratios: These can be used by existing or potential shareholders to assess the rate of return
on shares and the prospects for their investment
5) Gearing ratios: These examine the degree to which the business is relying on long-term loans to finance
its operations.

Profitability ratios
Return on capital The higher the value of this ratio, the Operating profit/capital employed x
employed greater the return on the capital invested 100
in the business.
Financial efficiency ratios
Inventory turnover ratio This ratio records the number of times Cost of goods sold/value of
the inventory of a business is bought in inventories
and resold in a period of time.
Day’s sales in trade this ratio measures how long, on average, Trade receivables/revenue X 365
receivables ratio it takes the business to recover payment
from customers who have bought goods
on credit – the trade receivables.
Shareholder ratios
Dividend yield ratio This measures the rate of return a Dividend per share/current share
shareholder gets at the current share price X 100
price
Dividend per share Total annual dividends/total numbers
of issues shared
Dividend cover ratio This is the number of times the ordinary Profit for the year/annual dividends
share dividend could be paid out of
current profits after tax and interest – the
‘profit for the year’.
Price/earnings ratio In general, a high P/E ratio suggests that Current share price/earnings per
investors are expecting higher earnings share
growth in the future compared with
companies with a low P/E ratio.
Earnings per share Profit for the year/annual dividends
Gearing ratios
Gearing ratio These examine the degree to which the Non current liabilities/shareholders
business is relying on long-term loans to equity + non current liabilities X 100
finance its operations.

Limitations of ratio analysis

1) One ratio result is not very helpful – to allow meaningful analysis to be made
2) Inter-firm comparisons need to be used with caution and are most effective when companies in the
same industry are being compared.
3) Trend analysis needs to take into account changing circumstances over time that could have affected
the ratio results.

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5.8 Investment Appraisal

Investment appraisal: evaluating the profitability or desirability of an investment project.

The five quantitative methods of investment appraisal are:

1) Payback period: length of time it takes for the net cash inflows to pay back the original capital cost of the
investment.

Adv: Quick and easy to calculate, results are easily understood by managers
Disadv: Measures the overall profitability of a project but ignores all cash flow after payback period

2) Average/Accounting rate of return: measures the annual profitability of an investment as a percentage of the
initial investment

Adv: uses all the cash flows, focuses on profitability

Disadv: ignores the timings of cash flows

3) Discounted payback. The present value of a future sum of money depends on two factors:

1) The higher the interest rate, the less value future cash has in today’s money.
2) The longer into the future cash is received, the less value it has today.

These two variables, interest rates and time, are used to calculate discount factors

4) Net present value: This method again uses discounted cash flows. It is calculated by subtracting the capital
cost of the investment from the total discounted cash flows.

Adv: It considers timings of cash flows and the size of them in arriving at an appraisal, considers the time value
of money
Disadv: reasonably complex to calculate, final result depends on the rate of discount used

5.9 Financial and Accounting Strategy

A business cannot develop or decide on a new strategy unless:

• The current profitability and financial performance of the business are analyzed.
• The availability of sources of finance is assessed.
• The relative success of the company’s current strategies can be compared with those of other similar
businesses.

Stakeholders Information in annual reports is used to…

Managers Help take strategic decisions
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Banks Decide whether to lend money to the business

Suppliers Assess whether the business is a good credit risk
Customers Assess whether the business is secure
Government and tax authorities Calculate how much tax is due from the business
Shareholders and potential shareholders Assess the value of the business and their investment in it

Assessment of business performance over time and against competitors One accounting ratio result alone is of
very limited value. Ratios give a much clearer picture of relative business performance when they are compared
with: Ratios for previous time periods. This is called trend analysis.

Ratios from other companies in a similar industry. This is called inter-firm comparison.

The impact of business growth on ratio results: Business growth is a common corporate objective. The rate of
growth, the resulting economies of scale and whether growth is financed from debt or equity will all impact on
ratio results.

Limitations of annual reports and published accounts:

• Only historic data is included. This might not be a good indicator of future performance.
• Intangible assets are rarely fully valued in the accounts which could undervalue knowledge-based
companies.
• The accounts are not always comparable with other companies if, for example, different methods of
valuing or depreciating assets have been used.
• The accounts may not be accurate. This point needs to be analyzed in further detail.

Are the published accounts accurate?

No company can publish accounts that it knows to be deliberately and illegally misleading – they are checked by
an independent firm of accountants known as auditors. There is an auditor’s report in every published account.
However, accounting decisions are not always based on exact science and there are many instances when in
compiling accounts it is necessary to use judgement and estimations.

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