Notesale: Turn your study into money

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Contents
Corporate & Functional Objectives
...
4
Shareholder vs Stakeholder approach
...
6
Developing & Implementing Marketing Plans
...
8
Qualitative Forecasting
...
9
Porter’s Generic Strategies
...
12
Critical Path Analysis
...
14
Diseconomies of scale
...
15
Invention & innovation
...
16
Business Location
...
18
Demand factors
...
19
Relocation
...
19
International location
...
20
Hard and Soft HR
...
22
Delayering
...
23
Handling labour shortages
...
24
Profitability Ratios
...
26
1

Efficiency ratios
...
29
Investment Appraisal
...
30
Average Rate of Return
...
31
Raising Finance
...
33
Venture capitalist
...
34
Profit Centres
...
35
Balance sheet
...
37
Production laws
...
38
Consumer law
...
38
Business Cycle
...
40
Deflation
...
41
Exchange rate
...
42
Unemployment
...
43
Fiscal policy
...
44
Supply-side policies
...
45
Social Environment
...
48
Environmental Auditing
...
49
2

Technological Environment
...
50
Planning for change
...
52
Leadership
...
53
Organisational culture
...
55
Managing Change
...
newer markets, competiveness, internal resources, external &
environmental factors
Mission

Overall purpose of the business
Qualitative statement of the business’s aims
 Not always supported by business
 Too vague and general
 Obvious statements
 PR exercise
 Regarded cynically by staff
 Not a true reflection of reality
 Must be supported wholeheartedly by senior management
Corporate Relates to the business as a whole
Eg
...

Responding to stakeholder power (measured against interest and power)
HIGH: level of interest
LOW: level of interest
HIGH: level of power
Key players, take notice
Keep them satisfied
LOW: level of power
Communicate to them
Can usually ignore

Shareholder vs Stakeholder approach
Shareholder
 Traditional approach
 Management acts in best interest of
shareholders
 Principal aim; maximise profits
 Main focus; growth and profits
Conflicting Stakeholder
interest

Stakeholder
 Increasingly popular
 Taking account of wider stakeholder
interest
 Approach based on consultation,
agreement, cooperation








Wage rises means increased expenses, lower dividends
Organisational growth, expense of short term profit
Expansion and productions, disruption in local community
Common Stakeholder
Shareholders and employees aims for success and growth
interest
Suppliers interested in growth and prosperity of the business
Local community, employees and shareholders benefit from
business involvement in the community (jobs to repeat
businesses)
Solutions Workers Councils
Compulsory for larger EU firms; bringing worker
representatives from departments and activities
to discuss business issues
Stakeholder Directors
Outside representatives, non-executive position
on the Board
Arbitration/
Formal processes to resolve conflicts between
5

Conciliations
Share options and
performance related
pay

employer and employees (eg
...
Economic slowdown, significantly reduced the cost of advertising
services
Responsiveness
Hard to measure, spending needs to generate an acceptable return
and returns from
Online and direct marketing are more sophisticated and able to track and
marketing
measure the financial returns
spending
Marketing planning
Benefits
 Clear sense of direction for marketing
management
 Evaluated and Prioritised marketing
options
 Effectively allocate scarce resources
 Encourages coordination with other
functional areas

Potential Drawbacks
 Time consuming
 Difficult to assume due to market
changes
 Danger of being too simplistic or
complicated
 Plan can be ignored

7




Provides basis for assessing actual
performance
Responsibility for marketing department

Analysing marketing data
Forecasting sales for new products
Gathering evidence to support finance exercise
Support new marketing strategy
Make decision with organisational or operational changes
Test marketing: launching the product in small (geographical) part of target market to gauge the
viability of a product or service in the target market prior to main rollout/ launch
Aim; gather information about the optimum marketing mix [Price, Promotion, Product, and Place]
Advantages
 Data provided from actual customer
spending
 Reduces the risk of full scale launchsaves costs if failed product
 Allows tweaking in marketing mix before
launch
 Creates a promotional ‘buzz’ supporting
main launch

Disadvantages
 Danger of competitors learning the
product
 May not represent the full target
market- inappropriate decisions
 Delays full launch- limiting revenue
opportunity cost in rapid change
 Cost and time consuming to administer
(manage and be responsible)

Analysing trends
Moving Averages: takes data series and ‘smooths’ the fluctuations in data to show an average,
taking out extreme data from period to period
Extrapolation: showing the growth trends (as a percentage growth rate) and extrapolation can be
used to predict the path of future sales
...
g
...

It suggest that the growth strategy depends on whether it markets new/existing products in
new/existing markets
...

The business with the lowest unit cost is able to; offer lowest price or make highest profit margin at
the average industry price
Targets
 Productivity & Efficiency
𝑻𝒐𝒕𝒂𝒍 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝒄𝒐𝒔𝒕 𝑖𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 (£)
 Production
𝑻𝒐𝒕𝒂𝒍 𝒐𝒖𝒕𝒑𝒖𝒕 𝑖𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 (𝑢𝑛𝑖𝑡𝑠)
 Contribution per unit
 Unit cost per item

Efficiency & Flexibility
Targets
 Efficient utilisation of assets
 Responsiveness to unexpected short-term
changes in demand
 Unit cost, determined by efficiency and
flexibility
 Labour productivity: output per employee,

𝐴𝑐𝑡𝑢𝑎𝑙 𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡
× 100
𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝑜𝑢𝑡𝑝𝑢𝑡
𝑂𝑢𝑡𝑝𝑢𝑡 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠
12





units produced, sales per shop
Output per time period: potential outputs
Capacity utilisation: the proportion of
potential output being actually achieved
Over lead times: time taken between
receiving and processing an order

𝑇𝑜𝑡𝑎𝑙 𝑙𝑎𝑏𝑜𝑢𝑡 𝑐𝑜𝑠𝑡
𝑇𝑜𝑡𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡

Quality
In a competitive market, consumers are more knowledgeable, demanding, prepared to complain
and share information about poor quality
Competitive advantage gained from high quality reputation
Targets
 Lower defects rates
 Reliability
 Customer satisfaction
 Number of customer complaints
 Customer loyalty, Repeat business
 Amount of on-time delivery

Environmental





Increasingly important focus
Stringent environmental legislation
Customers may base their decisions on
firms taking environmental responsibility
seriously
Target closely integrated into firm’s
corporate social responsibility

Example targets
 Efficient use of energy
 Proportion of production packaging
materials recycled
 Compliance with waste disposal
regulation and proportion of waste to
landfill
 Supplies of raw materials from
sustainable sources

Internal Influence on Operational objectives
Corporate objectives
Objectives should align with corporate objectives
Finance
Financial position (profitability, cash flow, liquidity) affects the choices and
operational investments available
Human Resources
Service businesses, quality and capacity of workforce is a key factor
Productivity will be affected by the investment in training and effectiveness
of workforce planning
Marketing issues
Nature of the product determines the operational set up
Marketing mix changes on products may strain on operations, particularly if
product is inflexible
External Influence on Operational objective
Economic
Sudden or short-term changes in demand impacts the capacity utilisation,
environment
productivity etc
...
Each
cell is responsible for complete unit of work
 Closeness of cell members improves communication
 Multi-skilled and more adaptable to the needs of the business
 Greater employee motivation
 Quality improvements as each cell has ownership for quality on its
area
 Culture, workers have to embrace trust and participation
 Invest in new material handling and ordering systems
 Low use of machinery and traditional flow production
 Small scale production may not yield enough product
 Difficult to allocate work efficiently to employees
 Staff must support this approach of recruitment and training
Aims to ensure that inputs into production process only arrive when they
are needed
 Lower stock holding, reduction in rent and insurance cost
 Less working capital is tied to stocks
 Less likelihood to perished and obsolete stocks
 Less time and re-working production
 Little room for mistakes, minimal stock is kept for re-working faulty
goods
 Reliant on suppliers, production scheduled can be delayed
 No spare finished product available to meet unexpected orders
 A clear complex, specialist stock system
An approach of constantly introducing small incremental changes in a
business to order to improve quality and efficiency
 Ideas come from employee, less likely to be radically different
 Small improvements, less likely to require major capital investment
than process changes
 Culture, implementation of continuous improvement
 Kaizen, encourages employees to take ownership from their work,
reinforcing motivation and team working

Business Location
Decision making factor
Operational costs
Direct affected, potentially affecting sales and deliver customer
Cost of the operation
Desired customer service level
Potential revenue
Supply factors
Concerned with the operation
cost

Demand factors
Factors affecting customer service and revenues

17

Supply factors
Labour cost
Land & building cost

Energy cost
Transport cost

Community factors

Overseas operation allows production to low labour cost in countries
overseas, compared to the UK
Rentals can vary enormously dependent on the location and facilities
provided
...
g
...
) can increase costs
Getting inputs and delivering to customers
Proximity; close to suppliers to lower transportation of raw material cost and
times
Distribution to customers is not a significant issue, as delivery firms may carry
out the transportation
Non-financial factors
Local amenities & services (e
...
schools, professional services)
Local government attitude to supporting business (including financial
assistance)
Language & political stability

Demand factors
Customer
convenience
Labour skills
Site suitability
Image
Expansion potential

Customers able to find stores quickly, easily and cheap to access
Strong customer footfall, location not hidden away out of sight
Locate themselves in areas where will established expertise are located
Specialist skills required
Characteristics which matches and maximises customer satisfaction and
revenue
Intangible, customers associate a product with a certain area and prefer to
buy from there
Future production capacity often has to be taken into account
...
Location
overheads and cost-effective access to
inputs
 Optimal revenue opportunities;
customer service is not inconvenienced
through the choice of location
 Acceptable rate of return on investment;
business projects compete for scare cash
resources
 Sufficient production capacity; meets
18

demand and future flexibility in capacity
management decisions
 Access to a labour force; able to meet
workforce planning
Are cost (supply) issues more important than customer and revenues (demand) ?

Industrial inertia
Once established business decides to stay in its original location even if other factors suggest a new
location would be beneficial
 Existing location provides advantages from external economies of scale
 Over time, location or region would be associated with particular industry developing
specialist skills and experience
 Pool of potential recruits, people with relevant training and experience
 Specialist suppliers are likely to be nearby

Relocation
Move to a new place and establish one’s business there
 Recruiting and training staff in the new location
 Duplication property cost- remaining periods on the original lease and upfront payments on
a new lease
 Cost of physical transfer- moving production equipment, transferring stocks, lost revenues
 Intangible

Multi-site location
Where business operates from more than one location; retailers, distributors and franchises
Examples of multi-site growth
 Retailer expands by launching the same format in other locations then across UK
 Manufacturers establishes regional distribution centres
 Franchisor expands by selling geographical territories to franchisees
 UK bank opens call centre operations overseas
Advantages
Disadvantages
 Proximity to customer, competing in
 Potential duplication of activities
geographical markets
(diseconomies of scales)
 Greater potential promotion amongst
 Controlling operation, but IT system can
junior management
simplify it
 Locally done, easier recruitment
 Communication is challenged
 Marketing & Management economies of
 Increase risk; unable to understand the
scale- costly resource can spread across
local markets
business locations, customers and
revenues
 Easier to flex capacity- adding or
removing locations
 Less risk of the business disruption from
problems at just one location
 Understanding of local market cultures &
19

conditions

International location
Reasons for operating overseas
 Cross border mergers and acquisitions
 Organic growth overseas
 Faster lead times to customers or reduce cost from moving overseas
Issues of overseas location
Exchange rates
Exposed to fluctuating exchange rates
Trade barriers
Varied protectionism around the world, important to locate business to avoid
trade barriers to effectively compete
Barriers; quotas, tariffs on imported goods and government subsidies for
domestic industries
Political stability
Developed economies enjoy relative political stability
No sudden changes in political landscape impacting business
Other territories are less predictable
Offshoring or outsourcing
Off-shoring: the work is done overseas
Outsourcing: someone else does the work for the business
Offshoring risks
 Customer service; cultural differences,
poor training, local management lead to
worse customer satisfaction
 Higher than expected cost; low wage
economies, hidden costs such as lower
productivity from overseas location
 Public and employee relation; sensitive
topic, poorly handled publicity will be
costly
 Protection of intellectual property;
process and brands not as strong
overseas
...

Advantage
Disadvantage
 Easy to implement common policies and
 Bureaucratic, extra layers of hierarchy
practices for the whole business
 Lack of authority lower down hierarchy,
 Prevents parts of the structure to
losing manager motivation
independent
 Junior managers likely to be closer to
 Easier to control from centre
customer needs
 Easier exploit economies to scale and
 Customer service misses flexibility and
overhead savings
speed of local decision making
 Usually quicker decision making, shows
strong leadership

Decentralised
Decision making is spread out, including more junior managers as well as individual business units or
trading locations
Local managers are empowered to make on-the-spot decisions to handle customer problems
Advantage
Disadvantage
 Decisions made closer to customer
 ‘Decision making’ may not be ‘strategic’
 Better response to local customer
 Hard to ensure consistency at each
 Improves customer service
location
 Aims for a flatter hierarchy
 Diseconomies of scale, e
...

 Way of training and developing junior
communication-duplication of roles
management
 Who provides strong leadership
 Improves staff motivation
 Harder to achieve tight financial controlrisk of cost overruns

Delayering
Removing the layers of management from the organisational structure
Advantages
 Lowers cost- fewer employees
 Better delegation, empowerment and
motivation as authority are passed down
the hierarchy

Disadvantage
 Not all business are suited to flatter
structure e
...
mass production industries
(with low skilled employees) may not
adapt easily
22

 Better communication- fewer levels of
hierarchy
 Less departmental rivalry
 Encourages innovation
 Should bring managers closer to
customers- better customer service

 Negative impact on motivation due to
redundancies
 Disruption periods- new responsibilities
and fulfil new roles
 Managers’ increased workload- wide
span of control damaging
communication
 Skills shortages- danger of losing staff
with valuable experience

Workforce Planning
Deciding how many and what types of workers are required
Developing & implementing workforce plans
 Corporate objectives set HR needs-setting the agenda, indicating likely demand for labour
e
...
retrenchment strategy indicates reduction in labour demand
 Analyse existing workforce- amount and type of employee contracts, workforce
performance, skills audit
 Assess future needs for labour- plans for markets, product & target for efficiency and cost,
technological impacts, external changes, based on reliable data
 Identify gaps in the workforce (gap analysis)- plan should identify a strategy for closing the
gap with combination of recruitment, training, promotion and likely cost
Internal Influences on workforce plan
Corporate objectives Aligns with the overall goals and direction of the business
Production &
Required production capacity, product quality and delivery timetables are
marketing objectives important for the business’s demand for labour
Financial position
Take account the financial budget and cash flow forecasting
and objectives
Staff remuneration is usually a major operating cost and cash flow
Remuneration: money paid for work or service
Strength of labour
Number, skills and experience of current staff’s influence on the workforce
supply
and ability to meet demand
Existing
Production organisation (cell, teams, production lines) and management
organisational
structure (flat, matrix) all affect existing internal supply of labour
structure
External Influences on workforce planning
Market demand
Demand for the firm’s product determines output and sets labour
requirements
Labour market
Rate of unemployment, easiness of recruiting staff and market rate of
trends
payment
Economic condition Weak economy may lower wages for easier recruitment
Poor economic growth is a result of lower market demand
Social and political
Legislations such as the minimum wage directly affects staff costs
change
Demographic factors affects the supply of labour (ageing population)
Local factors
Local labour market; infrastructure, substantial local business employers

Handling labour shortages
Not enough labour to meet production demand

23

How shortages may occur
 Short term demand increase- not enough production capacity
 Staff turnover- loss of experienced staff
 Head hunted by competitors- staff offered better pay
 Changes to products/production processes- staff doesn’t have required skills and experience
Ways of handling shortages
 Increase production capacity- introducing additional shifts, e
...
overtime, temporary or
seasonal staff
 Review of existing pay and reward system; review competitiveness
 Training investments- fill the skills gap
 Aggressive recruitment, promoting job opportunities or offering incentives to staff to
introduce potential recruits
 Broaden pool of potential recruits to the business

Excess labour
When a business has too many employees for its needs


Excess production capacity
Economic downturn, reduced demand leaving too many staff
Existing employees do not have the skills that business demands

Dealing with excess labour
 Redundancies; short term response but must be genuine
 Ban or Restrict overtime; cut shift or short-term working (lower pay, but fewer job losses)
 Flexible working; full time to part time, job sharing, career breaks
 Temporary workplace shutdown; extended holiday breaks
 Relocate or retrain employees to cover skills gaps, time consuming
Benefits of effective workforce planning
 Achieve its corporate objectives; ensures workforce is the right size, skills, place
 Encourages preparing and planning for changes, ’strategic decision making’ , rather than
reacting
 Better able to handle workforce implications
 Improved communication; staff feeling closer to decision making process if HRM takes
labour seriously
Cost of workforce planning
Cost
 Plan supported by sufficient financial resources to be effective planning
 Every decision has a cost implication; new training, extra recruitment, redundancies
Cost needs to be justified and should be consistent with corporate objectives
Employer and Employee relations
 Planning inevitable affects both sides
 Improve communication and consultations
Training
 Expensive
 Disruptive
 Difficult to measure the benefits
Business image
24




Effective workforce plan support of employees is likely to enjoy good branding/ corporate
image
High customer service and quality experience are recognised by customers

Profitability Ratios
Profit: reward or return for taking risk and making investments
Measuring profits
Absolute terms
Value of profits earned
£50,000 profit made in 2016
Relative terms
The profit earned as a proportion of sales achieved or investments
£50,000 profit from £500,000 of sales is a profit margin of 10%

Ratio analysis: analysing relationships between financial data to assess the performance of a
business
...
50:£1
However, companies who generate cash quickly can run on much
lower ratios
Too much liquidity Firms may have too much inventories or too many receivables
Business can be inefficient as cash can be invested elsewhere into the
business to generate more profits
Too little liquidity Could lead to insolvency as they are unable to pay debts
Acid Test Ratio
Quick ratio excludes inventories as it is the most illiquid of current assets and compares it to current
liabilities
26

Acid Test Ratio

Debtors+ Cash
Current liabilities

Acid Test Ratio

Current Assets – Inventories
Current liabilities

Ideal ratio 0
...
g
...
g
...

Cost of goods sold
Inventory Turnover
Inventory
Low gross profit margin Requires a high level of inventory turnover as they only make small
profit margin on each item sold
High gross profit margin Survive on lower levels of inventory turnover as they make a larger
gross profit each time they sell
JIT production High ratio as they sell their stocks in a more complex and efficient
method
Improvements
 Hold less stock or increase sales
 Sell off or dispose slow moving/ obsolete stocks
 Introduce lean productions to reduce stock holdings
 Rationalise product range or reduce stock holding
requirements
 Negotiate sale or return arrangements with suppliers; stock is
only paid when customer buys it
28

Aged stock analysis Obsolete and unsaleable inventories are offered with discounts by
managers as they also cut down orders for slow-selling stock
Limitations
 Varies from industries to industries
 Holding more stock can improve customer service as they are
able to meet demands
 Seasonal fluctuations not reflected in the calculations
 Irrelevant in service sectors but no retailers and distributors

Shareholder Ratios
Measures the returns that shareholders gain from their investment
Dividend per Share
Expressed as a number of pence
Dividend Per
Share

Total Dividend
Number of Shares Issued

Short term Shareholders
Long term Shareholders
Low share price

Want a higher figure for a higher return in dividends
Maybe happy will a low figure as they may want to see the business
grow
Made lead to more shareholder investments as its cheap to buy more
shares

Dividend yield
Comparison between the cost of shares and dividend received
Dividend yield

Dividend per share
Price per share

x 100

Increasing percentage Increase proportion of profits that are paid out as dividends
Changes in figures Depending on the business performance
Interpreting results
Annual yield Compare with other companies in same sector
Rates of returns with alternative investment
Shareholders Looks at yield to decide where to invest
High yield suggests an under-valued share price of a possible dividend
cut

Investment Appraisal
Process of analysing whether investment projects are worthwhile
Capital Expenditure
Cash spend on non-current assets
 Plant & machinery
 Factory buildings
 IT systems
 Distribution equipment
 Fixtures and fittings

Revenue Expenditure
Cash spent on day to day operations
 Raw materials
 Energy costs
 Wages and salaries
 Marketing costs
 Office administration
29

Capital expenditure has an “economic life” in the business; intended to be kept rather than sold or
turned into products
 Adds extra production capacity
 Replace worn-out, broken or obsolete machinery and equipment
 Support the introduction of new products and production processes
 Implements improved IT systems
 Complies with changing legislations and regulations
Scares finance
Finance in most business is scares
 Justifiable risk of investments
 Choice between competing investments
Risks of investment appraisal
Length of project Long projects; risk of estimated revenues cost and cash flow prove unrealistic
Source of data
Estimated project profit based on research or gut feeling
Size of the
Bigger the project, the more risky
investment
Risk, major consequences if project fails
Economic and
Large investment, businesses will make assumptions about demand, cost,
market
pricing which can be wildly inaccurate through changing market and economic
conditions
Experience of
Lower risk proposition if management team has strong experience in a know
management
market, vice versa
team
Qualitative factors to investment appraisal
 Impact on employees
 Product quality and customer service
 Consistency of investment decision with corporate objectives
 Brand image and reputation
 Disruption/ change in set up on operations
 Responsibilities to society and external stakeholders

Payback period
The time taken to repay its initial investment
Amount required
Amount received
(inflow that year)

x12

Advantage
 Simple and easy to calculate
 Focuses on cash
 Emphasis on the speed of return; good
for changing markets
 Straightforward to compare competing
projects

Disadvantages
 Ignores cash flow arise after payback has
been reached
 Takes no account of ‘time value of
money’
 May encourage short term thinking
 Ignores qualitative aspects of a decision
30



Doesn’t create a decision for the
investment

Average Rate of Return
Method looks at the total accounting return for a project to see if it meets the target return
1
...
– initial investment
3
...
÷ initial investment cost
5
...
Annual net cash flow x Discount factors
2
...
Total all present value even year0’s negative investment
Time value of money
 Better to receive cash now than the future
 Future cash are ‘worthless’
 Discount factors brings back ‘present value’
 Relevant discount factor determined by required rate of return
Advantage
 Takes account the time value of money,
placing emphasis on earlier cash flow
 Looks at cash flow involved through the
life of project
 Discounting reduces the impact of long
term cash flows
 Decision making mechanism- reject
projects with negative NPV

Disadvantage
 Complicated methods
 Difficult to select most appropriate
discount rate- may lead to rejection of
good project
 NPV calculation is very sensitive to the
initial investment cost

Raising Finance
Business needs finance for
 Business set-up
 Day-to-day trading (work capital)
 Growth

31

Purpose
Cost
Flexibility
Ownership
structures
Period required

Easy to finance long term assets or short-term increase in stock
Loan finance incurs interest costs
Share capital also has a cost; dividends required by shareholders
Types of repayment required
Limited companies, easier to find compared to the sole traders
Short term vs medium term vs long term

Equity
Finance from shareholders
Share capital
 Return: dividends+ share price growth
 Highly flexible
 Best suited for long-term finance
 No obligation to repay

Debt
Short, medium or long term loans
Bank overdraft, Bank loan
 No loss of ownership
 Require security, collateral
 Interest cost
 Repayment is an obligation

Internal
 Retained profits
 Sale of assets & leaseback
 Reduced working capital

External
 Bank overdraft
 Bank loan
 Debentures
 Issue shares

Retained Profits
Most important and significant source of finance for an established, profitable business
Advantages
Disadvantages
 Cheap
 Danger of holding cash
‘Cost of capital’ is the opportunity costs
 Shareholders may prefer dividends if the
 Flexible
business is not making sufficient return
Management in control reinvestment
on investment
Shareholders control proportion
 High profits and cash flow would suggest
retained
the business could afford debt (a higher
 Doesn’t dilute the ownership of the
gearing percentage)
company
Sale on assets
Selling spare or surplus assets, achieving a short term boost to cash flow
e
...
spare land, surplus equipment but not all business have spare assets
Surplus: amount of something left over when requirements have been met; excess production


Sale and leaseback
Specialist method of raising cash, selling fixed assets then leasing them back from new owner
Involving properties, e
...
hotels, supermarkets, offices) but can only be done once


Working capital
Reducing working capital; one off benefit from lower working capital, but can it be sustained
Finance often wasted in excess stocks and trade debtors
Low stock turnover ratio or high debtor days


Raising finance from suppliers
Provide goods and services in advance of payment, trade creditors
Amount owed to supplier may increase due to expansion
Strong relationship with suppliers allows better payment terms
32



Bank overdrafts
Short term finance, widely used
Loan facility, bank lets business owe money when balance goes below zero for a charge of high
interest rate
Flexible, only used when needed
Great for businesses with seasonal fluctuation in cash flow or a short term cash flow problem
 Easy to arrange
 Can be withdrawn in short notice
 Flexible, used when it’s only required
 Interest rate varies with changes in
 Interest, only paid on amount borrowed
interest rate
 Not secured on assets of business
 Higher interest rate than loann
Bank loan
Long term finance; fixed period, rate of interest varied or fixed, set repayments and provided
security for the loan
Able to finance fixed assets, lower rate of interest than overdraft but not much flexibility
 Greater certainty of funding provided
 Requires security (collateral
 Lower interest rate
 Interest paid on full amount outstanding
 Good method to finance fixed assets
 Harder to arrange

Debentures
Form of bond or long-term loan issued by company, usually with a fixed rate of interest
 Long term, 10-20 years
 Issued by the company
 Fixed rate of interest
 Secured against the assets of company
 Can be traded
Issuing shares
1
...
Shareholders buy new shares
3
...
g
...
g
...
g
...
g
...
g
...
g
...
g
...
g
...
g
...
g
...

FDI, foreign direct investment dependent on certain industry
Social
Social environment gauges determinants like cultural trends, demographics, and population
analytics
Technological
Innovations in technology that may affect operations of the industry and the market favourably or
unfavourably
...
g
...
g
...
Also encourages consumers to borrow and spend on goods
which increases demand in economy
Economist think that it’s better to encourage steady growth by ‘supply-side policies’ encouraging
investment, training and employment, increasing quality of labour
Economic growth and effects on business and government
Individual
 Higher revenue and higher revenue
businesses
 Potential economies of scale
 Sustained growth increases confidence and helps plan for future
 Fast growth; shortages of raw material and skilled labour
Governments
 Higher revenue; new investments in projects, creating jobs therefore less
welfare benefits
 Increase revenue through taxes
 Very high rates of growth; followed by recession
The
 High economic activity may deplete non-renewable resources
Environment
 Increased activity: increased pollution

Business Cycle
A series of cycles of economic expansion and contraction
Growth: increase in amount of goods and services produce per head by a population over a period
of time
Recession: Period of economic decline over six months, marked by high unemployment, stagnant
wages and fall in sales

39

How much a business is affected depends of the income elasticity of
demand due to its consumer durability
Income elastic goods; luxury goods and services
Income inelastic goods; aren’t affected by business cycles
Business changes during Economic activity Locally and Globally
Booms; raise prices and profitability
...
National recession, locate
abroad
...

Stores may even cut prices to artificially boost demand during the downswing
...
It can also make profit margins go up, as business put up prices in response to high
demand without their costs going up by as much
...

Cost-push inflation can make profit margins go down if business doesn’t put up their prices

40

High inflation; spending goes up temporarily, people rush to buy more before price rises
...
Manufacturers can reduce prices ( but not reduce too much to
reduce its premium image) or invest heavily in advertising
 Period of high inflation, good time to expend if interest rates are lower than rate of inflation
as it’s cheap to borrow money for new premises or machinery
...
Bank of England
often raises interest rates in time of high inflation to encourage saving so business don’t
benefit from high inflation
 Harder to plan during inflation, as stable prices allows better accurate sales forecasts

Deflation
Opposite of inflation, not enough demand so companies reduce their prices
Lower productivity usually means firms don’t need many workers, so deflation leads to rise in
unemployment
...


Interest rate
Cost of borrowing, a fall in interest rate increases business activity as it’s cheaper to borrow to
invest, vice versa
...
Many also save more money as they
get a better rate of return therefore the market demand goes down
 Dependent on product, borrowing products (cars, houses, new kitchen and high end
consumer electronics) are more sensitive to interest rate changes
...
Affecting imports and exports
...
Strong pound is bad for UK exports as they can’t be competitively priced abroad, vice
versa
...
Or pay UK suppliers in Euros to keep costs in the same
currency as their target consumer

Taxation Rates



High tax rates for businesses means that their net profits are reduced after tax
High tax rates for individuals, reduce customer disposal income- reducing business turnover
Low tax rates encourage people to spend so business make bigger profits

Unemployment
Measured by number of people seeking work
 Structural unemployment; changes in economic structure e
...
decline in major industry
 Regional unemployment; concentrated in one particular region of the country
...
Highly affects luxury businesses
...
g
...

Except for structural and regional as unemployed workers aren’t in the right place and
industry and need training
...
Businesses who invest in
training can find competitors poach employees after
...

No
...
g
...
g
...
Low rates of tax give more profit and encourage business
activities and new start-ups
...
g
...
To pump more money into the
economy
 Changing expenditure on welfare benefits has quick impact on the economy as the poorer
people will change spending habits immediately
 Expenditure on infrastructure, slower effect on the economy

43

Balancing Tax changes by the Chancellor of the Exchequer in the yearly budget
Expansionary fiscal policy
When
Change in government
borrowing
Effect on economy

Economic slowdown/ high unemployment
Cutting taxes and/or raising
Borrowing increases
spending
(or government surplus decreases)
Demand for goods and services increases

Contractionary fiscal policy
When
100% capacity/ high risk of inflation
Change in government
Rising taxes and/or cutting
Borrowing decreases
borrowing
spending
(or government surplus increases)
Effect on economy
Demand for goods and services decreases
Expansionary fiscal policy helps to lower unemployment
...
It can cause inflation though, so it needs to be
monitored
...
Reduces unemployment and increase output and the supply of labour
 Privatisation and deregulation
 Encourage international trade (European single market)
 Promoting entrepreneurship by offering loans to new businesses
 Lowering corporation tax to attract investors from outside the country and encourage
growth
 Decrease income tax, workers motivated by larger proportion of wages
 Cutting benefits and spending more on training to encourage people to work
Privatisation
State-owned businesses are sold to private investors
Usually to improve efficiency to make profit; British telecom, British Gas, British Steel, water
companies and electricity distributors
Privatisation benefits
 Promotes competition which increase
efficiency
...
Helping to cut taxes
and reduce its borrowing, encouraging
business activities

look for quick profit rather than long
term strategy

Some industry being a natural monopoly; privatising it means the government will need to build in
regulations to prevent the new owners from exploiting their position and raising prices or cutting
quality
Nationalisation
Taking businesses into government ownership
...
Lack of competition lead to inefficiency and poor quality and wouldn’t be making much
profits
State as a consumer
The state buys products and services and becomes the biggest consumer (e
...
pharmaceutical)
Dependency on the government can be risky; as they can move to another market with similar
product, often leading to regional unemployment
Intervention vs Laissez-Faire
Whether governments interfere in the economy
Interventions: charging taxes, passing laws, providing public services and taking part as a consumer
...
) and
2007 (Romania and Bulgaria)
...
g
...
Common currency
European Central Bank set the interest
would reduce transaction costs between
rates causing problems as different
the UK and Eurozone countries
countries face different economic
 Harder to compare prices when they’re
situation
not in same currency
 UK exporting aboard faces uncertainty
of fluctuating exchange rates
...
Regulation are binding laws that apply to all EU citizen as soon as they are passed
2
...
g
...
Decisions are binding laws that apply to a specific country or specific business
4
...

Currently the UK has an aging population, meaning the number of people available to work is falling,
affecting business’ efficiency
...
g
...
Flexible working; choice of when and how many hours they want to work
...
Homeworking; new technology becoming more common, reduces labour turnover and
absenteeism but can be hard to monitor employee’s performance
...
Unethical child labour but differs in unethical trade of cigarettes despite the
cancerous risks
 Manufacturing issues; the balance between capital and labour, increased use of automation
tends to increase redundancies numbers
 Ethical behaviour can affect profit; paying higher ethical supplies increases costs and could
lower profit margins but can attract customers approving the approach, becoming a unique
selling point to premium pricing and good PR
 Growth objectives affect ethical behaviours; speed of growth of fair trade clothes likely to
have longer lead times than non-fair trade company
...
E
...
Marks and Spencer, voluntarily promised not to
buy from sweatshops but other companies either still use them or have only stopped
following pressure/ boycotting from customers
...
Business have special responsibility to their stakeholders
“Corporations should pursue shareholder wealth with a long-run orientation that seeks sustainable
growth and profits based on responsible attention to the full range of relevant stakeholder
interests”

Employee

Suppliers








Customers




Local
community





Legal responsibilities
Training employees
Choose to give better deals than bare legal minimum
Honest and pay on time
Long-term relationship e
...
long-term exclusive supply contracts with regular
orders, leading with regular orders
Need to make sure suppliers don’t exploit workers or pollute excessively; firms
may not see this as worthwhile, unless customers care enough to boycott the
product
Good customer service (customer goodwill) of good quality and reasonable
prices encourages customer loyalty and repeat business
Complaints/boycotting with campaigns against the firm can even persuade
other people not to buy
Job security or use of local suppliers
Avoid noise pollution, air pollution and excess traffic on local roads
Earn goodwill by charity donations or sponsoring local school

Stakeholder vs Shareholder
Milton Friedman [American economist], Shareholder value
Businesses responsibility of business is to increase profits
seen as the historic way of doing business with companies realising that there are disadvantages to
concentrating solely on the interests of shareholders
...

Edward Freeman [American philosopher and professor of business administration], Stakeholder
Recognises the responsibilities of corporations in the world today, whether they be economic, legal,
ethical or even philanthropic
...
Whilst the measures adopted by the companies are legal, they are widely seen as
unethical as they are utilising loopholes in the British tax system to pay less corporation tax in the
UK
...


Environmental Auditing
A review of the environmental effects on the firm’s activities, assessing whether the firm is meeting
legal environmental protection requirements and whether it’s meeting its own targets
Lowered greenhouse gas emission, clear objective to reduce emission and check their progress
towards the objective
Able to compare waste output to legal requirements or company policies to know what actions to
make, overtime needs to keep more accurate records
48

Competitive Environment
Market structure affects strategy and competitive behaviour
 Perfect competition; competing in an equal basis, identical products, come and go
businesses in the market
...
Perfect competition leads to low profit margins, so firms try to keep
cost low and focus on efficiency
 Monopoly; one business in complete control, no competition and no alternatives
...

UK, Competition Commission treats firms with +25% market shares, they also have the
power to prevent takeover and mergers
...
Making prodcuts stand out
and show consumers chose based on their needs
 Oligopoly; small number of large firms dominate a market, charging similar prices
...
The innovation makes
stock control easier and improves quality control
...
Factories and
production plants often use automated pickers to take goods from the production line and pack
them into boxes, cheaper and faster than humans
...
Quality assurance
can help with this
 Technological developments encourages innovation and firm may pursue a diversification
strategy and encourage risk taking
Disadvantages of New Technology
 Advance computer system does not guarantee the success in the market place
 Difficult to integrate new technology with existing machines; may even be less efficient and
takes time to coordinate multiple system
 Retraining of workers; expensive and has opportunity costs
 Less reliant on workers; leading to redundancies and loss of motivation in organisation
 Level of customer service provided, automated telephone switchboards and answering
machines are cheaper but will lose personal contact with consumers

Internal causes of Change




Growth causes big changes to businesses; relocating to bigger premises
New leaders or owners; small changers like flexible working hours or bigger changes like
redundancy
Bad performances; manages likely to make changes to improve business performances e
...

fall of sales or mangers might change the customer services policy to retrain staff

Organic Growth
When business grows naturally (internal growth)
 Business size usually measured by revenue or number of employees
 If a business is successful, it will grow naturally as demand for company’s products grows
 Organic growth; able to finance growth by reinvesting profits into the business
...
Shareholders unlikely to favour investment in longterm projects
Floating the business on the stock market is expensive and complicated
Expanding overseas, familiarizing with the commercial law of the host country (languages
and culture)
Large companies may suffer from diseconomies of scale, cost of producing units ries
Avoid dominating and become a monopoly- penalised by the competition commission if they
damage competition in a market
Shareholders/Owners to restrict growth
Maintain the culture
‘Overmarketing’ product they could let customers down; productive, administrative or
distributive capacity may not be enough to handle increased demand

Retrenchment
 Choice of being smaller due to the suffering from diseconomies of scale
 Downsizing by choosing to focus their energy on one area of business; too many activities
makes it hard to stay competitive
 Forced out of a market by a larger competitor, forced to stop making some types of product
by changes in consumer taste
 Changes in economy; recession or high interest rates may force downsizing
Takeovers or Mergers
 Takeover; one business buys enough shares in another so they have more than 50% of the
total shares
...
The shares of the merged company are
transferred to the shareholder of the old companies
Hostile or Agreed Takeovers
 Hostile takeover; public limited company buys majority of the shares in another, against the
will of the directors of that company
...
Encouraging existing shareholders to sell them the shares by
offering a premium, extra payment on top of the actual value of the shares
...
This is usually due to the owners agreeing it would
benefit the survival of the business
Reasons for takeover or merge with others
 Diversify and buy existing business operating in the market they want to enter; gain from
the experience of those employed by the businesses they buy so they make profits faster
 Buy out companies that operate the same market so they reduce the amount of
competition that they face
 Suppliers or retailers that sell their products in order to have more control over how goods
are produced or sold
 Other companies will want to extend their market in the same industry but in other
countries
 ‘assets stripping’, buy poorly performing businesses cheaply and then sell off the assets at a
profit
...
Corporate integration, allows business to switch production
from country to country where labour cost may be low but the expertise already exists

Planning for change
Corporate plans
Setting out their overall strategy
 Corporate objectives can set out the overall strategy of the business
 Corporate planning processes
1
...
Research the market to identify opportunities and threats
3
...
Develop strategies to achieve objectives and focus on external opportunities and
internal strengths
5
...
g
...

 Technological factors; emerging trends, e
...
increase in internet shopping and mobile
commerce
 Environmental factors; consumers caring more about the environment, influencing the
business’s pollution and wastages
Internal factors on corporate plans
 Skilled and motivated staff help business achieve objectives, can limit or help
 Evaluating the viability of the products; hard to increase failing product
 Finances affect corporate plan, e
...
cash flow restriction
 Production capacity; limit the plans a business can make e
...
can’t increase output, why
increase demand

Contingency plans
Preparing for out of the ordinary events
Help business respond to different types of crisis
 Faulty or dangerous products
 Hostile takeover
 Fire that destroys factory
 Bad news/PR
 Sudden change in demand caused by competitor’s activity or economic crisis
 Overseas factory shutdown by foreign law
 Lost or corrupt data caused by computer network problems
52

Its very expensive so it’s not worthwhile to plan for every single thing, mangers will decide on the
probability and the impact to the business
Crisis management; unexpected situation occurs and business has to respond
 Less effective if there is no contingency plan, making snap decisions rather than a
straightforward decision
 Mangers need to act quickly and decisively to limit the amount of damage caused,
best to achieve through strong leadership
Help of Hinder
 Helpful; clear direction and everyone is working towards same goal, senior management
think about strength and weaknesses, and external threats and opportunities
...
Leaders’ powers comes from their personalities
...

Managers can have leadership qualities to persauade people about the decisions made
...

Useful when dealing with unskilled workers in crisis management, requiring supervision which may
demotivate intelligent workers
Paternalistic; consults before making decision, explain and persuades to their interest
...
Leaders good and communication and good at dealing with to and
from communication
...

Laissez-faire; weak form, managers might offer employees coaching and support and rarely interfere
with business running
...

 Workforce motivation; demotivate and become uncooperative and actively resist change
Leader can persuade employees by
 Communicating and understanding
53




Retrain employees to feel comfortable about new role
Involve employees in making decision; make employees in control and less fearful

Effective leaders can meet the needs of the workforce and the demands of the business
...
Not complacent, take every opportunity to help business grow
 Think ‘outside the box’, finding creative solutions to problems and inventive new ways to
expand the business, allowing firm to stay ahead of competitors

Organisational culture
The way business does things and the way that people in the business expect things to be done;
shaping expectations and attitudes
 Affects staff behaviours
 Reinforces company rules and managerial attitudes and recruitment policies
 identified by looking at its heroes, stories told repeatedly with the company’s values
Strong culture
Employees believe in corporate values of the company
 employees need less supervision, behaviour will naturally fit with company values
 staff are more loyal to business, low staff turnover
 increases motivation and productive work
Weak culture
Employees don’t share company values and have to be forced to comply with them
Charles Handy, four types of organisational culture
1
...
Role culture; bureaucratic where authority is defined by job title
Avoid risk for fear of failure and develops cautious aims and objectives
Lose out in new or expanding markets as they fail to exploit opportunities
3
...
Task culture; emphasis on task, small teams together to work on a project but there may be
conflict between teams and have many projects
Supports objectives based on products
Respond well to management objectives, specific targets for each department and each
individual employee
Manager’s reason for change
 New manager; wants to change to a previous and similar environment, for familiarity
 Change of culture to be more competitive; power culture slowed to save money and
increase efficiency, into entrepreneurial culture
Changing period
 Workforce’s resistance to change
54




Attitudes and behaviour to the objectives
Can be expensive; new equipment, change of office layout, logo or motto

Stakeholders and corporate culture
 Staff; motivation, power and role culture demotivates creative staff who sees ways of
improvement but don’t have power to change
 Customers; affects customer loyalty, dependent on business’s customer focused culture
 Shareholder; risk depends on the culture, they might get low returns if it’s a low risk culture,
but high risk culture has the possibility of high returns and risk of losing money

Strategic Decisions
Strategic, tactical and operational
Strategic decision
 Long term decision affecting general direction, made to achieve its long term aims
 Expensive and high risk, not obvious if it’s the right decision until a long time after
 Taken by owners or directors
Tactical decision
 Medium term decision made after ‘strategic decisions’
 Easier to predict the impact
 Taken by senior mangers
Operational decision
 Routine decisions taken on a daily basis
 Taken by middle or junior managers
Information management
Collecting and processing data
1
...
Information is processed and organized by department
3
...
g
...
Use of media to raise awareness and
consumer response to pressure groups can affect business practices
Corporate culture; risk taking culture with encourage risky decision with potential of high
rewards whereas a conservative culture will discourage risk taking
Stakeholders; e
...
g
...

Resources availability; shortage of local labour

Scientifically vs Gut Feeling
 Scientific decision making (data collection, analysis, conclusion, testing to predict outcomes)
Breakeven analysis; predict sales that covers cost
Investment appraisal techniques; financial returns
Decision trees; measure financial impact
 Costly and time-consuming but reduces risks of expensive mistakes
 Manager may have a good intuition, based on past experience good for routine problems
 Unfamiliar problems would require more research and analysis

Managing Change
Strategies that overcome resistance
 Success can come from employees who have opportunities to be fully consulted, as lack of
information can lead to distrust affecting motivation and morale
1
...
Keep staff informed at each stage of the process, managers may try to persuade
leading to a more paternalistic approach
Project champion; manager’s role is to encourage employees to support changes by being
enthusiastic about changes

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