Theme 3

Revision Notes

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3.3.1 Business objectives and strategy
What is a mission statement?
A mission statement is a brief written statement of the purpose of a company or organisation. Ideally a mission
statement guides the actions of the organisation, spells out its overall goal, provides a sense of direction, and
guides decision making for all levels of management.
Potential Benefits
 To promote the business; as the statement can give a very good impression to stakeholder groups. e.g.
focus on low prices or high quality

 To set corporate objectives; managers can break down the mission statement into SMART corporate
objectives.

 To give the business direction i.e. something to aim for in the long term.

 To motivate workers; to provide direction and an aim which may appeal to many employees (e.g.
ethical stance)

 To attract investment; sends out a powerful message which appeals to potential shareholders.

Potential Drawbacks

 In terms of day-to-day planning the mission statement has limited value. This is because managers
require measurable corporate objectives and often it is very difficult to create SMART targets from
the wording of a mission statement.

 Often perceived to be a marketing ploy rather than a meaningful statement of intent

 Also, it is often never seen by stakeholders such as customers and employees so will have minimal
impact.

 Investors may be interested by a mission statement but a decision to invest would normally require
access to a business plan, accounts etc. They are highly unlikely to invest by just reading a
mission statement.

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The most effective business objectives meet the following SMART criteria:

S – Specific – objectives are aimed at what the business does, e.g. a hotel might have an objective of filling
60% of its beds a night during October, an objective specific to that business.
M - Measurable – the business can put a value to the objective, e.g. £10,000 in sales in the next half year
of trading.
A – Agreed (or attainable) by all those concerned in trying to achieve the objective.
R - Realistic – the objective should be challenging, but it should also be able to be achieved by the
resources available.
T- Time specific – they have a time limit of when the objective should be achieved, e.g. by the end of the year.

Business objectives include:

Survival

 To continue to exist as a business

 This may be the most important objective in the short term
 This may be the primary objective of a start-up business or one experiencing difficult trading conditions
 To achieve this a business may set a cash flow objective to ensure sufficient cash is available to meet
day to day expenses

Profit maximisation

 To produce at the level of output where the surplus of sales revenue over total costs is at its highest
profit = SR – TC
 This will help keep investors happy as well as fund growth

Other business objectives include:

Cost efficiency

 To control costs so that the maximum value of outputs is achievable with the lowest value of inputs
 This is necessary to support an objective of profit maximisation

Employee welfare

 To look after the economic and physical well being of the workforce
 A motivated workforce will increase productivity
 Helps maintain positive employer/employee relations

Customer satisfaction

 To ensure that goods and services meet the needs and expectations of the customer
 Helps to build customer loyalty and repeat business maximising sales in the long run

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Social

 To behave in a way which benefits society

 This could include to create employment, support the local community or improve educational standards

Corporate strategy

 Corporate strategy is the course or route that a business has chosen to follow in order to achieve its
corporate objectives.

 This will in part be informed by an assessment of the business’ internal strengths and weaknesses and
external opportunities and threats.

 Corporate strategy will influence which markets a business chooses to compete in and which products to
offer.

Ansoff Matrix

Ansoff looked at the degree of risk and potential for reward from different strategic options.

He identified 4 potential growth strategies:

 Market penetration
 Market development
 New product development
 Diversification

Market penetration

Market penetration is the name given to a growth strategy where the business focuses on selling existing
products into existing markets.

Market penetration seeks to achieve four main objectives:

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  Maintain or increase the market share of current products – this can be achieved by a combination of
competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to
personal selling
 Secure dominance of growth markets
 Restructure a mature market by driving out competitors; this would require a much more aggressive
promotional campaign, supported by a pricing strategy designed to make the market unattractive for
competitors
 Increase usage by existing customers – for example by introducing loyalty schemes

A market penetration marketing strategy is very much about “business as usual”. The business is focusing on
markets and products it knows well. It is likely to have good information on competitors and on customer needs.
It is unlikely, therefore, that this strategy will require much investment in new market research.

Potential dangers of this strategy include:

 Competitors’ reactions

 Market may already be saturated

Market development

Market development is the name given to a growth strategy where the business seeks to sell its existing products
into new markets.

There are many possible ways of approaching this strategy, including:

 New geographical markets; for example exporting the product to a new country
 New product dimensions or packaging: for example
 New distribution channels (e.g. moving from selling via retail to selling using e-commerce and mail
order)
 Different pricing policies to attract different customers or create new market segments

Potential dangers of this strategy include:

 The product may not be accepted, desired or understood in a new market

 Strong competition in a new market
 The business may not understand the new market
 Alienation of current customers

Product development

Product development is the name given to a growth strategy where a business aims to introduce new products
into existing markets. This strategy may require the development of new competencies and requires the business
to develop modified products which can appeal to existing markets.

A strategy of product development is particularly suitable for a business where the product needs to be
differentiated in order to remain competitive. A successful product development strategy places the marketing
emphasis on:

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  Research & development and innovation
 Detailed insights into customer needs (and how they change)
 Being first to market

Potential dangers of this strategy include:

 High product development costs
 May shorten product life cycle of existing products
 May be "beaten to market" by competitor so lower sales than anticipated

Diversification

Diversification is the name given to the growth strategy where a business markets new products in new markets.

This is an inherently more risk strategy because the business is moving into markets in which it has little or no
experience.

For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to
gain from the strategy and an honest assessment of the risks. However, for the right balance between risk and
reward, a marketing strategy of diversification can be highly rewarding.

Potential dangers of this strategy include:

 High costs
 Aggressive response from competitors – barriers to entry
 Brand name may be diluted
 Cultural differences may exist

Advantages of Ansoff Matrix

 Helps a business to understand that there are 4 different growth strategies

 Helps a business to understand the risk attached to each growth strategy. e.g. market penetration - low
risk and diversification- high risk. A business will know that when the risk is higher - more research
and planning needs to be undertaken to minimise the risk.

Disadvantages of Ansoff Matrix

 It does not provide a business with any specific information on how to implement these growth
strategies. For example, with market development a business will have to conduct a significant amount
of research to determine how best to penetrate a new market with existing products.

 It does not consider the external environment and whether it is a sensible decision to pursue, for
example, a diversification strategy.

Porter’s Strategic Matrix

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A matrix that categorises the marketing strategies a business can adopt to try and achieve a competitive
advantage

Analyses low cost v. differentiation

Porter’s basic premise is to be one thing or the other and not be “stuck in the middle”

He emphasises the danger of the middle ground, almost as if it is a “no mans’ land” where there is little
protection.

He believes that businesses must put their flag in one camp and remain clearly focused on this.

Porter states that a strategy of low cost can be successful in either a mass or niche market.

He refers to this as cost leadership, in the mass market, and cost focus, in a niche market.

Cost leadership means being able to offer your good or service at the lowest cost possible.

A business that operates with the lowest cost can charge the lowest prices but does not necessarily have to –
i.e. can just increase profit margins.

Porter states that a strategy of differentiation can be successful in either a mass or niche market.
He refers to this as differentiation, in the mass market, and differentiation focus, in a niche market.

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  Differentiation means being able to offer a good or service that stands out from the competition.
 Product – has to appear better than the competition e.g. USP or patents
 Promotion – create desire, exclusivity, brand loyalty
 Operational objectives will focus on R&D and innovation

Advantages

 A business has a clear understanding as to how to gain a competitive advantage. e.g. the use of
differentiation if targeting a mass market.

 A business will understand that if they try to adopt TWO strategies at the same time e.g. cost leadership
and differentiation they will be “stuck in the middle”. This means they will not have a USP and
will lose their competitive advantage to businesses that focus on just one approach.

Disadvantages

 Porter made it clear that a business can only use ONE strategy, or they will lose their competitive
advantage. However, many successful businesses are now using TWO strategies (e.g. Superdry) and
have enjoyed significant success. The fact that some markets are very competitive has forced many
businesses to differentiate but also to be more affordable. This means that Porters theory may now
be outdated.

Product Portfolio Analysis – Boston Matrix

 Product portfolio analysis looks at the range of products and brands that a firm has under its control.

 A businesses product range is called its product portfolio.

 This type of analysis can help a firm identify where every single one of its products is positioned in
the market.

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Star products

Question Mark (Problem Child) products

Cash Cow products

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Dog products

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Effect of strategic and tactical decisions on human, physical and financial resources

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SWOT Analysis
A diagnostic tool used to identify the internal strengths and weaknesses and the external opportunities and
threats to a business.

 Strengths; Internal factors within a business that can help it achieve its objectives
 Weaknesses; Internal factors that could prevent a business from achieving its objectives
 Opportunities; External business circumstances that can help it achieve its objectives
 Threats; External problems that may prevent a business from achieving its objectives

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Benefits

 It facilitates an understanding of the strengths and weaknesses of the organisation – immediate

action can be taken to deal with weaknesses.

 It enables senior managers to focus on strengths and use them to exploit opportunities.

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  It can enable an organisation to anticipate future business threats and take action to avoid or
minimise their impact.

Limitations

 Bias - is often completed by the businesses own management team, A reluctance to admit to
weaknesses and to focus too much on the strengths could mean that the business fails to improve in key
areas. (may need to use an external impartial group to undertake it)

 The business needs to conduct an effective PESTLE analysis to identify opportunities and threats. A
lack of information or understanding of these factors could mean that important information is not
included. e.g. impact of economic factors.

 Failure to constantly update the SWOT analysis (particularly in dynamic markets) could lead to poor
decision making.

PESTLE Analysis

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NOTE: Questions are likely to focus on one or two of these factors only – the extract evidence will provide
information which allows you to identify the specfic factors that are potentally affecting the business.

Porter’s Five Forces

In 1979, Michael Porter, a Professor at Harvard Business School, created a framework to look at the
attractiveness to businesses, in terms of profitability, of markets.

Each of the Five Forces will affect the profitability of businesses in the industry. Each business should use this
strategy to analyse their position, and therefore ‘attractiveness’, in that market.

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FACTORS AFFECTING THE BARGINING POWER OF SUPPLIERS
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3.1.2 - Growth
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Objectives of growth
Objectives of growth include:

Internal economies of scale - the advantages enjoyed by a business as it increases the scale of its current
operations.

As output increases the cost per unit falls.

Lower unit costs are very important in making a business more competitive. They will allow a business to:

1. Reduce prices, therefore selling more, whilst keeping the same profit margin
Or
2. Maintain the same price and earn more profit per unit on the product.

Internal economies are when the business grows in size.

Purchasing (Bulk-buying) economies

As businesses grow they need to order larger quantities of supplies. For example, they will order more raw
materials. As the order level increases, a business obtains more bargaining power with suppliers. It may be able
to obtain discounts and lower prices for the raw materials.

Production (or Technical) economies

Businesses with large-scale production can afford more advanced machinery and technology which leads to
greater efficiency and consequently lower costs per unit.

Financial economies
Many small businesses find it hard to obtain finance and when they do obtain it, the cost of the finance (interest
payments) is often quite high. This is because small businesses are perceived as being riskier than larger
businesses that have developed a good track record. Larger firms therefore find it easier to find potential lenders
and to raise money at lower interest rates.

Marketing economies
Every part of marketing has a cost – particularly promotional methods such as advertising and running a sales
force. Many of these marketing costs are fixed costs and so as a business gets larger, it is able to spread the cost
of marketing over a wider range of products and sales – cutting the average marketing cost per unit.

Managerial economies
As a firm grows, there is greater potential to employ the “best” managers (can offer higher
wages) to specialise in particular tasks (e.g. marketing, human resource management, finance). Specialist highly
skilled managers are likely to be more efficient as they possess a high level of expertise, experience and
qualifications leading to lower costs per unit.

External economies are when a business enjoys lower unit costs as a result of external factors such as a growth
in the industry and geographical clustering within an industry.

External economies of scale include:

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Other objectives of growth include:

Increase market power over customers and suppliers:

 Brand loyalty
 Barriers to entry
 Stronger negotiating power

Increase market share and brand recognition:

 Dominant business
 Saturate the market
 Strong physical and promotional presence

Increased profitability:
 Lower costs through economies of scale
 Ability to charge higher prices
 Increased productivity and efficiency

Organic Growth

Methods of growing organically

 New products
Extending the existing product range

 New markets
Opening new outlets in new areas of a domestic market (e.g. different region in the UK)
orexpanding into other countries

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  New routes to market
Multi-channel distribution e.g. start selling online

 Franchising
Adapting the business model to allow for quicker growth through franchises

 Diversification
Bringing out new products in new markets

Advantages and Disadvantages of organic growth

Inorganic Growth
Growth that involves mergers and takeovers with other businesses.

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Advantages of mergers and takeovers
Cost Synergies. Can reduce costs due to duplicate resources. For example, there will be two marketing
departments so some staff can be made redundant (long term labour cost savings). Also there may the option to
close down some shops or manufacturing facilities.

Economies of scale. e.g. purchasing economies because of increased order size, bulk-buying discounts etc.

Increased revenue and market share. Increased size of the combined company increases market power and
ability to set higher prices.

Cross-selling. This is when the two companies involved in the deal sell each other’s products and services (in
their shops or websites), increasing sales.

Acquiring unique capabilities and resources. Sometimes it’s simply impossible for a company to create the
technology, resource etc it needs to sustain its growth. It can be a lot simpler to just buy it.

International Expansion. Acquiring a local competitor helps to get over culture issues, government policy,
regulation and other issues related to international expansion.

Disadvantages of mergers and takeovers

Original purchase cost – may need to take out loans or significantly reduce the cash reserves

Opportunity cost – i.e. this finance could have been spent on the existing business e.g. product development

Diseconomies of scale if business becomes too large, which leads to higher unit costs. E.g. due to poor
communication, poor co-ordination or fall in employee motivation

Risk of overtrading – grow too quickly and run out of cash.

Clashes of culture between different types of businesses can occur, reducing the effectiveness of
the integration. - leads to diseconomies of scale.

May need to make some workers redundant, especially at management levels – this will means paying short
term redundancy packages – so increased costs and may also influence motivation, which will impact
on productivity and efficiency.

May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and
causing disruption in the running of the business.

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Horizontal and Vertical integration
:
External growth through mergers and takeovers can take several forms:

Horizontal - 2 businesses at the same stage within a process integrate

Potential Advantages of Horizontal Integration

 Immediately increase market share

 Benefit from economies of scale

 Cost savings from the rationalization of the business – this often this involves sizeable job losses

 Can enter new markets (e.g. overseas)

 Reduces competition if removing key rivals

 Buying an existing and well-known brand can be cheaper than organically growing a brand – this
can then make the entry barriers higher for potential rivals

Potential disadvantages of Horizontal Integration

 Diseconomies of scale if business becomes too large, which leads to higher unit costs. E.g. due to
poor communication, poor co-ordination or fall in employee motivation

 Risk of overtrading
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  May be blocked by a regulatory body e.g. CMA in the UK
This is because it is considered to not be in the best interests of key stakeholder
groups, such as customers. e.g Asda and Sainsbury

 Clashes of culture between different types of businesses can occur, reducing the effectiveness of
the integration.

 May need to make some workers redundant, especially at management levels – this will means
paying short term redundancy packages – so increased costs and may have an effect on
motivation, which will impact on productivity.

 May be a conflict of objectives between different businesses, meaning decisions are more
difficult to make and causing disruption in the running of the business.

Vertical - 2 businesses at different stages within a process integrate

Forward vertical – joins with a business at the next stage in the process e.g. manufacturer with a retailer

Backward vertical - joins with a business at an earlier stage in the process e.g. a manufacturer with a supplier
of a raw material

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Potential Advantages of Vertical Integration

 Cannot be held to ransom by another business e.g. suppliers setting very high prices or retailers
demanding very low prices

 Potential competitive advantage – e.g. can receive supplies at "cost" price as they own the
supplier (either raw material suppliers or a manufacturer– makes the business more price
competitive (or retain current prices and generate higher profit margins)

 Can stop supplying competitors who use the same suppliers OR increase prices for competitors
to make it more difficult for them to compete against the business.

 If the business controls the retail element they can also prevent competitors from selling their
product in their outlets. E.g. if Heineken purchase pubs /bars they can stop rivals from selling
their products such as beer and cider in these outlets.

 Personally manage the standard of quality

Potential disadvantages of Vertical Integration

 Vertical mergers will have less economies of scale because most of the production is at different
stages of production. (e.g. purchasing economies)

 May lack the expertise required e.g. no retail expertise

 Lose focus on their core competency e.g. if they are a manufacturer and shift their attention (time
and resources) to the new retail operation – may weaken the manufacturing business

 The initial costs may be significant – e.g. purchase price and management costs.

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Conglomerate
A conglomerate is a corporation made up of several different, independent businesses.

In a conglomerate, one company owns a controlling stake in smaller companies that each conduct business
operations separately.

Conglomerates can be created in several ways, including mergers or acquisitions.

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Problems arising from growth
Increasing the size of a business does not always result in lower costs per unit. Sometimes a business can get
too big!

Diseconomies of scale occur when output increases at too fast a rate and the cost per unit increases.

Diseconomies of scale occur for several reasons, but all as a result of the difficulties of managing a larger
workforce.

Poor communication

As the business expands communicating between different departments and different branches/sites (i.e. located
in different geographical locations) becomes more difficult. In addition, there may be more written forms
of communication (e.g. newsletters, notice boards, e-mails) and less face-to-face meetings, which can result in
less feedback and therefore less effective communication.

Lack of motivation
Workers can often feel more isolated and less appreciated in a larger business and so their loyalty and
motivation may diminish. It is harder for managers to stay in day-to-day contact with workers and build up a
good team environment and sense of belonging. This can lead to lower employee motivation with damaging
consequences for output and quality. The main result of poor employee motivation is falling productivity levels
and an increase in average labour costs per unit.

Loss of direction and co-ordination

It is harder to ensure that all workers are working for the same overall goal as the business grows. It is more
difficult for managers to supervise their subordinates and check that everyone is working together effectively, as
the spans of control have widened. A manager may be forced to delegate more tasks, which while
often motivating for his subordinates, leaves the manager less in control.

Overtrading

Overtrading happens when a business expands too quickly without having the financial resources to support
such a quick expansion. If suitable sources of finance are not obtained, overtrading can lead to business failure
(run out of cash). Importantly, overtrading can occur even if a business is profitable. It is an issue of working
capital and cash flow.

Overtrading is, therefore, essentially a problem of growth. It is particularly associated with retail businesses
who attempt to grow too fast. Overtrading is most likely to occur if:

 Growth is achieved by making significant capital investment in production or operations

capacity before revenues are generated

 Sales are made on credit and customers take too long to settle amounts owed

 Significant growth in inventories is required in order to trade from the expanding capacity

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  A long-term contract requires a business to incur substantial costs before payments are made
by customers under the contract

3.3.3 – Decision making techniques

Quantitative sales forecasting
 Sales forecasting is the process of predicting future sales levels by volume or value and future trends.

 Quantitative sales forecasting is based on data which can be historic or the result of quantitative
research.

 Sales forecasting will be used to:

- Inform resource management about inventory levels, production output and logistics.

- Inform cash flows and budgets.

- Aid workforce planning.

Times Series Analysis

Three Period Moving Average

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Example

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Investment Appraisal
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Calculation of Payback

Between years 2 and 3

£10,000 x 12 months
£30,000
= 4 months

Payback = 2 years 4 months

To calculate months

Cumulative net cash flow year before payback/net cash flow the following year x 12 months

Benefits

 Simple and easy to calculate + easy to understand the results

 A business can determine when it will start to generate profit

 Can assess risk – e.g. a lower Payback period is desired in a dynamic market as projected net cash flows
may be not generated.

Limitations

 Does not consider profitability.

 The projected net cash flows for the next few years may be very unreliable e.g. due to external factors
(PESTLE). This means that the calculations may be misleading and lead to poor decision making.
 Takes no account of the true value of money.
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Average Rate of Return (ARR)

Payback does not consider how much profit can be made from the investments over the lifetime of the projects.
So, a business will use ARR (which stands for average rate of return) and compare annual profit generated by
the project with the initial amount invested in it.

ARR shows the expected profitability of an investment project over the projected cash flow period.

Net return/Number of years x 100

Initial Cost

85,000/5 X 100
250,000

= 6.67%

For every £1 invested there is a return of 6.67p on average for each year of the forecasted project
timeline. The higher the ARR the better.

NOTE – If you are only given one project to discuss – if the ARR is higher than the rate of interest
(usually only 2-3%) then you can argue that it is better to proceed with this investment than saving the
money in a bank.

Benefits

 Simple and easy to calculate + easy to understand the results.

 A business can compare the profitability of different investments.

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Limitations

 The projected net cash flows for the next few years may be very unreliable e.g. due to external factors
(PESTLE). This means that the calculations may be misleading and lead to poor decision making.
 Takes no account of the true value of money.
 Does not take into account the Payback perio

Net Present Value (NPV)

Calculates the total return on an investment considering the changing value of money.

It discounts the return each year to recognise, for example, that £1 in three years’ time does not have the same
purchasing power as £1 does today (e.g. due to inflation). Therefore, a discount factor is used:

For example,

Year 0 Year 1 Year 2 Year 3 Year 4

1 0.91 0.83 0.75 0.68

£1 today will only have the same buying power as 91p in a years’ time, 83p in two years’ time, 75p in three
years’ time and 68P in four years’ time.

Interpretation of NPV

The higher the NPV figure is, the better and when comparing two options, the project with the higher NPV should be
favoured.

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Benefits

 Considers the changing value of money e.g. adjusting to inflation

 Can compare to other investments - the higher NPV the better.

Limitations

 The discount factor used may not be reliable. It is very difficult to business to judge factors such as
inflation rates in the next few years.
 The projected net cash flows for the next few years may be very unreliable e.g. due to external factors
(PESTLE). This means that the calculations may be misleading and lead to poor decision making.

Decision Trees

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Critical Path Analysis
Critical path analysis is a technique used to identify the order in which all activities need to be completed
when planning a complex project.

Critical path diagrams organise the activities in an order to show which activities can be done simultaneously
and which are dependent upon earlier activities.

This allows for the identification of the shortest time in which a project can be completed.

The critical path is the set of activities that will lengthen the duration of the project if delayed.

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The critical path activities – where there can be no delays - C, D, F and G
Float – this is when there is flexibility to complete an activity.
For example, Activity B the float is 16 days as it could be started on Day 2 but could be
started as late as day 18 without delaying the whole project.
Benefits
 Can identify the critical path and then focus on ensuring that these specific activities are completed
on time.

 Can identify activities can be carried out simultaneously - this will save time and reduce the costs of
the project.

 Can use the CPA to motivate workers (provides deadlines)

 Help spot which activities have some slack ("float") and could therefore transfer some resources =
better allocation of resources.

 Stakeholders will be able to see the total time frame for the project to be completed.

Drawbacks
 All the data in the network diagram is based on estimates and can quickly become inaccurate e.g. if
the weather turns bad on a building project or suppliers fail to be delivered on time.

 Relies on estimations of the duration of each activity.

 May encourage inefficient behaviour on non- critical activities (i.e. where there is a float)

 Large projects can be too complex for CPA.

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Contribution

The concept of contribution is a crucial one in business. It focuses on the returns (contribution) a business
makes from each unit of product sold.

Formulas

Contribution per unit = Selling price per unit - Variable costs per unit

Total contribution can also be calculated as:

Contribution per unit x Number of units sold

Let's look at a simple worked example of contribution. Here is some information about a business that just sells
one product:

 Selling price per unit £30

 Variable cost per unit £18

 Contribution per unit £12 (i.e. £30 - £18)

 Units sold 15,000

Using the formulae, we can perform the following calculation:

Total Contribution = £180,000 (i.e. £12 x 15,000 units)

Note that the total contribution of £180,000 is not the total profit made by the business.

Why? This is because we have not yet taken account of the fixed costs of the business. Let's do that now...

Imagine that, in the example above, the business has fixed costs totaling £116,000

If we take these away from the contribution (£180,000), then we can calculate the overall profit or loss of the
business:

Total profit = Contribution - Fixed costs

Total profit = £180,000 - £116,000

= Profit of £64,000 (i.e. £180,000 less £116,000)

Why is contribution a useful decision-making technique?

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  A business selling multiple products such as a supermarket wants to know the contribution made by
every product. Any products that generate a high contribution are likely to be allocated more shelf
space. Products that generate a small contribution will either be removed or take up less shelf space.

 A business can determine the impact of increasing the selling price or reducing the variable cost of each
product sold.

 A business can determine the total contribution required to cover fixed costs and can set prices
accordingly to ensure that the business generates profit.

HOWEVER
 Variable costs may change due to suppliers increasing/decreasing prices
Variable costs may change due to economies of scale – i.e. as output is increased
Therefore, contributions for each product need to be regularly updated to inform decision making.
 Setting prices to ensure the total contribution exceeds fixed costs in order to guarantee profit is
generated – does not take into account if prices are competitive.

3.3.4 – Influences on business decisions

Corporate Culture

A strong culture
 Staff respond positively to organisational values
 Shared sense of responsibility towards vision, mission and objectives
 Motivated and loyal workforce
 Greater efficiency
 Accept roles and responsibilities willingly
 Abide by policies

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 A weak culture

 Little alignment with organisational values

 Employees have to be forced to perform duties
 Greater management control and supervision required
 Treat the organisation as a source of income only

Power Culture
In a power culture there is a central figure (or small group of individuals) that will make all the decisions
 A consequence of this can be quick decision-making- adapt quickly to change.

HOWEVER

 There is little opportunity for workers to share their views or to be given any responsibilities-
Therefore, there is a potential lack of motivation for many workers.

Role Culture
In a role culture the organisation is based on rules. This type of organisation is highly controlled, with everyone
knowing their role and responsibilities. (written in employment contract)

Therefore, power in a role culture is determined by a person's position (role) in the organisational structure. (i.e.
their job title)

 The obvious benefits for the business are that workers that are failing to follow their specific job role are
easily identified and can be dealt with. Therefore owners/higher level managers have more CONTROL

 To ensure all workers are closely monitored there will be narrow spans of control (i.e. a
tall organisational structure). Therefore, a positive benefit for the workers is more
promotional opportunities – increases motivation and this benefits the business.

 Workers are also clear on exactly what their job role is and therefore more feel more secure.

HOWEVER

 Some workers will not like being controlled and would prefer more freedom – leads to demotivated
workers (particularly important for higher skilled workers)
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  Increased labour costs due to more supervisors/managers being employed
.
 Taller organisational structure so slower decision making as there is a longer chain of command.

Task Culture

In a task culture the focus is on creativity and empowering workers - Involves the use of a MATRIX structure

Teams are created and complete projects (e.g. new car design) – i.e – (Theme 1 topic)

The task is the important thing, so power within the team will often shift depending on the status of the project
(i.e. when specific expertise is required this individual holds the power)

 Likely to result in greater motivation amongst the team members (Mayo)

 Talented workers from different departments work together – encourages intrapreneurship which
will help the business to improve its performance.

 Can help to break down traditional department barriers, improving communication across
the entire organisation.

HOWEVER

 Members of project teams may have divided loyalties as they report to two-line managers. Equally,
this scenario can put project team members under a heavy pressure of work.

 It takes time for matrix team members to get used to working in this kind of structure.

 Team members may neglect their day-to-day functional responsibilities.

Person Culture

In organisations with person cultures, individuals very much see themselves as unique and superior to
the organisation. The organisation simply exists in order for people to work. An organisation with a person
culture is really just a collection of individuals who happen to be working for the same
organisation. e.g. doctors surgery and law firm

 Benefits include that the organisation is highly creative and individual, with a strong emphasis on
customer needs.

 It is also very quick to deal with the changing needs of the market.

HOWEVER

 Staff are often only interested in achieving individual goals.

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 Staff are more difficult to manage if their goals are different to the business.

Difficulties changing an established culture

Resistance to change

 Worker’s failure to accept the need for change; Insecurity; Preference for the existing arrangements

 Fear of change

 Loss of power; Loss of skills; Loss of income; Fear of the unknown; Inability to perform as well in the
new situation; Break up of work groups

Lack of trust

 Misunderstanding of reason for change

Organisational inertia

 Difficult to change habits that may have been embedded over a long period of time.

Alienation of:

 Suppliers
 Customers
 Other stakeholders

Kotter and Schlesinger – strategies to change an established culture

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54
Stakeholder v Shareholder Approach to business
A stakeholder is any individual or group with an interest in the activities of the business.

These can be:

Internal i.e. from within the business

External i.e. from outside of the business

They include owners/shareholders, managers, employees, customers, suppliers, lenders, competitors, the local
community, pressure groups and the government.

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What is the stakeholder approach?

The stakeholder approach suggests that a business’ responsibilities are towards all of its stakeholders. It
will aim to meet the objectives of each stakeholder group.

What is the shareholder approach?

The shareholder concept suggests that a business’ responsibilities are solely aimed at meeting the objectives of
the shareholders.

Therefore, it has profit maximisation as its main corporate objective.

Higher profits will lead to higher dividends i.e. an increase in the income received and the share price is also
likely to rise.

Conflicting stakeholder objectives

It is not possible to meet the objectives of all stakeholders.

There is conflict between the profit-based objectives of shareholders and the wider objectives of
other stakeholders.

For example, increasing employees pay will increase costs and reduce profits and this conflicts with the
shareholder objective to achieve profit maximisation.

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Business ethics
Business Ethics looks at morality in decision-making.

This infers doing what is ‘right’.

An ethical business is essentially adopting the stakeholder approach – attempting to meet their objectives.

Trade off’s
A trade-off arises where having more of one thing potentially results in having less of another.

If a business is behaving in an ethical manner, it will potentially generate lower profits due to the higher costs
incurred or due to reduced revenue.

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Ultimately:

Does a decision to be ethical result in a loss of profit?

OR

Does being ethical lead to higher profits in the longer term?

Pay and rewards

Pay of workers is governed by the living wage.

 Is it ethical to pay just the living wage?

 Should businesses pay above the living wage?

 Should bonuses be linked to business performance? Should CEOs receive large bonuses?

 Remuneration of leaders and managers can be seen as unethical if considered too high and
disproportional to the success of the business or treatment of workers. However, does the performance
of the business or the necessity to retain the best workers support very high pay?

Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) aims to ensure that companies conduct their business in a way that is
ethical (i.e. adopt the stakeholder approach). This means taking account of their social, economic and
environmental impact, and consideration of human rights.

It can involve a range of activities such as:

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  Working in partnership with local communities

 Developing strong relationships with employees, suppliers and customers

 Environmental protection and sustainability

Some businesses have as their main purpose the fulfilment of social or environmental goals, as opposed to a
business that tries to achieve its financial goals while minimising any negative impact on society or the
environment. These businesses are called Social Enterprises.

Marketing benefits

 Enhanced reputation - greater customer loyalty – increased sales

 Potential for differentiation and using CSR as a USP allowing for premium pricing
 Positive media attention and PR – increased sales

Other Financial benefits

 Ability to attract ethical investors

 Avoidance of fines and environmental taxes
 Mistakes and bad PR are expensive

HR benefits
 Recruitment and retention of staff - attract a wider pool of talent and skills
 Motivation of staff

Operational benefits
 Lower production costs through efficient procedures and recycling
 Positive relationship with suppliers

All of these can result in a competitive advantage.

HOWEVER

Potential financial implications

 Looking after employees e.g. training, pay and working conditions – increased labour
costs
 Ethical suppliers – often more expensive
 Product safety and greater quality – increased production costs
 Reduced prices – lower profit margins
 Environmentally friendly practices throughout the business’ operation - increases costs

Not meeting corporate objectives

 Reduced short term shareholders’ returns
 Slower Growth due to less finance available.

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Opportunity cost
 Time and money spent on CSR, policies, reports and monitoring.

3.3.5 – Assessing competitiveness

Statement of Comprehensive Income

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Statement of Financial Position

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Ratio Analysis

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 Allows for a more meaningful analysis of published accounts

 Shows relationship between figures

 Used for comparisons over time

 Inter and intra business comparisons

 Intra means between businesses e.g. to compare performance to competitors or to benchmark

 Inter means within a business e.g. over time within one organisation or between branches

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64
65
Return on Capital Employed (ROCE) – NEW RATIO

A measure of how efficiently a business is using capital employed to generate profits

Capital employed = total equity (i.e. share capital + retained profit) + non-current liabilities

i.e. all the money invested in the business from:

 Share capital
 Retained profit
 Non-current liabilities (Long term loans)

Operating profit x 100

Non-current liabilities + Total Equity

Gearing ratio – NEW RATIO

Measures what proportion of a business’ capital is funded through long term loans

Loans are “compulsory interest bearing” i.e. you have to pay interest on them even if profits are low or non-
existent

A highly geared business is of greater risk if interest rates are likely to increase

Non-current liabilities x 100

Total equity + non-current liabilities
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Benefits of Ratio Analysis

 Accounting ratios help compare current performance with previous records – to assess the performance
of managers in the last financial year

 Accounting ratios help compare a firm’s performance with similar competitors

 Accounting ratios help monitor and identify issues that can be highlighted and resolved e.g.
poor liquidity

 Accounting ratios help with future decision making e.g. whether to prioritise repaying long term debt.

Limitations of Ratio Analysis

 The ratios need comparison

For example, 15% for the ROCE on its own means nothing but a rise from 15% to 25% means
something – at least 5 years data is usually required to make an accurate assessment.

 The Statement of Financial Position (SOFP) or balance sheet is just a snapshot of the business on one
selected day – the ratios could change significantly during the financial year.

 The ratios are only as good as the information provided in the SOFP and SOCI – e.g. has
window dressing taken place, such as delaying making payments to make the ratios look stronger.

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Employee contribution to objectives

Human resource data is quantifiable information that can be used to measure workforce performance

This will help inform decision making e.g. is corrective action needed, should bonuses be paid, are
staff motivated?

Human resource data includes:

 Labour turnover and retention

 Absenteeism
 Labour productivity

Labour turnover

Labour turnover is the rate of change in a firm’s labour force.

Calculated as:

Number of staff leaving in a specified time period x 100

Average number of staff

Example:

A car firm has 1000 full time employees in 1 year

Of these, 50 employees leave the company

What is the labour turnover for the company?

50 x 100 = 5%
1000

Labour turnover is normally shown over a period of 1 year

Labour retention

Retention rates are a measure of a firm’s ability to keep its workforce.

Calculated as:

Number of employees retained in a specific time period x 100

Average number of staff

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Low retention rates may present a threat to a business:

 High recruitment, selection and training costs

 Risk of loss of important information (secrets)
 Loss of talent
Absenteeism

Absenteeism can be defined as the number of staff who miss work as a proportion of the total number of staff.

Calculated as:
Number of staff absent in a specified time period x 100
Total number of staff days worked in a specified time period

Worked example:

 A car firm has 1000 full time employees

 Of these, 40 employees did not turn up for work on a Friday
 What is the absenteeism rate for that Friday

40 x 100 = 4%
1000

Labour productivity

Labour productivity is a measure of workforce performance that looks at output per worker

Calculated as:

Total output
Number of workers

Example:
 A car firm produces 100 000 cars per year
 It has a labour force of 1000 workers
 What is the labour productivity of the company?

100,000 = 100 cars per worker

1000

Labour productivity is normally shown over a period of 1 year

Human resource strategies

Financial Rewards Employee Share Ownership

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 Consultation Strategies Empowerment Strategies

Financial rewards are the variety of methods that have a money value and are used to reward the workforce and
influence their behaviours at work

Financial methods of motivation include:

 Piece rate is when payment is based on the number of items (pieces) produced by an employee
 Commission is when payment is based on the number of units sold
 Bonus is an additional, lump sum, one off payment to an employee for meeting individual, team or
company targets
 Profit share is when a proportion of employee pay varies with the profits of the company
 Performance related pay (PRP) is when employees receive a bonus based on the performance of the
employee measured against a pre agreed range of criteria

Employee share ownership

Giving employees shares or the option to buy shares in the company

The employee therefore directly benefits from the success of the company

 Dividends received
 Increased share value

The advantages of employee share schemes for employers include:

 Motivates employees to become more productive.

 Recruit or retain key employees.
 Can compensate for lower salaries.

The disadvantages of employee share schemes include:

 A falling share price damages employee morale, retention and motivation.

 Dilution of share ownership.
 Many employees would prefer other financial rewards such as bonus payments and profit sharing

Consultation strategies

 Seeking the thoughts and opinions of employees prior to making decisions

 Involving employees in decision making

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  Increases feeling of worth and involvement

 Easier to implement change as staff feel involved in the decision making process

 Employees have valuable input as they are often the ones working within functions and understanding
key issues e.g. production problems or customer service

Empowerment strategies

 Delegating greater responsibility to employees

 Allowing them to use their abilities and to have a greater say in the decision making process

Consultation and empowerment strategies can be achieved through:

 Matrix structure
 Employee/employer groups e.g. works councils or trade unions
 Open, two way communication channels
 Meetings and forums

3.3.6 – Managing Change

Managing change is the combination of activities involved in planning for, implementing, coordinating and
monitoring the process of change. For change to be achieved with maximum positive outcomes and minimum
negatives it is necessary to manage it

 Change occurs when a business alters its structure, size or strategy to respond to internal or external
influences

 Change may be necessary to help a business meet its aims and objectives

 Change creates opportunities and threats

 Change should not be seen as bad but must be managed carefully to ensure a business maintains or
increases its competitiveness as a result of change

Causes of change

 changes in organisational size

 poor business performance
 new ownership
 transformational leadership
 the market and other external factors (PESTLE)

Key factors in change

Organisational culture
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Due to the existing organisational culture workers may resist change. This is particularly the case if changes are
rarely made (workers like the way things are), there are poor employer/employee relations and a high number
of workers have been employed by the business for a long period of time. Alternatively, in some organisations
there is a culture where workers may embrace changes suggested by owners/management.

Size of organisation

The size of the organisation will influence the ability to communicate and manage change, as well as the speed
of change. Considerations include:
 Number of employees
 Geographical spread
 Levels of hierarchy
 Complexity of structure

Overall, it is more difficult to implement changes in large businesses, such as multinationals. This is because
the more people there are to change, the harder it is to push change through. In a large company, such as a giant
telecommunications provider, pockets of culture can form throughout the firm. If leadership then wants to push
a change through, they may need to address each group in different ways. This can make decision-making
extremely inefficient.

Time/speed of change

Incremental change - change that is implemented over time with a number of small changes being made on a
regular basis to achieve ongoing improvements.

Rapid (step) change - rapid and sometimes unexpected having a dramatic effect on the way in which an
industry or businesses operate The time required for a change can certainly have an effect on whether the

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change is successful. If change can be slower, incremental, it is more likely that a majority of staff
will understand and take ownership of the change.

Alternatively, if a change needs to be made quickly and this can significantly cause problems if the process is
not managed properly.

Managing resistance to change

Kotter and Schlesinger’s model shows 4 reasons for resistance to change:

Parochial self interest

Stakeholders fear that change will result in them being personally worse off and therefore want to
protect themselves against this.

Prefer the status quo

Stakeholders are happy with the way things are and therefore just want to keep it as it is

Different assessment

Stakeholders believe that the proposed change is not the correct course of action and that they could suggest
a better solution.

Misunderstanding and fear

Stakeholders believe that the motives for change are wrong, and they therefore mistrust the decision makers

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Effective change management – (as covered in Corporate Culture)

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Transformational leadership

Leaders with a clear vision who are able to lead others to achieve the extraordinary

 Passionate, energetic and enthusiastic

 Inspire others
 Supports every member in a team to achieve their potential as well as the whole group to achieve a
successful outcome

Four components of transformational leadership:

Intellectual simulation

Challenges the status quo whilst encouraging creativity

Individualised consideration

Supportive of and encouraging to all team members

Inspirational motivation

Shared passion and a clear vision

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Idealised influence

A role model who earns trust and respect

Possible Effects on a Business

Competitiveness: a transformational leader can increase competitiveness as they have a new vision for how to
produce, sell and market.

Productivity: a transformational leader will have successful methods of motivation that could improve the
firm’s productivity.

Financial performance: a transformational leader will implement strategies that significantly improve the
financial performance

Stakeholders: a transformational leader should meet the objectives of many stakeholder groups e.g.
shareholders. However, some changes to improve business performance may not satisfy stakeholder
objectives e.g. employees if redundancies are made or customers if some outlets are closed.

Contingency planning

Identifying Key Risks through Risk Assessment

Contingency planning (also referred to as scenario planning) is the anticipation of different business situations,
emergencies or otherwise, and the decision of how to manage them. Businesses use risk and probability
assessment techniques, such as decision trees, to decide which scenarios most apply to them and which of these
pose the biggest threats.

Risks include:

Natural disasters
 Events caused by environmental factors e.g. earthquake, flooding, landslides

IT systems failure
 IT can be mission critical i.e. without it a business can no longer operate
 Ability to make transactions, contact customers, control operations
 Threat of cyberattacks
 Loss of customer trust

Loss of key staff

 Loss of expertise
 Damage to brand if the person is seen as key to the brand integrity
 Knowledge going to competitors

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Risk Mitigation

Risk mitigation is the process of planning for disasters and having a way to lessen negative impacts. Although
the principle of risk mitigation is to prepare a business for all potential risks, a proper risk mitigation plan will
weigh the impact of each risk and prioritize planning around that impact. Once risks have been identified,
the business needs to reduce the impact as far as possible. There are four main areas when it comes to risk
mitigation:

Risk acceptance

This involves a business, usually a small one, accepting that the cost involved in preventing a risk is greater
than the cost of the impact brought on by the risk.

Risk avoidance

This is when a business decides to move away from a risk, physically or otherwise. The firm may remove its
operations from one part of the world because of risk brought on by war. Alternatively, a business may stop
using suppliers in low wage countries to avoid the risk of being associated with unethical behaviour.

Risk limitation

When a business accepts that the risk exists and then, rather than doing nothing, works to mitigate the effects of
this risk. An example might be the IT security of a business, which is increased as a way to lessen the effects of
a computer virus.

Risk transference

This involves a business handing its risk to someone else, such as outsourcing a particular part of its
operations. e.g. IT

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Business continuity

An important element of risk mitigation, business continuity ensures that a firm restarts all of its key processes
as soon as possible following any disaster. A business continuity plan can help with this.

Example of Business Continuity Plan for a Computer Manufacturer in Event of a Virus

Assess Systems are temporarily shut down so that the analysis team can assess
damage caused which processes have been affected. Other teams work offline in the
by impact meantime.

Company has various strategies already prepared in order to react

Agree a strategy to different virus types. Leadership discusses with key IT personnel
in order to choose the right strategy for the situation.

Employees are notified of the situation and delivered an action plan

in order to respond to the threat as efficiently as possible.
Preparation
Any equipment or backups are brought in. Press team is also notified
so that they can communicate with any journalists (if necessary).

Succession planning

No business wants to lose its key staff. A key member of staff can be anyone, from the CEO or managing
director to a particular marketing executive who drove sales to levels previously unseen. A key member of staff
might even be that IT manager who knows every business process but keeps it all in their head.

A business needs to be ready for the eventuality of losing a key staff member. In October 2011, Apple, Inc. lost
its most key staff member, Steve Jobs, to cancer. Steve Jobs led Apple, Inc. to some of the most popular
computing products of all time, from the iPod and iMac to the MacBook, iPhone and iPad.

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Succession plan - example

Contingency planning advantages and disadvantages

Advantages

 Minimises the potential “damage” (e.g. impact on productivity, health and safety, legal action) to the
business as it is able to clearly implement the contingency plan

 Enables the business to potentially only suffer short term disruption (i.e. minimises potential financial
losses)

 Ensures that the business meets legislation (e.g. health and safety – must have scenario plans in place)
and therefore avoids potential legal action being taken.

Disadvantages

 The opportunity cost/trade off - It can be very expensive as contingency plans need to be
constantly updated and larger organisations will also have to employ specialist workers. There will
also be increased training costs (to test the plans). As many of these plans will never be used
and managers would prefer to spend the finance spent on other areas of the business.

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 Contingency plans cannot totally eliminate damage to the business and may not always deal with the
exact problems being faced.

 Businesses cannot plan for all potential disasters.

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