Business Unit 3 Flashcards

Question

two parts of business strategy

Answer 1

The first part of the process involves using analytical tools to understand the current position of the business in the market. - A firm might begin this analytical process with a SWOT analysis
The next part of the process involves evaluating where the business wants to be - a Five Forces Analysis

Answer 2

corporate strategy - the plans and policies developed to meet a company's objectives. It is concerned with what range of activities the business needs to undertake in order to achieve its goals, It is also concerned with whether the size of the business organisation makes it capable of achieving the objectives set

Answer 3

A successful strategy will give the firm an advantage in the competitive market place, It will help to fulfil stakeholder expectations

Answer 4

The process of strategic planning involves key members of management looking critically at what the business has done before (i.e. assessing what it has done well and what it has done badly).
They look at what the business may need to do in the future in order to achieve its corporate objectives.

Answer 5

Ansoff's Matrix
Porter's Strategic Matrix
portfolio analysis.

Answer 6

Igor Ansoff was an applied mathematician and business strategist. He developed Ansoff's Matrix as a strategic tool to help a business achieve growth

Answer 7

Ansoff's Matrix is a useful decision-making tool because it allows the owners of a business to consider a number of factors that will determine its corporate strategy:

the level of investment in existing and new products
the exploitation of different markets
the growth strategy for the business
the level of risk the business is willing to accept.

Answer 8

The key issue is that risk becomes greater if a business moves away from its most important existing products and consumers. in other words, the further a business gets from the top left-hand corner of the matrix, the greater the risk

Answer 9

market penetration
product development
market development
diversification

Answer 10

market penetration - using tactics such as the marketing mix to increase the growth of existing products in an existing market

increase the brand loyalty of customers so that they use substitute brands less frequently, An example might be adopting a loyalty scheme, such as the loyalty card introduced by small restaurant chain Casa Brasil. This card offers points that provides holders with discounts at the restaurants.
encourage consumers to use the product more regularly, An example might be encouraging people to eat breakfast cereal as a night-time snack.
encourage consumers to use more of the product. An example might be a crisp manufacturer producing maxi-sized crisp packets rather than standard-sized crisp packets.

Answer 11

A business might adopt a market penetration strategy if it has a successful product and believes that it can make more revenue from it.
This is the strategy with the lowest risk because it involves the lowest level of investment. In addition, the business will have a good understanding of the product and how the market might respond

Answer 12

it is marketing new or modified products in existing markets

The confectionery market is famous for product development, Some businesses have gained a reputation for continuous product development and used this strategy to stay ahead of the competition.
Example - Apple® has achieved this through the iPhone®, iPad® and Apple Watch'

Answer 13

This might be an appropriate strategy to adopt where the product life cycle is traditionally short, or where trends or technology change quickly

Answer 14

A strategy of product development requires a lot of investment in research and development.
There may be a high level of risk in developing new products — it may be that only one in five product launches succeed; for those that do succeed, heavy investment in promotion may be required

Answer 15

market development the marketing of existing products in new markets

USA-based Enterprise Rent-A-Car is one example of a business that has adopted a very successful strategy of market development. The car-leasing company's model was very successful. However, the business achieved exponential growth (i.e, the rate of growth became faster and faster) when it started to locate its branches at airports.
This move opened the company up to an entirely different profile of customers, such as flyers and holidaymakers. By 2018, Enterprise Rent-A-Car had over 7600 branches worldwide with more than 250 in US airports alone.

Answer 16

The most basic form of the strategy is to enter geographically new markets

Answer 17

This is not always simple. Tastes and preferences may be different in regions of the same country, let alone between countries A market development strategy relies heavily on understanding local habits, tastes and needs.
Even where market development is appropriate and successful, small changes are often made to suit the new market. This might be changing the name to be more acceptable or accessible in a different language or labelling the product differently to meet international laws

Answer 18

diversification - developing new products in new markets

It enables a business to move away from depending upon existing markets and products. Therefore, it allows the company to spread risk and increase safety. If one product faces difficulties or fails, a successful product in another market may prevent the overall business facing problems
Examples of this marketing strategy include the move by Mercedes-Benz " into the market for small, high-volume cars, and the diversification by Virgin® into financial services,
Virgin is one business where the brand has allowed it to diversify into a range of industries.

Answer 19

Diversification is adopted by large corporations and conglomerates that have extensive business networks, considerable capital and strong corporate brands.

Answer 20

diversification will take a business outside its area of expertise (Le. the area where the business has special skills or knowledge). For this reason, it is the strategy with the highest risk, This might mean that its performance in new markets is poor compared with more experienced operators
there may be significant barriers to entering a new industry when diversifying

Answer 21

Porter's Strategic Matrix was developed by Michael Porter, a professor at Harvard Business School
to identify the sources of competitive advantage that a business might achieve in a market.

Answer 22

Porter stated that any business that does not adopt one of these three generic strategies is 'stuck in the middle' and unlikely to succeed

Answer 23

cost leadership
differentiation
focus

Answer 24

Cost leadership: This involves striving to be the lowest-cost provider in the market

Answer 25

increasing profits, while still charging market level prices
increasing market share, while charging lower prices (still making a profit since costs are reduced).

Answer 26

Cost leadership is generally held by one business in the market as it requires having a significant market share in order to achieve the lowest costs.
A firm will achieve the lowest costs by operating on a large scale and therefore exploiting economies of scale
The business will also have a clear focus on reducing costs through negotiation with suppliers, efficiency and streamlining operations)
A cost leader will also offer a basic product in order to minimise costs and limit the options for adding value. The level of service and number of available versions of the product will be minimal and the scale will be associated with mass production

Answer 27

Big Bazaar is controlled by Future Group It is a large and growing retail store with 300 branches located in 100 Indian cities. It operates hypermarkets, discount department stores and grocery outlets. Big Bazaar has a wide product range including home furnishings, utensils, sports goods, electronics, toys, footwear, men's and women's clothing, luggage, fruits, vegetables and stationery products.
Big Bazaar employs a low-cost leadership strategy. This means that the retailer sells branded products 10-15 per cent cheaper than its rivals. Big Bazaar is a very large retailer and is able to exploit economies of scale. This helps to lower costs significantly. However, the company is very active in finding new and cheaper suppliers. It is constantly trying to find ways of lowering its operating costs.

Answer 28

Differentiation: This involves a business operating in a mass market with a unique position instead of the lowest-cost position

Answer 29

A business adopting differentiation will do so through adding value to their products in a unique way. This might include quality, design, brand identity or customer service.

Answer 30

+ The advantage of operating under a differentiation strategy is that the business may be able to charge a premium price if customers value their unique selling point.
- However, it is difficult to guarantee that the rewards of differentiation will justify the additional costs, For example, differentiation will require good research and development as well as effective marketing to highlight the uniqueness to the customer.
- Differentiation is much easier to copy than cost leadership
+ unless the differentiation is sustainable and defensible, For example, a business may be able to get a patent on a design or register a logo as a trademark so that competitors cannot copy it.

Answer 31

One company that has done well by differentiating its products is Airstream`^-, the US caravan producer. It produces iconic luxury caravans. The products are very different from the majority of caravans and recreational vehicles (RVs) in the global market.

Answer 32

Focus: This strategy involves targeting a narrow range of customers. It tends to be used by small or very specialist firms

Answer 33

Cost focus — emphasising cost minimisation within a focused or niche market. The German supermarket chain Aldi^-'⁾ is a good example of this strategy. Although it does not operate as the cost leader in the market, it is able to offer a focused range of products at very low prices.
Differentiation focus — following different strategies within a focused market. Ferrari:⁹ is an example of this strategy. Its high-performance cars are targeted at a very small percentage of the population.

Answer 34

As a business is focusing on a very narrow segment of the market, it is able to gain an advantage by understanding its customers very well, It can deliver products and services that are very specific to their needs. As a result, this can create a high level of customer satisfaction and loyalty.
Also, a focus strategy will result in less competition and higher profit margins.

Answer 35

However, as the market is very small, a firm adopting this strategy tends to have low bargaining power with suppliers

Answer 36

portfolio analysis - a method of categorising all the products of a firm (its portfolio) to decide where each one fits within the strategic plans

Answer 37

The products are then evaluated according to their competitive position and

potential growth rates. This involves a two-step process.

Step 1: Give a full and detailed overview of all of
the products in the current business portfolio.
Step 2 : Look at the performance of each of these products and services by examining:
current and projected sales
current and projected costs
competitor activity and future competition
risks that may affect performance

Answer 38

1 Stars are high-growth products that are strong compared to those of competitors. Stars require investment, but the hope is that they will become cash cows.

2 Cash cows are low-growth products with high market shares. They generate more cash than they consume, and so can provide a return for investors and fund investment in other areas.

3 Question marks are products with low market shares in high-growth markets. They consume a lot of cash but give little return. However, they have the potential to turn into stars. Keeping these lines requires a belief that there is a potential for growth.

4 Dogs are products with low market share in low-growth markets. They may break even, but nevertheless take up time and effort with little prospect of future growth. They should be sold or divested

Answer 39

The Boston Matrix may be used to assist a business in identifying which strategy to adopt.

For example, if a firm believes that it has a 'Star' it may decide to adopt a market penetration strategy This is so it can increase sales revenue and maximise market share while the product is competitive.
Similarly, a firm may choose to move a product out of a low-growth market and target a market with high-growth prospects.
Or, the matrix could be used to identify those 'Dogs' that need to be discontinued. This will help the firm to cut costs and follow its strategy of cost leadership.

Answer 40

Strategies set out the long-term direction that a business will take to achieve its objectives. Strategy is often based on a set of principles or guidelines set down by the CEO and board of directors.
In contrast, tactics are short-term responses to an opportunity or threat in the market. Most day-to-day decisions in business are tactical and involve decision making in response to the current business conditions. Tactical decisions happen at managerial or even supervisory level

For example, a business might organise a two-week sale to help generate cash in order to improve cash flow.

Answer 41

Human resources:

A strategic decision will have a long-lasting effect on the workforce. For example, a new growth strategy might involve increasing the size of the workforce, recruiting different types of labour or moving existing workers to a new location. People may feel the impact of such measures indefinitely.
A tactical decision may affect people for a short period of time and only a small proportion of the workforce might be affected. For example, an ice-cream manufacturer may decide to open the factory at weekends to cope with an increase in demand caused by very warm weather. This may only affect some of the workforce, as it is likely that only production workers will be needed, They may be recruited on a voluntary basis (in many countries workers cannot be forced to work overtime). Also, once the warm weather has ended, normal working hours are likely to be resumed

Answer 42

Physical resources: Physical resources in a business include land, machines, tools, equipment, vehicles, shops, computers, factories and raw materials.

A strategic decision could have quite a wide variety of effects on these resources depending on the nature of the decision. For example, if a business decides to permanently outsource its transport and delivery operation, it will need to sell off most of its delivery vehicles. This means only a small proportion of physical resources will be affected, However, if the business decides to develop and launch a new product, a larger proportion of physical resources will be affected, e.g, more research equipment, additional factory space or new types of raw materials may be required.

Tactical decisions can also have an impact on physical resources, but they may not be so dramatic. For example, if a catering company agrees to meet an unusually large order for an event outside of its normal geographical area, it may have to lease some extra kitchen equipment, utensils or dining furniture. But since these additional physical resources are only leased, they will be returned to the hire company after the event. Therefore, they will not affect the company in the long term.

Answer 43

Financial resources: Strategic decisions can have a significant and long-term impact on the financial resources of a business.

Strategy - For example, a company might raise $200 million by issuing some shares to pay for a planned acquisition programme. Once the shares have been issued, the company will have to meet dividend payments on those shares for as long as the company trades, This is a long-term effect on the finances of the business.

Tactical - In contrast, a tactical decision may only have a short-term effect, For example, a business may deliberately go overdrawn at the bank because it is waiting for a delayed payment from a customer. This tactical decision will not have a huge effect on the company's finances as the assumption is that once the customer pays the debt, the overdraft will be cleared

Answer 44

Ansoff's Matrix is a useful tool for a business to identify its current position and choose an appropriate direction for the company — the 'what and where tool'.
In contrast, Porter's Strategic Matrix presents three strategies that a business might use to compete in its market — the 'how tool'.
Similarly, using the Boston Matrix can help to categorise a firm's products and make informed recommendations on how it should use them for future growth

Answer 45

An internal audit is an analysis of the business itself and how it operates. It attempts to identify the strengths and weaknesses of its operations

Answer 46

In a large business, the internal audit might be conducted by outside management consultants.
This could help to produce a more independent-minded analysis of the business's situation.

Answer 47

The external audit: An external audit is an analysis of the environment in which the business operates, The business has little or no control over it.

Answer 48

the market,
competition and the political, economic, social, technological, legal , environmental issues relevant to the business.

Answer 49

the size and growth potential of the market
the characteristics of the customers in the market
the products on offer
the pricing structure
how products are distributed
how products are promoted
industry practices, such as whether there is a trade association or government regulation

Answer 50

The nature and strength of competitors will be an important influence on the development of a strategy.

For example, it should analyse:

the structure of the industry (including the number and size of competitors)
the production capacity and marketing methods of competitors
how likely it is that there will be new entrants to the market
how likely it is that businesses will leave the industry
the profits of competitors
competitors' investments programmes, costs, revenues, cash and assets.

Answer 51

trade association an organisation whose members are all involved in the same industry or trade. The organisation pursues the interests of these businesses

Answer 52

SWOT analysis an analysis of the internal strengths and weaknesses of the business and the opportunities and threats presented by its external environment. It is an analytical tool that can help managers with complex decisions

Answer 53

SWOT analysis might be used by senior managers before drawing up a strategic plan. It helps to give an idea of the advantages and disadvantages of a particular decision.

It might also help to make the current position of a business easier to understand,

Answer 54

These are the positive aspects of a business that may be identified from the internal audit. Strengths are what the business is good at — they are what help make the business a success.

examples

a respected, intelligent, inspirational and visionary leader
a highly motivated and loyal workforce
a product with a unique selling point
state-of-the-art production facilities a loyal customer base (i.e. the people who buy the product)

Answer 55

These are the negative aspects of a business that may be identified from the internal audit.

Weaknesses are what the business lacks or does poorly; for example, in relation to its competitors. They are the characteristics that undermine the performance of a business — perhaps preventing it from growing

examples

a poorly motivated workforce with a high staff
turnover (i.e. the rate at which workers leave)
an organisational structure that has too many layers of management
a product range that is getting out of date
poor cash flow and growing debt
outdated tools and machinery
a poorly presented and out-of-date website.

Answer 56

The external audit should show up what opportunities are available to the business. These are the options or openings that the business might be able to exploit — resulting in improvements, such as higher revenues or lower costs

examples:

a new overseas market opening up following a political change
a fall in the cost of an essential raw material, such as oil
low interest rates, which provide cheap finance for investment
a fall in the exchange rate, which will make exports cheaper
some difficult regulations being abolished
the failing of a major rival in the market

Answer 57

Threats are the possible dangers that have the potential to damage the performance of the business.

Examples might include:

a new entrant in the market
a rival employing a new and highly successful CEO
a probable recession
new legislation (i.e. laws) aimed at improving the rights of employees
increasing pressure from environmentalists
a change in social attitudes towards the business's key product.

Answer 58

It can be a powerful way of summarising and building upon the results of internal and external audits, Clearly, it will be a useful tool when developing a corporate strategy, but it may have other uses.

For example, it might be used to:

decide which new product to launch
design a new marketing strategy
decide whether to outsource a specific business task or activity, such as IT
prepare for a completely new business venture
plan a restructuring of the business.

Answer 59

Finally, by identifying clearly the strengths, weaknesses, opportunities and threats, it may be possible to improve the performance of a business.
However, this will depend on the action it takes after carrying out the analysis. For example, performance will only improve if a business acts to remove known weaknesses.

Answer 60

the sale of company shares to the public for the first time. The shares are then traded on the stock market

Answer 61

Sometimes, businesses have to deal with events and issues that are completely beyond their control. These are called external influences and can impact on businesses unexpectedly

Answer 62

PESTLE analysis - analysis of the external political, economic, social, technological, legal and environmental factors affecting a business

Answer 63

Some parts of the world are politically unpredictable. It is important to pay special attention if businesses try to operate in politically unstable countries. However, political factors can also influence businesses in stable countries. The activities of pressure groups can play a role in influencing business activity.

Some examples of political factors include the following.

Members joining or leaving a trading bloc. This could disrupt financial markets and create a great deal of uncertainty. For example, in 2016, the UK voted to leave the EU.
The issue of national security has become a priority for many governments. If measures designed to improve national security restrict the movement of goods, people and capital, this could have either a positive or a negative impact on businesses.
Pressure groups such as trade unions, which aim to protect the rights of workers, can affect businesses. For example, they may be able to force up wages for their members. This will raise business costs.
Changes in government. For example, a new government may want to introduce laws which might have an impact on some businesses.

Answer 64

The general state of the economy can have a huge impact on business activity. Since the financial crisis in 2008, a number of countries have suffered a recession. This has made trading conditions very difficult for many businesses.

However:

falling unemployment might help to increase demand for many businesses
stable prices would create more certainty, which should encourage businesses to invest for the future
a strengthening exchange rate might make exporting more difficult but it might also make importing cheaper
lower interest rates would make borrowing cheaper and encourage more investment
some businesses may suffer badly during a recession - Businesses that produce goods and services that are income elastic will tend to be worst affected during a recession. These include car producers, house builders, holiday companies, computer games companies and 'white goods' companies (dealing with freezers, cookers and washing machines, etc.). This is because people can postpone purchases of these items until incomes pick up again.

Answer 65

Over time there are likely to be changes in the way society operates. Although social and cultural changes tend to be gradual, they can still have an impact.

examples

In some countries, greater numbers of people are going to university. This could increase the quality of human resources, which might benefit certain businesses.
The population in many countries is ageing. This could affect demand patterns and create new opportunities for some businesses.
Increasing migration (i.e. large numbers of people moving from one place to another) might increase the size of the potential workforce, making recruitment easier. It might also provide a boost to demand.
People appear to be becoming more health conscious. This might create opportunities for certain businesses, such as those selling healthy foods or running fitness centres.

Answer 66

The rate of technological change seems to be increasing all the time. Businesses usually welcome technological developments because they can provide new product opportunities or help to improve efficiency.

examples:

Changes in technology can shorten product life cycles. This is because new products are quickly developed to replace ones that use older technology.
Developments in technology often mean that businesses can replace labour with machines. This is welcomed because human resources are often said to be the most expensive and difficult to manage. New technology also lowers unit costs.
The development of social media has helped to improve communications between businesses and customers. This allows businesses to keep track of changing consumer needs.

Answer 67

The government provides the legal framework in which businesses operate. However, it also directs legislation at businesses to protect vulnerable groups (i.e. groups that are easily hurt or damaged) that might otherwise be exploited. EU businesses are also affected by EU regulations.

examples

EU legislation can affect tax laws. For example, a few years ago the rules changed so that EU VAT would be charged in the country where products were bought as opposed to the country where they were sold. The legislation only applied to digital products, such as e-books, online courses or downloads.
Businesses in the food industry are currently under pressure to reduce the amount of sugar and salt they add to products. In some countries, governments have imposed taxes on the use of sugar in certain products
In some countries, the government states that it wants to reduce the number of rules and regulations addressing business behaviour. This might benefit a wide range of businesses.

Answer 68

People are increasingly protective of the environment; for example, because of the threats posed by global warming. Business activities also sometimes threaten wildlife and natural habitats.

examples:

Some people prefer to buy environmentally friendly goods. This provides opportunities for businesses that specialise in these products.
There are new ways of generating power using renewable sources rather than by burning fossil fuels, such as oil and coal, which are providing new opportunities,
The trend towards recycling is gathering pace in many countries. By using recycled resources, businesses can cut their costs.

Answer 69

deman
cost
operations

Answer 70

Businesses will be concerned if external influences reduce demand for their products. This is likely to result in lower revenues, lower profits and weaker cash flows,
For example, a sharp rise in the exchange rate will have a negative impact on most businesses that rely heavily on exports.
In contrast, importers such as retailers will benefit from the rise. Their purchases will be cheaper and so they may sell more

Answer 71

Some external influences are likely to raise costs. This will reduce profit margins or force businesses to raise their prices.
For example, a surge in the global oil price will raise costs for many businesses. This is because oil is an important input for many businesses —particularly in manufacturing.
However, oil producers will clearly benefit from the price rise.

Answer 72

Businesses often have to change their operational methods as a result of an external influence.
For example, a government may introduce a new minimum wage. This may force a multinational company to relocate production to a country with lower wages in comparison to its current location.
The development of new technology might force firms to adopt new production methods or risk losing their competitive edge

Answer 73

Competition is the rivalry that exists between firms when they are trying to sell goods in a particular market. In some markets

Answer 74

In a competitive market, there is likely to be a large number of buyers and sellers, and the products sold by each business are close substitutes for each other.
Barriers to entry in competitive markets will be low and businesses have very little control over the price charged. For example, if a firm tries to charge more than its rivals, it is likely to lose business.
Finally, there will be a free flow of information about the nature of products, availability at different outlets, prices, methods of production and the cost and availability of production factors.

Answer 75

Some markets are dominated by a single producer or just a few large businesses. In a small number of markets, such as rail travel and water supply, a monopoly exists.

Answer 76

This means that just one business supplies the entire market.
For example
1. if you want to get a train from Glasgow to Edinburgh in Scotland, UK, there is only one train service provider — ScotRail.
2. A monopoly might also exist in a local market. For example, a village shop might serve the whole community without any competition from other shops. .

Answer 77

Monopolies may attempt to exploit consumers by charging higher prices and preventing competition. For example, they may erect barriers to entry. Therefore, the government may choose to monitor the activities of monopolies closely

Answer 78

A market that is dominated by a few very large producers is called an oligopoly

Answer 79

One of the key features of an oligopoly is interdependence. This means the actions of one business will affect other businesses. For example, if one business gains an extra 4 per cent of the market, others must have lost the 4 per cent between them.
There are usually high barriers to entry in this type of market. The larger firms can exploit economies of scale.
Also, because of interdependence, prices tend to remain stable for long periods of time. This is because all firms in the market are afraid of a price war. In an oligopoly, businesses are more likely to engage in non-price competition, such as advertising and promotion

Answer 80

governments around the world have tried to make markets more competitive by reducing the amount of regulation.

For example, at one time in the UK, only local councils were allowed to operate bus services. However, today it is easier for those who meet the minimum requirements to get a licence and provide bus services on any route they choose

Answer 81

This means that there are now fewer businesses in the market.
This might result from a takeover or merger activity when two
or more firms join together.

Answer 82

Retailing has become more competitive due to an increase in the number of consumers using online shopping facilities. For example, people can buy products from all over the world when shopping online, e.g. from Amazon or All Babe.
There has been a significant consolidation in the global airline industry. For example, in 2005 there were 11 US airlines sharing 96 per cent of the domestic market, In 2016 this had fallen to just seven airlines sharing the majority of the market. In Europe, there were mergers between national airlines. British Airways, Iberian Airlines and several others merged to become IAG, now one of the biggest carriers in the world, Air France and KLM have also merged, as have Swiss Air and Lufthansa.
In India, the handheld mobile phone market, which was thought to be worth $15 billion in 2017, is expected to consolidate. There were about 100 brands, but intense competition is expected to reduce this number in the near future. Industry analysts say that the market will be consolidated because it is not possible for smaller competitors to survive.

Answer 83

new entrants
new products
consolidation

Answer 84

When new entrants in the market increase competition, existing businesses have to consider their position.

For example, the growth in online shopping has forced many retailers to offer their own online shopping services. In some cases, retailers have collapsed (i,e. they went out of business) as they failed to compete online. In 2017, an estimated 7795 US retail stores closed down according to research by UBS. This was a record number, and one chain, Radio Shack®, closed down 1470 stores alone.

Not all of these closures are due to online shopping; however, retailers may find it hard to survive if they do not offer an online service in the future,

Answer 85

When a new product appears in the market, businesses may be forced to make changes of their own. They might adapt their own products, lower the price of existing products or invest in an aggressive marketing campaign.
example - In the banking industry, a number of new entrants have appeared offering peer-to-peer (P2P) lending Traditional banks have noticed this, and some have started to respond. The majority have looked to join up with online services that are already running.

Answer 86

When consolidation occurs in markets, the number of businesses in the market falls but some of the existing businesses get bigger. These bigger organisations are likely to be more of a threat to the others; they may be able to lower their costs and they will have a larger market share,
Other businesses in the market might respond by organising mergers or takeovers of their own.
Alternatively, they may look to develop their products, diversify, or cut their costs in some way, As a last resort, they may continue to operate in much the same way but accept lower profit margins.

Answer 87

Failure to respond effectively to the changing competitive environment could negatively affect the performance of a business. At worst, certain changes may threaten the business's survival.

Answer 88

Another way of looking at the competitive environment is to consider a model put forward by Michael Porter in his book, Competitive Advantage: Creating and Sustaining Superior Performance (1985).
In the book, he outlines five forces, or factors, which determine the profitability of an industry. He argues that the ultimate aim of competitive strategy is to cope with and ideally change those forces in favour of the business.

Answer 89

Where the collective strength of those five forces is favourable, a business will be able to earn acceptable or average returns on their investments.
Where they are unfavourable, a business will have low or unpredictable returns.

Answer 90

Suppliers, like any business, want to maximise the profit they make from their customers. The more power a supplier has over its customers, the higher the prices it can charge and the more it can reallocate (i.e. move) profit from the customer to itself

Answer 91

Limiting the power of its supplier will therefore improve the competitive position of a business

Answer 92

It can grow vertically (backward vertical integration) either acquiring a supplier or setting up its own business by growing organically upwards.
It can seek out new suppliers to create more competition amongst suppliers.
It might be able to engage in technical research to find substitutes for a particular input to broaden the supply base.
It may also minimise the information provided to suppliers in order to prevent the supplier realising its power over the customer.

Answer 93

Suppliers want to charge maximum prices to customers, and buyers want to obtain supplies for the lowest price. If buyers or customers have considerable market power, they will be able to beat down prices offered by suppliers.

example - the major car manufacturers have succeeded in forcing down the price of components from component suppliers because of their enormous buying power and the small number of major car manufacturers in the world

Answer 94

One way a business can improve its competitive position with buyers is to extend into the buyers' market through forward vertical integration. A car manufacturer might set up its own dealership. for example.
It could encourage other businesses to set up in its customers' market to reduce the power of existing customers.
It could also try to make it expensive for customers to switch to another supplier. For example, one way games console manufacturers keep up the price of computer games for their machines (which they receive a royalty fee for) is by making them technically incompatible (i.e. unable to work together) with other machines

Answer 95

If businesses can easily enter an industry and exit if profits are low, it becomes difficult for existing businesses in the industry to charge high prices and make high profits. Existing businesses are constantly under threat from new suppliers if the profits in an industry rise too much. This is because the new suppliers can undercut their prices.

Answer 96

Businesses can protect themselves from this by erecting barriers to entry to the industry. For example, a business may apply for patents and copyright to protect its intellectual property and prevent other businesses using it.
It can attempt to create strong brands which will attract customer loyalty and make customers less price sensitive.
Large amounts of advertising can be a deterrent (i.e. something that stops people from doing something) because it represents a large cost to a new entrant, which might have to match the spending to grow some market share.
Large sunk costs, costs which have to be paid at the start but are difficult to get back if the business leaves the industry, can deter new entrants,

Answer 97

The more substitutes there are for a particular product, the fiercer the competitive pressure on a business making the product. Equally, a business making a product with few or no substitutes is likely to be able to charge higher prices and make high profits

Answer 98

A business can reduce the number of potential substitutes through research and development, and then patenting the substitutes itself.
Sometimes, a business will buy the patent for a new invention from a third party and do nothing with it, simply to prevent the product coming to market.
Businesses can also use marketing tactics to stop the spread of substitute products, A local newspaper, for example, might use predatory pricing if a new competitor comes into its market to drive it out again.

Answer 99

The degree of rivalry among existing firms in an industry will also determine prices and profits for any single firm

Answer 100

If rivalry is fierce, businesses can reduce that rivalry by forming cartels, or engaging in a broad range of anti-competitive practices. In many countries this is illegal, but it is not uncommon,
Businesses can also reduce competition by buying up their rivals Again, competition law may intervene to prevent this happening, but most horizontal mergers are allowed to proceed
In industries where there are relatively few businesses, often businesses don't compete on price. This allows them to maintain high profitability. instead, they tend to compete by bringing out new products and increased advertising, thus creating strong brands. As a result, their costs are higher than they might otherwise be, but they can also charge higher prices than in a more competitive market, creating high profits

Answer 101

cartel a group of businesses that act together to reduce competition in a market — by fixing prices, for example

Answer 102

If a business is growing, it means that it generates more revenue, owns more assets, uses more resources (such as labour and capital) and hopefully makes more profit

Answer 103

If a business is growing, it means that it generates more revenue, owns more assets, uses more resources (such as labour and capital) and hopefully makes more profit.
Growing businesses experience,

lower average costs,
increased market power,
increased brand recognition
increased profitability

Answer 104

In Figure 2, a firm is currently producing in a small plant (i.e. a factory) and its short-run costs are SRAC₁, When it produces an output equal to Q_i. its average cost will be AC_i. If it raises production to Q₂, average costs will rise to AC,. This is the result of the law of diminishing returns.
If the firm expands the scale of its operations (which it can do in the long run), the same level of output can be produced more efficiently. With a bigger plant, represented by SRAC_z, Q₂ can be produced at an average cost of just AC,.
Long-run average costs fall due to economies of scale. They will continue to do so until the firm has built a plant which minimises long-run average costs (i.e. makes the costs as small as possible). In the diagram, this occurs when a plant shown by SRAC₃ is built.
This is sometimes called the minimum efficient scale of plant. When output reaches Q* in this plant, long-run average costs cannot be reduced any further through expansion. The business is said to be productively efficient at this point.
At any output level higher or lower than Cr, the business is productively inefficient because average costs could be lower. For example, if the firm continues to grow, it will experience rising average costs due to diseconomies of scale, as in SRAC, in Figure 2.

Answer 105

Internal economies of scale are the benefits of growth that arise within the firm

Answer 106

Purchasing and marketing economies
Technical economies
Technical economies
Financial economies
Risk-bearing economies

Answer 107

Large firms are likely to get better rates when buying raw materials and components (i.e. the parts something is made of) in bulk. In addition, the administration costs involved do not rise in proportion to the size of the order.

Answer 108

Technical economies arise because larger plants are often more efficient. The capital costs and the running costs of plants do not rise in proportion to their size.
For example, the capital cost of a double-decker bus will not be twice that of a single- decker bus. This is because the main cost (engine and chassis) does not double when the capacity of the bus doubles. Increased size may mean a doubling of output, but not cost.
Therefore, the average cost will fall, This is sometimes called the principle of increased dimensions. In addition, the cost of the crew and fuel will not increase in proportion to its size

Answer 109

indivisibility - the phsycial inability or economic inappropriateness of running a machine or some other piece of equipment at below its optimal operational capacity

Another technical economy is that of indivisibility. Many firms need a particular item of equipment or machinery but fail to make full use of it. A small business may pay $400 for a laptop computer. The cost will be the same whether it is used twice a week by a part-time worker or every day. As the business expands, it will be used more and so the average cost of the machine will fall.

Answer 110

As the scale of operations expands, the firm may switch to mass-production techniques. Flow production involves breaking down the production process into a very large number of small operations. It allows for greater use of highly specialised machinery. This results in large improvements in efficiency as labour is replaced by capital.

Answer 111

A firm can afford to employ specialist managers as it grows. In a small business, one general manager may be responsible for finance, marketing, production and human resources.
The manager may find the role demanding.
Efficiency may improve and average costs fall if a business employs specialists in these fields. Specialists would be an indivisibility if they were employed in a small firm

Answer 112

Large firms have advantages when they try to raise finance. They will have a wider variety of sources from which to choose.
For example, sole traders cannot sell more shares to raise extra funds, but large public limited companies can.
Very large firms will often find it easier to persuade institutions to lend them money. This is because they will have large assets to offer as security.
Finally, large firms borrowing very large amounts of money can often gain better interest rates.

Answer 113

As a firm grows it may well diversify (i.e. develop a wider range of products) to reduce risk.
For example, the online retailer Amazon has recently diversified into the operation of supermarkets.
Large businesses can also reduce risk by carrying out research and development.
The development of new products can help firms gain a competitive edge over smaller rivals

Answer 114

External economies of scale are the reductions in costs that any business within an industry might benefit from as the industry grows

Answer 115

External economies are more likely to arise if the industry is concentrated (i.e. if there are a large number of firms) in a particular geographic region

Answer 116

Labour
Ancillary and commercial services
Co-operation
Disintegration

Answer 117

The concentration of firms may lead to the buildup of a labour force with the skills required by the industry. Training costs may be reduced if workers have gained skills at another firm in the same industry.
Examples - Local schools and colleges, or even local government, may offer training courses which are aimed at the needs of the local industry

Answer 118

An established industry tends to attract smaller firms that are trying to serve the particular industry's needs. A wide range of commercial and support services can be offered.
Some examples include specialist banking, insurance, marketing, waste disposal, maintenance, cleaning, components and distribution services.

Answer 119

Firms in the same industry are more likely to co-operate if they are concentrated in the same region. They might work together to fund a research and development centre for the industry.
Example - An industry journal (i.e. magazine) might be published so that information can be shared.

Answer 120

Disintegration occurs when production is broken up so that more specialisation can take place. When an industry is concentrated in an area, firms might specialise in the production of one component. Then, they would transport it to a main assembly plant (i.e. the place where it is put together).
For example, in US film production, many different operations were often done by the same organisation based in Hollywood.
However, there are now far more specialist businesses, such as editing, casting, makeup, costume design, special effects, filming, props manufacturing, marketing and distribution.

Answer 121

As businesses get bigger they become more dominant (i.e. more powerful). As a result, rivals are left with a smaller market share and some weaker businesses may be forced to close down.

Answer 122

If a business is large enough, it may be able to dominate two particular stakeholders: Customers and Suppliers

Answer 123

A dominant business may be able to charge higher prices if competition in the market is limited.
Customers are forced to pay higher prices when there is less choice.
Also, there is less need to develop new products if there is a lack of competition in the market. This means that a dominant firm will not have to meet the costs of expensive and risky innovation (i.e. new ideas). As a result, product choice may remain limited for consumers.

Answer 124

Sometimes a business can dominate its suppliers. For example, it may be able to force the costs of materials and commercial services down if it buys large quantities from smaller suppliers.
Dominant businesses will be in a good position if their suppliers rely upon them for their custom. For example, a small supplier is vulnerable if it sells all of its output to just one large business. It may have to accept the prices that the customer is prepared to pay.

Answer 125

a business might attract the attention of the authorities if it becomes too dominant. If the dominant business appears to be exploiting consumers or suppliers, there may be an investigation into the industry.

examples:

In recent years, energy companies in some countries have been criticised for charging high prices.
Some supermarkets have also been accused of 'bullying suppliers' (i.e. using their power to hurt the suppliers). For example, suppliers might be threatened with the loss of an order if prices are not reduced.
Alternatively, they might be made to wait an unreasonable amount of time for payment.

Answer 126

As a business gets a larger and larger share of the market, customers become more aware of the brand name because they see the brand advertised and offered for sale in more locations.

Answer 127

As the brand becomes stronger, a business may be able to:

charge higher prices
make the product distinct from those of rivals
create customer loyalty
achieve greater product recognition
develop an image
launch new products more easily.
A business with a larger market share is also more likely to attract media attention, which helps to promote the company

Answer 128

Larger businesses tend to make bigger profits than smaller ones. As profits grow, returns to the owners will also grow.
For example, Arca Continental is a business that manufactures bottles and distributes Coca-Cola³⁾ products throughout Mexico, Central America and the USA. It is the second largest Coca-Cola distributor in South America and the third largest in the world. It has a market value of $11.3 billion.
Between 2015 and 2016, its revenues grew 17.8 per cent . The benefit to shareholders of this growth was significant. Arca increased its dividend payment to shareholders from MXN1.75 to MXN1.85 per share

Answer 129

Additionally, when a company grows, shareholders are likely to see the price of their shares rise. The Arca share price rose from MXN92 to about MXN105 over the calendar year.
If a business grows and increases its profitability, it will have more profit for investment and innovation. This will allow the business to develop and launch new products
make acquisitions.
The business is likely to grow even further if these investments are successful.

Answer 130

This type of growth is called external growth or inorganic growth. It involves businesses joining together so that, in theory, they could double in size overnight.
For example, in 2016 the Barcelona-based start-up Doctoraliae, an online booking platform for healthcare appointments, merged with the Warsaw-based company DocPlanner. Doctoralia has around 9 million monthly users, while DocPlanner has over 8 million. This means that the new organisation will virtually double in size,

Answer 131

In contrast, internal growth or organic growth occurs when a business grows naturally by selling more of its output using its own resources.
For example, many to European football clubs have experienced some solid organic growth over the last 10 years or more German club Bayern Munich has seen its revenues grow from around €166 million in 2003-04 to over €640 million in 2015-16.
Clubs have grown by increasing the capacity of their stadiums and attracting new sources of revenue such as income from TV rights, hospitality and other commercial activities.

Answer 132

Speed is one of the key differences between the two growth strategies, Inorganic growth is much faster. it is possible to instantly double in size as a result of joining with another business. Organic growth is normally much slower. It takes time to develop and grow a business using its own resources.
Another difference is the potential risk involved in the two different strategies. It could be argued that organic growth is a safer strategy because owners expand their businesses by developing their current expertise. They may be growing by 'doing more of the same', There is not much risk involved in this strategy. In contrast, growing through mergers or acquisitions has risk attached. This is because the process of integrating when two organisations are brought together can create problems. For example, there could be differences between the working cultures that might result in conflict, delays and instability.

Answer 133

New customer
new products
new markets
new business model
franchising

Answer 134

Perhaps the easiest approach is to rely on driving sales from existing activities.
For example, a food processing company that supplies to local shops may gradually increase production to supply to more and more customers. The business can carry on growing organically (by building an extension or moving to larger premises if the factory reaches full capacity).

Answer 135

It may be possible to find new customers by exploiting new distribution channels.
This approach to growth may need investment in marketing to increase the customer base.

Answer 136

Some businesses grow by developing new products, They may be very innovative (i.e. good at introducing new ideas) and committed to research and development. For example, a business that designs software for computer games can grow by designing new games.
a business might identify customers with slightly different needs. This could require adapting or modifying existing products (i.e. making changes to improve them) to meet these needs, A business might need to invest some of its profit into product development

Answer 137

Some businesses grow organically by finding new markets for their products.
For example, a hairdresser could open another salon in a different location. The assets, systems and working practices used in the original salon can be copied in another location.
New premises (i.e. the building or land that a business uses) can be adapted and decorated in the style that has already been successful.
Some businesses may look to overseas markets to grow.
However, this approach carries more risk because markets abroad are unfamiliar. Growing by selling in new areas is sometimes called geographic expansion.
For example, a number of European and US retailers have opened stores in China, such as Auchan''' and Carrefour from France, and GAP''" and Bebe® from the USA.

Answer 138

It is possible to grow organically by using a new business model, Developments in technology or social change may lead to this growth.
For example, a retailer selling children's toys may start an online operation. This approach could see the business grow very quickly because the size of the potential market opened up could be considerable, even global,

Answer 139

A business might set up a franchising operation to increase the speed of organic growth. This approach allows other entrepreneurs to trade under the name of the original business.
The fast-food outlet SUBWAY' is an example of a business that has used this method to grow

Answer 140

Less risky
Relatively cheaper
Keep control
better protection
avoid diseconmies of scale

Answer 141

Organic growth might be less risky than other growth strategies. Growth can be achieved by extending practices that are well known and understood. This can prevent errors because the culture, norms and practices of the business are already established and effective.
Organic growth can also help to avoid the complications that might arise when integrating with another organisation,

Answer 142

Growing organically might be cheaper than using other methods. Organic growth can be financed from retained profit, This is likely to be the cheapest of all sources of finance.
There will be an opportunity cost, but the financial cost can be zero. Businesses that grow inorganically often have to borrow money or raise fresh capital, This will add to the costs of growth.
Organic growth also avoids the premium prices that can be paid when buying other businesses.

Answer 143

A business will keep more control when growing organically. Owners, or the senior management team, will have complete control of the growth process. This is because there are no outsiders with any controlling interest.
For example, a retail chain is growing because they are opening a new store in a new location every six months. Therefore, the business will have a team of employees who are experienced at opening new stores. They can go in, recruit and train new staff. They can ensure that the store is run in the way that has proved

Answer 144

The financial position of a business might be better protected with organic growth. Since growth is gradual, there is less strain on financial resources. As a result, cash flow is stronger and the business will keep more liquidity.
Inorganic growth often requires huge outlays of money. For example, in 2018, US company Keurig Green Mountain Inc, bought Dr Pepper'⁾ Snapple Group Inc. for US$18.7 billion in cash. Such high expenditure can put financial pressure on the business.

Answer 145

A business that grows organically is less likely to experience diseconomies of scale. Sharp increases in unit costs are not likely to occur if growth is steady and measured.
It may be easier for a business growing organically to see any possible difficulties resulting from scale increases, This will help to keep costs under control

Answer 146

slow pace of growth
lack of access to resources
unable to be competitive
unable to fully exploit economies of scale
may be inappropriate

Answer 147

The pace of organic growth may be too slow for some stakeholders.
For example, shareholders in a plc may want the business to provide quicker returns on their investments than organic growth can deliver.
Shareholders may sell their shares if they are unhappy with the pace of growth, As a result, the share price can fall, This could make the company at risk of a takeover

Answer 148

Organic growth may prevent the business from using the resources owned by other businesses. As a result, it might miss out on some profitable developments.
For example, a construction firm might want to develop expertise in energy-saving technology. This would help it to build more houses with solar panels, It could do this by gradually developing its own expertise.
However, it might be better to buy a company that already does this, rather than trying to do it for themselves. Such companies will be specialists and can provide the knowledge and experience required by the housebuilder.

Answer 149

A business that grows slowly may be left behind in the market. The business may end up feeling small if competitors are growing through mergers and acquisitions, As a result, it may lose its ability to compete effectively.
For example, it may not be able to match the advertising budgets of its larger rivals,

Answer 150

A business may be able to exploit economies of scale as it grows. However, if a business is growing organically it may take some time before such economies are fully exploited. This could mean that a business is having to operate with higher costs for longer periods of time. This could lower profit margins and make it less competitive.
Also, some businesses, such as shipbuilding, require investment in large-scale production before trading can begin. Businesses that grow organically may be prevented from entering such industries

Answer 151

Organic growth may not be appropriate if a market is growing rapidly.
For example, when mobile telephones were first introduced, the market expanded very quickly. Businesses making the best progress were those that were growing through mergers or acquisitions. The three firms now remaining in the UK market are all the result of multiple takeovers and mergers.

Answer 152

a business model where a business owner (the franchisor) allows another person (the franchisee) to trade under their name

Answer 153

profit after tax that is 'ploughed back' into the business

Answer 154

a financial interest in a business which entitles the investor to part-ownership

Answer 155

exploit synergies
Sometimes Buying another business is cheaper than growing internally
Extra cash
Defensive reasons
Response to economic changes
Gain entry into foreign markets
Globalisation culture
Economies of scale
Asset stripper firms
Growth is a main objective of the business

Answer 156

One of the main motives for integration (i.e, joining) is to exploit the synergies that might exist following a merger or takeover. This means that two businesses joined together form an organisation that is more powerful and efficient than the two companies operating on their own. Synergy occurs when the whole is greater than the sum of the parts'.

Answer 157

Synergies may arise from economies of scale, the potential for asset stripping (i.e. removing assets; see below), the reduction of risk through diversification (i.e. providing a wider range of products) or the potential for gains by management

Answer 158

A business may calculate that the cost of internal growth is $80 million. However, it might be possible to buy another company for $55 million on the stock market.
The process of buying the company might inflate its price. But, it could still work out much cheaper.

Answer 159

Some businesses have cash available which they want to use. Buying another business is one way of doing this.
eg - In 2018, in many countries around the world the returns on cash were only about 1 per cent. Many businesses would be keen to generate higher returns than this,

Answer 160

Mergers take place for defensive reasons, One business might buy another to consolidate its position (i.e. make its position more powerful) in the market.
Also, if a firm can increase its size through merging, it may avoid a takeover itself.

Answer 161

Businesses respond to economic changes, For example, some businesses may have merged to deal with Brexit in the UK. A larger organisation may be able to cope with the uncertainties arising from Brexit,

Answer 162

Merging with a business in a different country is one way in which a business can gain entry into foreign markets.
It may also avoid restrictions that prevent it from locating in a country or avoid paying tariffs on goods sold in that country.

Answer 163

The globalisation of markets has encouraged mergers between foreign businesses, This could allow a company to operate and sell worldwide, rather than in particular countries or regions.

Answer 164

A business may want to gain economies of scale. Firms can often lower their costs by joining with another firm.

Answer 165

Some firms are asset strippers, They buy a company, sell off profitable parts, dose down unprofitable sections and perhaps integrate other activities into the existing business.
Some private equity companies have been accused of asset stripping in recent years.

Answer 166

Management may want to increase the size of the company, This is because the growth of the business is their main objective.
It may also be because the financial rewards to managers is often linked to growth and the size of the company.

Answer 167

A merger is where two (or more) businesses join together and operate as one Mergers are usually conducted with the agreement of both businesses. They are generally 'friendly' The name of the new business is often formed out of the names of the two original businesses.
For example, one of the biggest mergers recently was between Swiss-based cement producer Holcim Ltd and French cement company Lafarge SA, forming LafargeHolcim. The merger helped to cut costs and cope better with overcapacity (i.e, when an industry produces more than it is able to sell) and weak demand

Answer 168

A takeover, sometimes called an acquisition, occurs when one business buys another,
Takeovers among public limited companies can occur because their shares are traded openly and anyone can buy them. One business can acquire another by buying 51 per cent of the shares. Some of these can be bought on the stock market and others might be bought directly from existing shareholders.
When a takeover is complete, the company that has been 'bought' loses its identity and becomes part of the predator company (i.e. the company that `hunted' the other),
However, private limited companies cannot be taken over unless the majority shareholders `invite' others to buy their shares.

Answer 169

In practice, a firm can take control of another company by buying less than 51 per cent of the shares. This may happen when share ownership is widely spread and little communication takes place between shareholders.
In some cases, a predator can take control of a company by purchasing as little as 15 per cent of the total share issue. Once a company has bought 3 per cent of another company, it must make a declaration to the stock market. This is a legal requirement to ensure that the existing shareholders are aware of the situation

Answer 170

Takeovers of public limited companies often result in a sudden increase in their share price. This is due to the volume of buying by the predator and also speculation by investors. Once it is known that a takeover is likely, investors quickly buy shares, anticipating a quick price rise.
Sometimes more than one firm might attempt to take over a company. This can result in very sharp increases in the share price as the two buyers bid up the price.

Some of the biggest takeovers in 2017 include:

CVS Health Corp, a US drugstore chain, agreed to
pay US$69 billion to buy Aetna, a health insurer
Walt Disney bought film and television businesses from 21st Century Fox for US$52 billion.

Answer 171

Integration is when businesses join together to form one

Answer 172

Horizontal integration occurs when two firms that are in exactly the same line of business and the same stage of production join together.
eg- The merger between the two cement producers, Lafarge SA and Holcim Ltd, is an example of a horizontal merger

Answer 173

a common knowledge of the markets in which they operate
less likelihood of failure than merging two different areas of business
similar skills of employees
less disruption.

Answer 174

Vertical integration occurs when firms in different stages of production join together.
Forward vertical integration is where a business joins with another that is in the next stage of production.
Backward vertical integration is where a business joins with another in the previous stage of production.

Answer 175

The main motive for such a merger would be to guarantee and control the supply of components and raw materials.
Another motive would be to remove the profit margin that the supplier would demand. Forward vertical integration involves merging with a firm that is in the next stage of production.
For example, the mountain bike manufacturer might merge with a retail outlet selling bikes. This removes the profit margin expected by the firm in the next stage of production. It also gives manufacturers guaranteed outlets for their output.

Answer 176

a very large single business organisation made up of many different businesses producing unrelated products

Answer 177

Each business usually operates as a separate entity with its own board of directors.
However, each business is still under the control of the owner (conglomerate).
The group of businesses are usually acquired through mergers and takeovers.
They normally have a wide range of business interests.
An example of a conglomerate is Tata, which is based in Mumbai, India. Some of the major companies owned by Tata include Tata Steel, Tata Motors (including Jaguar Land Rover), Tata Consultancy Services, Tata Power, Tata Chemicals, Tata Global Beverages, Tata Coffee and The Indian Hotels Company Limited (Taj Hotels). In 2017, the group's revenue was over $100 billion

Answer 178

The main advantage of operating as a conglomerate is that these organisations have a very wide range of business interests. This spreads the risk of business enterprise. If one of the businesses is not doing very well, group revenues and profits can be supported by other businesses in the conglomerate.
Another advantage is that they are very large and powerful. They can exploit economies of scale and often have influence in markets.

Answer 179

One of the disadvantages of a conglomerate is that diversification can result in difficulties. For example, the specialist skills built up in the original company or group of companies may not be relevant in the new acquisitions. This means the original management team may not fully appreciate the forces that drive success in some of its component parts.
Over time, a conglomerate can become a confusing body that fails to maximise its full potential. For example, sometimes a conglomerate may be too slow to get rid of failing companies. This might be due to the fear of losing the required levels of diversification.

Answer 180

stakeholder benefits
stronger balance sheet
lower costs
lower taxes

Answer 181

Shareholders in the 'target' company often get an immediate premium when taken over. This is because the share price often rises sharply during the process of a bid.
eg - Primero shareholders received a 200 per cent premium on the share price following the takeover by First Majestic Silver

Answer 182

If an acquisition is successful shareholders in the 'predator' company (the company making the acquisition) will also benefit.
However, their benefits may be long term. It may take a while for the integration process to be completed and there may be a delay in the improvement of financial performance.
But if all goes well, shareholders should get higher dividends in the future and the share price should rise. In the long term, job security might also improve as the business becomes stronger due to the merger or takeover. It is also likely that the remuneration packages of some employees (i.e. the money paid to them), particularly senior management, will be better.

Answer 183

A takeover or merger results in a larger single organisation. As a result, the strength of the balance sheet improves. The company will have more assets which are also likely to be more diverse.
It is possible that the cash flow of the company will also improve since greater revenues will be generated by the larger organisation.

Answer 184

One of the main motives for mergers and takeovers is to lower costs. Following acquisitions, corporations will be larger. As a result they will be able to exploit economies of scale and lower their costs.

Answer 185

It is possible for a company to lower its tax liabilities following a takeover. This is likely to occur if a business acquires another which is located in a `low-tax' country.
lTax liabilities can be reduced by registering all the activities of the business in the country where tax rates are lower

Answer 186

integration costs
overpayment
bidding wars

Answer 187

After a merger or takeover has been agreed, the next step is to physically integrate the two organisations. This can be a very complex, expensive and time-consuming process, the effects of which may be felt for many years.
Some of the costs incurred result from the organisational and personnel changes, severance pay for dismissed workers (i.e. the money paid to workers who are forced to leave), technical changes, systems changes, training and many others,
It is not uncommon for businesses to underestimate these costs and encounter problems when carrying out the consolidation process. For example, merging two different cultures can be particularly problematic

Answer 188

There is some evidence to suggest that businesses often pay too much when making an acquisition. Numerous studies over the years reckon that the failure rate of mergers and acquisitions are somewhere between 70 per cent and 90 per cent. One of the main reasons for this is overpayment. This may be because the financial benefits are overestimated, or the costs of acquisition are underestimated, or both, Therefore, the price that the acquirer is willing to pay is inflated.
For example, Yahool® felt that it paid too much ($1 billion) for social network site Tumblr, Yahoo! said that assessing the value of a fast-growing new business which has only a small amount of revenue can be difficult. Tumblr's assets were $353 million, and it liabilities were $114 million, according to Yahoo!,

Answer 189

In some cases, it is possible that one business attracts more than one potential buyer. If this happens the price of the acquisition will start to rise, as it would do in an auction. This makes the takeover more expensive.
One example of this was the takeover of the American food company Hillshire Brands Co. by Tyson Foods Inc. Previously another company, poultry producer Pilgrim's Pride, had made an offer of $6.4 billion for Hillshire. However, within 48 hours, Tyson offered $6.8 billion. Pilgrim then raised its bid to $7.7 billion, but this was outstripped by Tyson's further bid of $8.55 billion, which was finally accepted by Hillshire, This case shows how the cost of a takeover can escalate when more than one business is interested in a target. The overall price rose from $6.4 billion to $8.55 billion, an increase of 33.6 per cent.

Answer 190

speedy growth
strategic benefits
economies of scale
eliminate competition

Answer 191

Businesses can grow far more quickly through mergers and takeovers than growing organically. This means that the benefits of growth, such as larger market share, lower costs resulting from economies of scale, more market power and higher profitability, can be enjoyed more immediately. This might benefit a range of stakeholders.

Answer 192

Acquisitions and mergers can help businesses to improve their strategic position. Firms often join together because their activities may complement each other.
For example, if two companies join together, collectively they may have a more balanced and diverse global product portfolio. A business can fill gaps in its product portfolio very quickly by making acquisitions.
Inorganic growth often means that strengths in one company can compensate for relative weaknesses in the other,

Answer 193

Economies of scale. An important advantage of inorganic growth is that a company may benefit from economies of scale almost overnight.
For example, when two companies join, the new organisation will only need one head office. Therefore, one can be closed down, reducing administration costs significantly.
Sometimes, after an acquisition, the size of a business can double. This provides scope for making cost savings in the form of bulk buying, increased specialisation of resources and raising capital.

Answer 194

Inorganic growth can help to reduce competition in the market. Clearly, if a company takes over a rival, there will be fewer operators in the market, If the process of acquisitions continues in the same market, competition will decrease.
This may lead to one firm (or just a few firms) dominating the market, which might allow the remaining companies to raise prices, restricting consumer choice.

Answer 195

regulatory intervention
drain resources
culture clash
alienation of customers
loss of managerial control

Answer 196

Australian conglomerate Wesfarmers bought the UK DIY chain store Homebase for £340 million in 2016.
However, in 2018 Wesfarmers admitted that the takeover had gone badly. Wesfarmers said the 250-store UK business was expected to make an underlying loss of £97 million in the half-year after a £54 million loss in the year to June 2017. As a result, Wesfarmers is taking a £584 million write down on the business, most of which relates to the value of the Homebase brand.
A spokesperson for Wesfarmers said the problems were 'through our own doing', as the company had ditched popular lines and removed concessions such as Laura Ashley":, Habitat'⁾ and Argos"..

Answer 197

Mergers and takeovers in most countries can attract the attention of market regulators (i,e. people or organisations that make sure an industry is being run fairly), If they think that a merger or takeover acts against the interests of the consumer, they have the power to order an investigation. This takes time and may cause delays. After the investigation, the regulator often has the power to recommend that the merger be blocked.
Alternatively, it may allow a merger or takeover to go ahead, but with certain conditions. Delays in proceedings and undertakings, such as the sale of assets, take time and cost money

Answer 198

Mergers and takeovers can cost a lot of money.
For example, in 2017, Aerospace supplier United Technologies Corp paid $30 billion for avionics and interiors maker Rockwell Collins Inc. This is clearly a very large amount of money and companies that spend such sums on mergers and takeovers have to be very well resourced.
If a company grows too rapidly by going on an aggressive acquisition trail, it may stretch financial resources and damage other aspects of the business.

Answer 199

When businesses merge, the integration process can be challenging because lots of changes have to be made, One of the main difficulties is merging two different cultures. It can be very difficult to impose a new culture on a business and there may be resistance (e.g. disagreements).
For example, a business that prizes flexible working practices and quality of life, may lose important members of staff after merging with a firm where employees are expected to be in the office at all times. If changes are forced through too quickly, without proper discussion for example, this resistance is likely to be stronger.
Such problems are likely to be more intense if growth is too rapid and firms are combining two contrasting cultures too quickly.

Answer 200

Companies that are growing too fast might lose touch with their customers. Too much attention and resources get focused on the process of growth. As a consequence, the needs of customers can be overlooked.
For example, after a takeover or merger the name of a business may change; some consumers may be confused, wondering what the new brand is and what values might be attached to it. Ultimately, this could damage the image of the company and result in the loss of customers,

Answer 201

If growth is too rapid the company might get too big too fast. This can result in a loss of control by the senior executives.
A bigger organisation means that additional layers of management are required. This means that communication channels take longer to reach the intended recipient and might impact negatively on the chain of command. As a result, costs may start to rise as diseconomies of scale set in

Answer 202

where markets become so large that products could be sold anywhere in the world

Answer 203

the combining of two or more activities or businesses which creates a better outcome than the sum of the individual parts

Answer 204

Internal diseconomies of scale are the rising costs caused by excessive growth in the business.

Answer 205

poor communication
control and coordination
poor worker motivation
technical diseconomies
bureaucracy

Answer 206

Very large firms often suffer from poor communication. The flow of information between individual employees, departments, divisions or between head office and subsidiaries becomes more difficult to manage when a firm is very large. This is because the chain of command in such organisations may be long. There may be many layers of management in the hierarchical structure (i.e. one that is organised into levels of importance from top to bottom). Both internal and external communication might be affected.
In a very large organisation it is possible to lose touch with customers and as a result a business may fail to identify changes in customer needs.
Also, large businesses often employ automatic telephone answering services which keep customers waiting, direct them to inappropriate departments or fail to provide a swift solution. Many customers find these answering systems annoying.

Answer 207

The control and co-ordination of large businesses is also demanding. Thousands of employees, large amounts of resources and many different operational locations all mean added responsibility and more supervision. In many cases, businesses have to employ a larger number of managers and supervisors to maintain adequate control. This can result in rising costs.
There have been examples where it has been challenging for senior managers in big companies to be in complete control of such a huge quantity of resources spread out all over the world, For example, Volkswagen (VW)®, the giant car manufacturer which employs around 600 000 people worldwide, had problems in 2015. It was discovered that many cars had been fitted with a 'defeat device' to help it pass certain environmental tests. However, when the cars returned to the road, the emissions levels rose again. It is possible that VW had grown too big and unmanageable. It was claimed that the CEO of VW did not know about this activity. In such a large organisation this might be true.

Answer 208

Motivation may suffer as individual workers become a minor part of the total workforce. For example, in an organisation that employs thousands of people globally, each individual worker may feel unimportant. This may lead to an attitude of wanting to `do the absolute minimum'. There may be higher levels of staff turnover, increased absence and poor time-keeping, which will raise labour costs.
There may also be poor relations between management and the workforce in a very large organisation. For example, managers might lose touch with the needs of employees. As a result, conflicts may occur and trying to resolve them may cost money.

Answer 209

Plants, machinery and equipment will usually have an optimum (i.e. most efficient) capacity. If these resources are overused, they are likely to become inefficient. For example, in the agricultural industry, if a tractor is overworked the engine may run 'too hot', causing it to stop working properly. This might reduce its output or result in a breakdown which will cost money to repair.
Another example is in the chemical industry, where construction problems often mean that two smaller plants are more cost-effective than one very large one. If a business employs one huge plant and a breakdown occurs production will stop. With two smaller plants, production can continue even if one breaks down.

Answer 210

If a business becomes too bureaucratic, it means that too many resources are used in administration. Too much time may be spent filling in forms or writing reports.
Also, decision making may be too slow and communication channels too long, If resources are wasted in administration, average costs will start to rise

Answer 211

External diseconomies of scale: External diseconomies occur when an industry grows too big (rather than the individual firm)

Answer 212

Rapid growth
Industry growing in the same geographical location

Answer 213

Rapid growth in an industry can result in the price of production factors rising sharply, This is because growing demand for them drives up the price.
For example. the construction industry in Japan has grown as the country develops the infrastructure (e.g. transport networks, water and power supplies) needed to stage the 2020 Olympics. This has driven up the wages paid to construction workers, resulting in all businesses in the Japanese construction industry facing rising labour costs as output expands.

Answer 214

External diseconomies are perhaps most likely to occur when an industry grows in the same geographical location. The price of land, labour, services and materials might rise as firms compete with each other in the same area for a limited amount of resources.
Also, congestion (i.e, too much traffic) in the area might lead to inefficiency, as delays are caused to deliveries and employees travelling to work.

Answer 215

Internal communication is the exchange of messages and the flow of information inside a business; for example, between individual workers or between departments.

Answer 216

With the rapid development in information and communication technology (ICT), some of these problems may have been reduced. For example, any number of people can be copied into an email so that important messages can be shared instantly to thousands of people all over the world, The use of video conferencing might also help internal communication, where members of staff in different geographical locations can communicate face to face.
However, it might also be argued that IT has brought a whole new set of communication problems. For example, communications can be seriously affected when IT systems fail.

Answer 217

Distortion of information
Resource duplication
Competition between departments

Answer 218

Sometimes resources might be wasted due to a lack of effective communication, One problem that might occur is the duplication of resources. This is where two or more identical activities or projects are being followed in the same organisation at the same time.
For example, a division of a company in Germany may be writing a new complaints procedure policy. If another division, say the Indonesian division, is doing exactly the same, resources will be wasted. Better communication would ensure that only one new complaints procedure policy is produced

Answer 219

If a business grows too big, there could be a problem with internal communication. This is because the number of layers in the management structure are also likely to grow. As a result, channels of communication get longer and the scope for error in sharing messages increases. Distortions to information may occur (i.e. changes that make the information no longer correct) as it is passed through the managerial hierarchy. At worst, this could lead to misunderstandings and arguments between workers and managers, Such arguments use up resources. Any cost resulting from a misunderstanding or argument will reduce productivity.

Answer 220

a situation where a business does not have enough cash to support its production and sales, usually because it is growing too fast

Answer 221

This is more likely to affect young, rapidly growing businesses.

Answer 222

business does not have enough capital
offers too much trade credit
operating with small profit margins

Answer 223

It is fairly common for a new business to be undercapitalised. This means that it has started trading with insufficient capital. It does not have enough cash to buy the resources needed to meet the growing orders

Answer 224

It may be tempting for a new business to allow its customers 90 or 120 days' trade credit, However, this means that the business has to wait that length of time, or more, to be paid. During this time it will be short of cash to buy the resources needed to meet new orders

Answer 225

In order to make an impact in the market, a new business may offer its products at lower prices. However, with lower prices (and therefore lower profit margins), it may not generate enough profit to fund the growing volume of business.

Answer 226

A method used in the calculation of a moving average where the average is plotted or calculated in relation to the central figure.

Answer 227

The relationship between two sets of variables.

Answer 228

A measure of the extent of the relationship between two sets of variables.

Answer 229

A succession of averages derived from successive segments (typically of constant size and overlapping) of a series of values.

Answer 230

A graph showing the performance of one variable against another independent variable on a variety of occasions. It is used to show whether a correlation exists.

Answer 231

A method that allows a business to predict future levels from past figures.

Answer 232

- Trend
- Seasonal Fluctuations
- Cyclical Fluctuations
- Random Fluctuations

Answer 233

- Moving Average --> to calculate this you add the number or sales up per year/quarter etc. then divide by the same amount you have added up
- four-period centred moving average --> can be used by finding the midpoint of a four-year moving total and a eight-year moving total.
- to work this out divide the eight year moving total by eight

Answer 234

- Using a line of best fit
- by plotting the values from the four-period moving average onto a graph accurately and then adding the line of best fit 'by eye', so that points fit equally either side of the line.
- This line can be extended should help give a reasonable prediction

Answer 235

- when drawing a line of best fit it should pass through the coordinates (X,Y), where X is the average of the years and Y is the average sales:

- X = (the sum of the years)/ (number of years)
- Y = (the total sales in the trend)/ (the number of years)

Answer 236

- predictions may not be accurate because it is taken from the trend, and the trend 'smoothed out; variations in sales.
- To make an accurate prediction the business will have to fine the average variation over the period and take this into account.
- To find out how much variation there is we must --> V= Actual Sales - Trends

Answer 237

- trends are the smoothed out figures that smoothed out the variation.
- If a set of data has been sorted with four-period centred average using the financial Quarters in the year we can make a more accurate prediction by calculating the average seasonal variation in the each quarter ( e.g. average of the 4th Quarters from the data etc.)

Answer 238

- The forecast is for a short period of time in the future, such as six months, rather than a long time. such as five years
- The are revised frequently to take account of new data and other informaiton
- The market is slow changing
- Market research data, including test marketing data, is avaible
- Those preparing the forecast have a good understanding of how to use data to produce a forecast
- Those preparing the forecast have a good 'feel' for the market and can adjust the forecast to take account of their hunches and guesses about the future

Answer 239

- by creating a forecast range
- by preparing 3 set of figures --> a optimistic, a pessimistic and a central forecast
- these give the best and worst case scenarios aswell as the central forecast, the one that is most likely to occur
- this give the departments in a business an indication of the possible variations they might have to face.

Answer 240

- Time series analysis only describes what is happening to information
-Casual modelling tries to explain data, usually by finding a link between on set of data and another
- this can be done by plotting the two variables on a scatter graph and looking at the correlations which can be show better with a line of best fit

Answer 241

- It can be calculated form two sets of data that would usually go on a scatter graph
- it is possible to calculate the extent of the relationship through the following formula;
r = ΣXY/sqrt((ΣX^2) x (ΣY^2))

Answer 242

- means that there is an absolute positive relationship between the two variables.
- All points in the scatter graph fall on the line best fit and the line slopes upwards from left to right.
- As the value of the independent variable, increase so do the dependent variable values

Answer 243

means that there is no relationship between the variables

Answer 244

- means that there is an absolute negative relationship between the two variables.
- All points in the scatter graph fall on the line of best fit and the line slopes downwards from left to right.
- As the value of the dependent variable falls

Answer 245

- Any value that falls below 0.7 make it difficult to see any correlation from the scatter graph
- A large rise in one of the Variable may be unrelated to other other factors and could have been affect by something completely different
- There are sometimes examples of 'nonsense correlations'. These are correlation coefficients that appear to show a strong relationship between two variables, when in fact the relationship between the figures is pure coincidence

Answer 246

- uses people's opinions or judgements rather than numerical data
- a business could base its prediction on the views of so-called experts, or on the opinions of experience managers
- these methods are useful when there is insufficient numerical data or where figures date quickly because the market is changing rapidly

Answer 247

A method of investment appraisal that measures the net return per annum as a percentage of the initial spending.

Answer 248

The amount of money spent when setting up a new venture.

Answer 249

A method of investment appraisal that takes interest rates into account by calculating the present value of future income.

Answer 250

The purchase of capital goods.

Answer 251

The evaluation of an investment project to determine whether or not it is likely to be worthwhile.

Answer 252

Cash inflows minus cash outflows.

Answer 253

The present value of future income from an investment project, minus the cost.

Answer 254

The amount of time it takes to recover the cost of an investment project.

Answer 255

The value today of a sum of money available in the future.

Answer 256

Investment or Capital Investment describes the process of purchasing fixed assets, such as new buildings, plant, machinery and office equipment. It refers to the purchase of any asset which the business plans to own, and will pay for itself, over a period of more than 1 year.

This may include:
- Replacement or renewing existing assets that have worn out (depreciated) or become obsolete
- Introduce new assets to meet changes in demand

Answer 257

- describes how a business might objectively evaluate an investment project to determine whether or not it is likely to be profitable
- It also allows businesses to make comparisons between different investment projects
- There are several quantitative methods that a business might use when evaluating a project
- However, they all involve comparing the capital cost of the project with the net cash flow

Answer 258

the payback period refers to the amount of time it takes for a project to recover or pay back the initial outlay.
- The payback period can also be found by calculating the Cumulative Net Flow.
- it is a measure of time, ie days, weeks or years

Answer 259

There are certain advantages to a business of the use the payback method to appraise the potential success of an investment
- This method is useful when technology changes rapidly as it is important to recover the cost of investment before a new model or equipment is designed.
- It is simple to use
-Firms might adopt this method if they have cash-flow problems. This is because the project chosen will 'payback' the investment more quickly than other
- Emphasises cash flow requirements - help planning

Answer 260

- This method measure the net return each year as a percentage of the capital cost of the investment
- Firms want to achieve as high a percentage as possible, certainly higher than they could achieve by keeping the assets invested in a bank as cash.

Answer 261

(Net return (profit)) / ((initial cost) x (time)) x 100
- If the ARR is greater than the return available investment markets, ie cash or giving debentures, then its worth it

Answer 262

- it clearly shows the profitability of an investment project
- Not only does it allow a range of projects to be compared, the overall rate of return can be compared to other uses for investment funds.
- % result makes it easy to compare against other investment choices
- Can show true profitability as takes account of all expenditure at face value
- % terms are easily understood by non accountants

Answer 263

- Money in the future is worth less than the same amount now (the present value )
- This is because money available today could be invested and it could earn interest
- Note that is a completely different idea to the fact that money in the future can also because devalued due to the effects of inflation
- Discounted Cash -flow techniques just deal with one of these, the effect of interest rates

Answer 264

- The payback and ARR methods assume the timing of payments and receipts are not important, they ignore the time value of money
- As such, any payment you receive in the future are discounted (reduced) to reflect their lower future value.
- in essence, it is taking a discount rate of the investment now and adding the total present values together to give you the total return on investment
- the higher the rate of discount the less the present value of cash flow in the furture

Answer 265

- take the discount rate. starting at 1 each year after divide by the discount rate
- multiple each year's total revenue by their relevant discount factor to give you the present value
- total the present values to give you the net present value
- take the net present value and take away the initial cost to give you the value

Answer 266

- Only method that considers time value of money
- As future monies are discounted heavily, less risk if incorrect
- Only system to give precise answer

Answer 267

- Calculation ignores revenues or costs that occur after point of payback
- Estimates over long periods can be inaccurate
- Takes no account of the future value of money
- Long payback terms may put off investment, leading to short-termism

Answer 268

- Harder and more time consuming to calculate.
-Takes no account of the future value of money

Answer 269

- Time consuming and difficult to calculate
- Difficult to understand, particularly for non financially trained
- Flat discount rate is unrealistic.

Answer 270

Firms take the following actions to allow for the risks and uncertainties:
- Build in contingencies – allow extra funds to account for changes in costs so that would make the project run over budget.
- Calculate alternative scenarios – expected, best and worst case scenarios
- Set demanding targets – high ARR’s or short payback terms. Covering costs early removes future uncertainties.

Answer 271

Human relations. Some investment projects can have a huge impact on the staff in an organisation. For example, investment in plant automation (i.e. replacing workers with machines) might lead to mass redundancies. A business might decide to postpone plans to automate their plant if it thought the damage to human relations in the organisation would be too severe.
Ethical considerations. Along with many other business decisions, managers are being more ethical (i.e. thinking about what is right and wrong) when choosing courses of action. For example, a chemicals producer might decide to build a new plant in a location that does not minimise financial costs but does reduce environmental damage. This decision might help to further improve the image of a company. Companies are increasingly keen to be seen as 'good corporate citizens'.
Risk. One factor in assessing the risk of an investment project is a business's financial situation. Other factors include the state of the economy and the markets into which a business sells. Investment projects that have long payback periods are also riskier than ones with shorter payback periods.
Availability of funds. Some investment projects do not start because businesses are unable to raise the money needed to fund the project. A large number of these will be small businesses that find it difficult to persuade investors and lenders to provide finance.
Business confidence. Entrepreneurs, managers and businesses tend to have different attitudes and cultures to each other. One aspect of this is confidence or optimism (i.e. a feeling that good things will happen). Some decision makers tend to be very cautious, seeing all the problems that might arise if things go wrong. Some decision makers are confident and optimistic. They see the future as much better and brighter than others. This has a crucial impact on investment. The cautious, unconfident entrepreneur or manager may delay or abandon investment projects. In the same circumstances with the same investment projects, confident and optimistic managers will tend to go ahead and authorise the expenditure. So, the deeply held attitudes of decision makers have an important influence on investment decision making.

Answer 272

a technique which shows all possible outcomes of a decision. the name comes form the similarity of the diagrams to the branches of trees

Answer 273

- A decision tree is a method of identifying all the alternative outcomes for a decision so that they can be compared to the results of undertaking an action.
- Numerical values are given to each potential option, then calculations can be used to determine the best outcome.

Answer 274

- Decisions Points
- Outcomes
- Probability or Chance
- Expected Monetary Value

Answer 275

where a decision needs to be made. Represented by a square.

Answer 276

points where the different possible outcomes. Represented by circles and referred to as chance nodes.

Answer 277

- the likelihood of success or failure of an outcome.
- These probabilities will be assessed based on market research data and previous experience (using a businesses backdata)

Answer 278

this is the financial outcome of the decision

Answer 279

EMV = S + F

S = probability of success x expected profit if successful

F = probability of failure x expected profit if it fails

If they are numerous outcomes you simply add all value of EMV together instead

Answer 280

- Can be applied to complex scenarios to allow visual comparison
- May allow possible courses of action to be identified that have been considered.
- Numerical values helps decision making
- Helps identify the risks associated with decisions, allowing management to them to separate important decision from those not important

Answer 281

- Due to the reliance on probabilities, may not be accurate.
- Time lag – by the time decision made, information may be out of date
- It can be time consuming, although computerised modelling can be quicker.
- Decision makers may have an agenda which means they manipulate the probabilities to distort the results.

Answer 282

How soon a task in a project can begin. It is influenced by the length of time taken by tasks which must be completed before it can begin.

Answer 283

The tasks involved in a project which, if delayed, could delay the project.

Answer 284

A method of calculating the minimum time required to complete a project, identifying delays which could be critical to its competition.

Answer 285

The time by which a task can be delayed without affecting the following task.

Answer 286

The latest time a task in a project can finish.

Answer 287

A chart showing the order of the tasks involved in completing a project, containing information about the times taken to complete the tasks.

Answer 288

Positions in a network diagram which indicate the start and finish times of a task.

Answer 289

The time by which a task can be delayed without affecting the project.

Answer 290

In business, the sooner a task is completed, the better. Once completed, the business can:
- re-direct resources to new projects,
- Satisfy the customer,
- Receive payment sooner, which
- Increases efficiency and profitability

- Critical Path Analysis (CPA) makes use of network diagrams to calculate the minimum time needed to complete a project.
- CPA will allow a business to identify areas where delays may occur and whether those delays may be crucial to the timely completion of a project.
- It is commonly used in the construction, engineering, software design, aerospace and defence industries, amongst others.

Answer 291

- Efficiency
- Decision Making
- Time-based Management
- Working Capital Control

Answer 292

- Allows business to identify jobs that can be completed simultaneously and those dependent on others.
- Allows for accurate use and delivery of resources
- Can identify where delays may occur

Answer 293

- Use of models allows for more objective decision making
- Past experience will guide development of plans to increase accuracy

Answer 294

- Identifies tasks which can be completed together and those done in order
- Increases efficiency by allowing resources to be used elsewhere until needed

Answer 295

9 As with a cash flow forecast, it will allow you to see which resources are required at which time, allowing for more accurate use of working capital.
- this is especially important if a business operates a 'just-in-time' system of stock control

Answer 296

- These are the name given to the diagrams used in Critical Path Analysis
- Some are relatively simple requiring activities to be complete in a certain sequence, other may have to have multiple tasks completed before moving onto the next one

Answer 297

- Business will frequently undertake large projects, which will require a series of tasks to be completed, in a certain order, for the project to be completed on time.
- Network allows a business to see which activities need to be completed at certain stages for the project to be completed on time, the “critical” tasks.
- It also allows businesses to see which jobs can be delayed and the project will still be completed on time.
- This allows a business to “path” the tasks that must be completed in order to ensure completion.

Answer 298

- Arrows and lines show tasks
- Some tasks can be completed at the same time (B&C can both be started after A)
- Arrows and lines cannot cross
- Each task takes a period of time
- Task must be completed in order
- Circles (nodes)show the start and end of each activity
There is always a node at the start and end of the project.
Nodes contain information about the timings of the project.

Answer 299

- This is the earliest time you can start at task (EST)
- This can be calculated by going through the diagram from start to finish and working out all the possible times an activity can start and calculating the earliest one
- This goes in the top box on the node
- The start node is 0, and have 0 in both of its boxes (it can finish any later than 0)

Answer 300

- This is the latest time a project must be finish in order to complete the task on time (LFT)
- We work back from the End node picking the largest value routes to go back on to calculate the LFT
- This goes in the bottom box on the node
- The end node has the same EST and LFT

Answer 301

- This shows the task which, if delayed, will lead to a delay in the project.
- To find the Critical Path it is the route where the Earliest Start Time and Latest Finish Time are the same
- But it also needs to be the route that takes the Longest time

Answer 302

- Once the network diagram has been completed and the CPA identified, businesses can identify the “total float” within the project. That’s how long a certain task can be delayed without the total project time being affected. It’s calculated by:

LFT of activity – EST of activity – duration

- The easiest way to remember this is the bottom number of the activity node minus the total number of the node before minus the weight of the time inbetween
- Total float only applies to task not on the critical path

Answer 303

- This is the amount of time by which a task can be delayed without affect the following task and is calculated by;

EST of the next task - EST start of this task - duration

- The easiest way to remember this is the top number in the activity node minus the top number in the previous node minus the weight of the line in the middle

Answer 304

Whilst CPA is a valuable tool in project planning and project appraisal, there are limitations to the technique:
- Information used to create estimates may be incorrect.
- Changes may occur during the project, particularly those with long completion times.
- Businesses should factor in contingency plans to allow for this.
- Just because a resource has been identified in this project as being needed on a certain date, doesn’t mean to say its available. It may be being used somewhere else.
- The larger the project, the harder to manage, due to the increased volume of tasks to be completed.

Answer 305

It is the amount of money left over from a sale after variable costs have been covered

Answer 306

overheads an overhead cost or expense, for example lighting, equipment and any extras paid for out of a centralised budget

Answer 307

Contribution per unit =

selling price — variable cost

Answer 308

option1) Total contribution =

total revenue — total variable cost

option 2) Total contribution = unit contribution x number of units sold

Answer 309

calculate the break-even level of output
calculate the amount of profit made by a business
calculate the amount that needs to be sold to reach a specific profit target
help a business to decide which order to accept when faced with a choice
help a business decide what price to charge for a product.

Answer 310

break even = fixed costs/contribution

Answer 311

Profit =

total contribution — fixed costs

Answer 312

output = (fixed costs + profit target) / contribution

Answer 313

contribution costing - the use of contribution to help make decisions based on costs, such as which order to accept
A business might use contribution when making certain types of decision. For example, sometimes a business will have to decide which order(s) or contract(s) to accept when faced with a choice from different customers. This may be because the business does not have enough capacity to accept all the orders it receives. Or it may be that they are not all financially viable (i.e. capable of financial success). Contribution costing can help here.

Answer 314

the use of contribution to help make decisions based on costs, such as which order to accept
A business may use contribution when deciding what price to charge. This involves setting a price that exceeds the value of variable cost.
This means that a particular order or product will always make a contribution when sold.
This approach ignores fixed costs because a single order or product may not generate enough contribution to cover fixed costs. This approach needs to be used carefully. Obviously, to make a profit fixed costs have to be covered.
.

Answer 315

Contribution pricing is more likely to be used when fixed costs are low or when a business, through experience, knows that fixed costs will be covered

Answer 316

The practice of buying businesses and breaking them up. The profitable parts are sold for cash and the rest are closed down.

Answer 317

An approach to decision making that involves gathering information and using a systematic and rational approach to reach a conclusion.

Answer 318

The time period where decisions have an impact on the vision, mission and objectives of a business. Typically longer than five years.

Answer 319

The time period where decisions only have an impact on the operational activities of a business – typically less than five years.

Answer 320

Decisions concerning policy that can have a long-term impact on a business. Can be risky.

Answer 321

An approach to decision making where the personal opinions of the key decision maker strongly influence the course of the action chosen.

Answer 322

- Corporate Influences
- Corporate Culture
- Stakeholder Perspective
- Business Ethics

Answer 323

- Short term goals conflicting with long term objectives.
- Focus on need for immediate profit can affect long term growth
- For example - limiting pay rises
- Another Corporate influence is whether business decision are based on evidence or the subjective view of key decision makers
- Subjective decision making is likely to carry more risk

Answer 324

- The corporate culture can affect decision making.
- Open cultures will be more flexible and innovative
- More restrictive cultures can lead to being more cautious, leading to being less competitive

Answer 325

- Some businesses will focus on corporate social responsibility
- Others will have less consideration for factors such as environmental or local issues

Answer 326

- Businesses focused on shareholder opinions tend to leave other stakeholders marginalized.
- Others will consider a range of stakeholders, such as customers or workers, this focus may appeal to more customers

Answer 327

- Maximise Short-Term Profits
- Invest Less Money in Research and Development (R&D)
- Invest less in Training
- Return Cash to Shareholders
- Engage in Asset Stripping
- Arrange more Short-Term Contracts
- Pursue External Growth rather than Organic Growth

Answer 328

- Most companies that pursue short-term objective aim to increase shareholder value
- They are likely to do this by trying to maximise short-term profits
- For example. they might try to maximise revenue by charging higher prices, invest in advertisement, use cheaper resources etc.

Answer 329

- This is because research and develop can be a big drain on cash reserves.
- A company will prefer to use this to help fund short -term objectives
- Investment in R&D is also risky, returns could be negative if R&D projects are fruitless
- Even if R&D is successful, the financial returns can take many years to reap

Answer 330

- Training staff is also expensive and the returns are not immediate
-The returns from training are likely to be positive because workers will be better motivated, better equipped to do their job and staff turnover will be lower
- However, it will take time for the benefit to materialise

Answer 331

- A business with a large cash reserves may pay special dividends to shareholders instead of investing for the long-term

Answer 332

- Once the other business has been asset stripped, the profitable parts are sold for cash and the loss-making sections are closed down.
- This practice is often considered unethical because there is no regard for the future of the company and its stakeholders
- However, in the short term it can generate a quick cash return for shareholders of the predator

Answer 333

- They may also employ more agency and temporary staff, and favour short-term leases for machinery and other essential assets.
- entering short-term contracts obviously does not really commit a business to any long-term objectives

Answer 334

- Organic growth may be considered too slow for companies with a short-termist approach
- growth through mergers and acquisitions is much faster and may generate swifter returns, if successful

Answer 335

- Long term profitability of a business could be threatened by focusing on short term goals.
- Companies can lose competitive edge, particularly in overseas markets
- Requirements of financial reporting – particularly quarterly reports – mean that too much time is spent by executives focusing on non productive activities.
- Over reliance on short term contract – can lead to inefficient use of resource in long term

Answer 336

- Essentially, the benefits of long-termism is the opposite of short-termism.
- Businesses less likely to miss profitable long term products as will be willing to accept longer payback periods
- Increases in R&D spending will lead to greater chances of developing new products and other innovations
- With increased training budgets, long term will lead to more qualified, experienced staff, improving productivity

Answer 337

- Evidence-based decision making --> requires a systematic and rational approach to researching analysing all the available information before a conclusion is reached
- Subjective decision making --> is where the personal opinions of the key decision maker strongly influence the course of action chosen

Answer 338

-Setting/Identifying Objectives
- Gathering Ideas and Data
- Analysing Ideas and Data
- Making a Decision
- Implementing the Decision
- Monitoring and Evaluation

Answer 339

- identify the objective a business wants to achieve
- The objective might be a corporate objective, such as growth or survival in a poor trading period --> decisions are likely to be complex and might be taken by the board of directors
- For lower-level objectives, such as filling a part-time vacancy, decisions may be taken by junior managers
- Objectives might be different at different stages in its growth
- government owned companies will have different objectives from PLCs
-The business also needs to develop criteria to measure whether it has achieved its objectives
- Quite often the objective is to solve a problem

Answer 340

- The amount and nature of the information needed will depend on the decision e.g. launching a new product would require alot of information compared to deciding who would be best to hire for a new position
- It could take several months to collect all this information
- Whereas some decisions can be made with the information a company already has e.g. dismissing an employee
- A business may get this information with a working party set up in the firm who could produce reports and presentation
- Alternatively, individual and departments might submit ideas and information

Answer 341

- the next stage in the process is to analyse information to look for alternative course of action
-Possible course of action may be based on previous ideas or completely new ideas
- The aim is to identify which course of action will best achieve the business's objective or solve the problem- it may be possible to test the alternatives before the one that is chosen is carried out

Answer 342

- this is the most important stage in the process
- decision makers have to commit themselves to one course of action
- It is difficult to change the decision, so getting it right is vital e.g. if a new product doesn't sell, it can lead to a lose of money
- Some decision can be reversed e.g. if a owner of a shop decisions to close on Tuesday afternoon but the loss of sales in intolerable, the owner can easily reopen
- Sometimes the decision makers feel that they cannot reach a decision
- They may have to obtain more information and complete the previous two stages in the process again

Answer 343

- once a decision has been made, personnel are informed and the decision is carried out
- Quite often the people making the decision are not those that carry them out
- Instructions may be passed by the decision makers to someone else, probably a manager, explaining what action should be taken

Answer 344

- Once a decision has been carried out it will take time before the results are known
- Sometimes this can be quite a long time e.g. the companies which decided to build to Channel tunnel will not know for several decades whether or not it will be a commercial success

Answer 345

- Finally, decision makers need to evaluate the outcome of their decisions
- This is often present as a report
- It may be necessary to modify the course of action on the basis of the report e.g. revise the objective or collect some more information
- there may be problems in following such as approach
- Objectives may be difficult to identify or unrealistic
- Information may be limited, incorrect or misleading
- People making decisions in the process may have different views and this may lead to differences of opinion about what is the best course of action

Answer 346

- This method of making decisions involves “feelings” and “hunches”.
- Some might argue that subjective decision making is too risky when making strategic decision
- This is because subjective decision maybe based purely on the opinions and emotion of perhaps just one person

Answer 347

- If there is a lack of current, accurate and meaningful information relating to a decision
- Some corporations are dominated by powerful and persuasive leaders, there may be occasions where such a leader makes strategic decisions singled-handedly, without consultation. This is acceptable, particularly if he leader is experience and has a good track record with decisions
- In some industries subjective decision making may be quite normal e.g. the fashion industry
-There are times when some decision have to be made very quickly and there maybe not be enough time to follow the scientific approach outlined earlier

Answer 348

A set of characteristics that form the international context of business culture.

Answer 349

The values, attitudes, beliefs, meanings and norms that are shared by people and groups within an organisation.

Answer 350

A culture where the values, beliefs and ways of working are deeply embedded within the business and its employees.

Answer 351

- It provides a sense of identity for employees. They feel part of the business. This may lead workers to be flexible when the company needs to change or is having difficulties.
- Workers identify with other employees. This may help with aspects of the business such as teamwork.
- It increases the commitment of employees to the company. This may prevent problems such as high labour turnover or industrial relations problems.
- It motivates workers in their jobs. This may lead to increased productivity.
- It helps employees understand what is going on around them. This can prevent misunderstanding in operations or instructions passed to them.
- It helps to reinforce the values of the organisation and senior management.
- It acts as a control device for management. This can help when setting company strategy.
In comparison to a strong culture, a weak culture exists where it is difficult to identify the factors that form the culture or where a wide range of sub-cultures exists, making the culture difficult to define. There are certain factors that are likely to determine whether a business has a strong or weak culture.

Answer 352

In comparison to a strong culture, a weak culture exists where it is difficult to identify the factors that form the culture or here a wide range of sub-cultures exist making the culture difficult to define

Answer 353

- Surface Manifestations
- Core Organisation values
- Basic Assumptions

Answer 354

- Artefacts
- Ceremonials
- Courses
- Heroes of the Business
- Language (used in a business-specific way)
- Mottoes
- Stories
- Myths
- Norms
- Physical Layout (of the premises)
- Rituals

Answer 355

Such as furniture, clothes or tools- wearing a uniform would be an example.

Answer 356

Such as award-giving ceremonies or the singing of the company song at the start of work.

Answer 357

Such as induction courses, or ongoing training courses for workers used to instil the organisational culture.

Answer 358

Referring to workers as ‘colleagues’ or calling workers ‘crew members’.

Answer 359

Which are short statements that never change, expressing the values of an organisation.

Answer 360

Which tell of some important even that exemplifies the values of the business, such as the history and role of the founders.

Answer 361

Which are frequently told stories within a business about itself, but are not necessarily literally true.

Answer 362

Which are the ways in which most workers behave, such as worrying if you turn up for work late, always being prepared to cover for workers who are off sick, or not using the company’s telephone to make personal calls.

Answer 363

Such as open plan offices, ‘hot desking’, or allocating the size of an office according to a manger’s place in the hierarchy.

Answer 364

Which are regular events that reinforce the culture of an organisation, such as always supporting Red Nose Day (we are a caring organisation), having a weekly ‘dress down day’ (we are a relaxed organisation), or holding an annual Christmas party (we are a sociable organisation).

Answer 365

Living or dead, such as Bill Gates, Richard Branson or Walt Disney, whose way of working provides a role model within the business.

Answer 366

- Core values are located below the surface manifestations of organisational culture.
- They are consciously thought-out and expressed in words and policies.
- The values expressed in a mission statement would be am example.
- Often these are the values that have come from the top of an organisation.
- They may have come from the original founders of the business, or the current senior management, which has attempted to impose a culture on the business.
- Core organisational values can reflect the actual culture of a business, but, equally, they might not.
- Workers at the bottom of the hierarchy might have very different values from the ones that senior management want them to possess.
- For example, workers who face a very difficult environment where customers often complain might not share the views of the CEO that the customer is always right and at the heart of the business.

Answer 367

- Basic assumptions are the unsaid beliefs and ways of working; they form the general attitude of the workforce and represent the totality of individuals’ beliefs and how they then behave. -- - They are ‘invisible’ and below the surface, and therefore often difficult to see, understand and change.

Answer 368

There are many ways of classifying organisational culture. One attempt was made by Charles Handy in Understanding Organisations (1993). He argued that there were four main types of organisational culture.
- Power Culture
- Role Culture
- Task Culture
- Person Culture

Answer 369

- A power culture is one where there is a central source of power responsible for decision making.
- There are few rules and procedures within the business and these are overridden by the individuals who wold power when it suits them.
- There is a competitive atmosphere amongst employees.
- Among other things, they compete to gain power because this allows them to achieve their own objectives. - This creates a political atmosphere within the business.
- Relatively young, small-to medium-sized businesses, where a single owner founded the firm and is still very much in control, could typically have power cultures.

Answer 370

- In a role culture, decisions are made through well-established rules and procedures.
- Power is associated with a role, such as marketing director or supervisor, rather than with individuals.
- In contrast to a power culture, influence and control lies with the roles that individuals play rather than with the individuals themselves.
- An organisation with a role culture will have a tall- or flat- hierarchy with a long chain of command.
- Role cultures could be described as bureaucratic cultures.
- The Civil Service is an example of a role culture.

Answer 371

In a task culture, power is given to those who can accomplish tasks.
- Power therefore lies with those with expertise rather than a particular role, as in a role culture. In a task culture, team working is common, with teams made up of the experts needed to get a job done.
- Teams are created and then dissolved as the work changes.
- Adaptability and dynamism are important in this culture

Answer 372

- A person culture is one where there are a number of individuals in the business who have expertise, but who don’t necessarily work together particularly closely. - - The purpose of the organisation is to support those individuals.
- The business will be full of people with a similar background, skills set and training.
- Examples of person cultures could be firms of accountants, lawyers, doctors or architects.

Answer 373

- Motivation
- Organisational Structures
- New Management
- Mergers and Takeovers

Answer 374

- Organisational culture affects the motivation of staff. - It can have a direct effect because the way in which treat each other impacts on motivation.
- For example, motivation is likely to be greater if the culture of organisation respects individual workers and their achievements.
- A highly competitive culture might motivate some workers and demotivate others.
- Organisational culture can also indirectly affect motivation.
- An organisational culture which leads to a successful business is likely in itself to motivate staff because they feel part of the successful business.

Answer 375

- Organisational culture can affect the organisational structure of a business.
- Differences can occur because a number of key workers share the senior management roles an example could be a Doctors’ Practice.
- In contrast there are likely to more layers of management in a large multinational business that might require regional and divisional managers and multiple product teams
- The larger the business, the more layers in the hierarchy there are likely to be as specialist role are assigned

Answer 376

- One way for a business to change for new management to be appointed.
- The greater the change needed, the more likely it is that the new management will have to confront the existing organisational culture.
- The organisational culture is likely to be part of the problem that needs addressing if the business is to be turned around.

Answer 377

- The process of creating a single business out of the two organisations will involve changing organisational culture
- In a takeover, one simple way of making that change quickly is for the senior management in the company being taken over to be made redundant.
- Without powerful advocates at the top of the organisation, those lower down will find it difficult to resist the change that will be imposed upon them.
- However, motivation and morale is often low in a company that has been taken over for the first year or so because they are being forced to change

Answer 378

- In the same way that you might identify a patent on an invention or an established brand as an asset, culture too can be a distinctive and sustainable competitive advantage.
- Unit 45 discussed distinctive capabilities as a route to achieving competitive advantage for a business.
- John Kay (1993) referred to 'architecture as one of the types of distinctive capability that could lead to competitive advantage.
- Architecture refers to the relationships and networks within an organisation and those that it develops with its external stakeholder’s corporate culture would fall into this category.
- Whenever discussing corporate culture, it is worth considering it in terms of an asset that can be used to add value and compete in the market.
- However, it is also worth remembering that culture is very difficult to manipulate and shape in order to meet the changing needs of the business.

Answer 379

- Many factors contribute to the formation of organisational culture.
- These include the role of the founding members of the organisation, their personalities and beliefs. often a strong leader's attitudes will permeate the organisation.
- For example, Jan Koum, the CEO of WhatsApp, has refused to let advertisers buy space on the WhatsApp application.
- His belief has influenced the strategy and values of the company.
- Other factors that are likely to have a significant impact on the formation a firm's culture are the environmental factors that the business was born into.
- For example, the history or heritage of a business may determine certain values and norms because they form part of what employees buy into.
- However, such a factor may not play a part in a new company such as Pinterest, which was set up in 2010.
- Similarly, the success of a company will play a big part in setting the values and expectations of staff.
- Pinterest was the most rapidly growing social network site in 2012 and 2013, and was named one of the most innovative companies, all of which will contribute to the motivation and belief of its workforce.
- The type of product is another factor in creating culture.
- For example, the technological complexity of a product may determine the skill and expertise of the workforce (perhaps contributing to a role culture) and the pace of change or need for innovation.

Answer 380

- From time to time it might be desirable for a business to change its culture to one that is stronger and more productive.
- A firm's culture can provide with a competitive advantage over its rivals. The problem with organisational culture that although it may be easy to describe, identifying the factors that contribute towards that culture and their significance is very difficult.
- Even changing one of these factors may not have significant influence on shifting the culture.
- Furthermore, most organisations have sub-cultures within specific teams or functions.
- Some aspects of organisational culture might also be easier to change than others.
- For example, it might be easy to change the policies, rules and working practices within a firm these are tangible factors.
- However, it is much harder to manipulate people's attitudes and beliefs.
- Overall, culture can be changed if the right factors are influenced and the leaders within the organisation are strong. but changing culture is not easy and can be a long process
- Many factors contribute to the formation of corporate culture. is important for the directors of a company to understand these factors and the role they play before they can hope to manage cultural change.

Answer 381

Power distance
This is the distance between managers and subordinates. A high-power distance culture suggests that managers will have significantly more power and privileges than their subordinates. They probably
will not socialise and communication is generally top down. A lower-power distance culture has greater collaboration and discussion between employees of different rank
Individualism
This is how people see themselves within their organisation. Where individualism is high, people tend to focus on their own success above that of the organisation or their team. The level of individualism versus collectivism within a culture can determine organisational structure, motivation and internal competition.
Masculinity versus femininity
Hofstede theorises the management style in a masculine organisation might be described as competitive and assertive. Its counterpart approach might be described as caring and co-operative. According to him, this could influence how people respond to targets and goals, and relate to one another in the business.
Uncertainty avoidance
This is the level at which an organisation will accept risk. A high level of uncertainty avoidance suggests a business will want evidence, security and proof before acting. By contrast a business with a low uncertainty avoidance might take 'a long shot' if it believes the rewards are worthwhile. Organisations with low uncertainty avoidance are more entrepreneurial and agile in their decision making.
Long-term versus short-term orientation This addresses a culture's time horizon' and the
basis on which decisions are made. A high score indicates business decisions are made to achieve success in the long term. A low score suggests an organisation makes decisions to achieve short-term rewards and immediate gratification in terms of shareholder value.
Hofstede's cultural dimensions go beyond simply identifying behavioural differences — they present
a useful framework for understanding the cultural setting of a business. This is particularly useful when analysing businesses across borders and interpreting how international businesses might react and interact in different circumstances, such as international trade, partnerships, mergers and takeovers.

Answer 382

Groups outside a business with an interest in its activities.

Answer 383

Groups inside a business with an interest in its activities.

Answer 384

A measure of company performance that combines the size of dividends with the share price.

Answer 385

Groups or individuals who can affect or be affected by the actions of a business.

Answer 386

- Business Owners
- Employees
- Managers and Directors

Answer 387

- A business is the property of the owner
- Owners are stakeholders because they stand to gain or lose, financially from the performance of the business
- They will benefit if the value of the business increases
- However if the business fails the owners may lose the money that invested in the business
- Most large plcs some of the senior managers and members of the board are likely to own shares
- One reason for this is because part of their remuneration often consist of shares
- Finally, in some companies employees may own a small number of shares

Answer 388

- Employees depend on businesses for their livelihood
- Most employees have no other sources of income and rely on wage to live on
- Some employees are represented at work by trade inions
- If this is the case, then trade unions also become stakeholders,
- The needs of employees are often in conflict with those of other stakeholders, such as owners and managers

Answer 389

- In small businesses managerial tasks, such as organising, decision making, planning and control are undertaken by the entrepreneur themselves
- However, in large businesses the key decisions relating to company policy and strategy are made by the board of directors
- It is then the responsibility of managers to ensure that the policies and strategies are implemented
- Large businesses employ specialists in managerial position
- Managers have to show leadership, solve problems make decisions etc.
- Managers are likely to help plan the direction of the business with owners
- they also have to control resources such as finance equipment, time and people
-Manager are also accountable, this means they are responsible for their actions and the actions of their subordinates
- Managers are accountable to senior manager in the managerial hierarchy.
- The board of directors is accountable to the shareholders

Answer 390

- Shareholders
- Customers
- Creditors
- Suppliers
- Pressure groups
- The Local Community
- The Government
- The Environment

Answer 391

- Most Shareholders in large companies are not involved in the day-to-day running of the business
- They are investors and have a purely financial interest
- External shareholders, who might be individual, or more likely , financial institutions, invest their money to get a financial return
- Shareholders are also entitle to a vote at the AGM of a PLC
- They can vote to re-elect or dismiss the current board of directors
- However, many external shareholders do not take up these entitlement, If they are not happy with the way the company is being rub, or the return they get is inadequate, external shareholder can sell their shares and invest their money elsewhere

Answer 392

- Customers buy the goods and services that businesses sell
- Through their purchases they provide the revenue and profit that businesses need to survive
- However, customers need businesses because they provide the goods and services they require and want
- Most customers are consumers (individuals and families) who use or 'consume products
- However, some may be other businesses
- For example, JCB manufactures a range of construction machinery that it sells to other businesses

Answer 393

- Creditors lend money to a business
- They may be banks, but could also be individuals, such as family members, or private investors, such as venture capitalists
- Clearly, these stakeholders have a financial interest in a business and will be keen for it to do well
- Creditors will expect their interest payments to be met and their money returned at the end of the loan period
-They will also want clear communication links with the business

Answer 394

- Businesses that provide raw materials, components, commercial services and utilities to other businesses are called suppliers
- Relations between businesses and their suppliers need to be good because they rely on each other
- Businesses want good-quality resources at reasonable prices.
- They also want prompt delivery, trade credit (buy now pay later) and flexibility.
- In return suppliers require prompt payment and regular orders
- As with customers and businesses, there is a mutual dependence between suppliers and businesses

Answer 395

- A business may employee people locally and if the business foes well the community may prosper.
- there may be more jobs, more overtime and possibly higher pay
- This will have a knock-on effect in the community e.g. shops, restaurants and cinemas may benefit form extra spending

Answer 396

- A business may be criticised by the local community
- For example, if a factory is noisy, polluting or works at nigh t there may be complaints form local residents
- If a business that employed a lot of local people closes down, the impact on the community can be devastating
- In the 1980s when many coal mines were closed in the UK, the mining communities suffered badly due to very high unemployment

Answer 397

- The government has an interest in all businesses
- Generally the government will want businesses to be successful
- They provide employment ,generate wealth and pay taxes
- Taxes form businesses and their employees are used to fund government expenditure
- It helps to pay for benefits, the NHS, schools and other services
- If businesses fail, the government loses tax revenue and has to by benefits to the unemployed
- However, the government will also require businesses to comply with the law
-A significant amount of legislation exists to protect those who might be exploited by businesses if they were too powerful

Answer 398

- Business activity can have an impact on the environment
- For example, if a business releases toxic waste into the waterway system, wildlife and its habitats could be destroyed
- Thus, representatives of the environment have an interest in business activity
- These representative may be individuals or environmental groups, such has Friends of Earth and Greenpeace
- An increasing number of people are concerned about environmental issues; consequently environmental groups are becoming more influential in business decision making

Answer 399

- The majority of shareholders ill want the business to maximise shareholder value
- This is a measure of a company performance that takes into account the size of dividends (share in profits) and the share price
- Over time shareholders want this to grow
- if the growth in shareholder value is not to the satisfaction of external investors they may sell their shares
- This could result in a fall in the share price which might make the company vulnerable to a takeover

Answer 400

- Employees want the business that they work for to prosper.
- If a business is growing and profitable, employees are likely to get higher wages, more perks and perhaps a bonus
- They will also feel more secure in their jobs
- It could be argued that, according to Herzberg, employees expect good pay and comfortable working conditions
- However, they will also want responsibility, interactions with colleagues, to be valued, personal development, fair and honest treatment, and opportunities for promotion
- Safety at work is also important as are issues to do with equal opportunities
- Generally, employees will want to maximise there financial rewards and welfare

Answer 401

- Managers and Directors are likely to have similar needs to those of employees
- Many managers (and employees) have part of their remunerations linked to the performance of the business and will therefore want the business to perform well
- Mangers may also press for other benefits, for instance bonus payments if they perform well, expense allowance when travelling on company business, and benefits such as a company, free health insurance and more flexibility
- Some senior executives may see power as an objective; they like 'empire building' As a result , the shareholder may lose the ability to influence key decisions in the organisation

Answer 402

- Customers want good-quality products at a fair price
- They also want clear and accurate information about products and high-quality customer service
- they may also want choice, innovative products and flexibility
- For some products, such as machinery, electrical goods and children's products, safety is an important issue
- If these needs are not met, customer will spend their money elsewhere
-Customers have a powerful influence on businesses
-They are also more aware today about the range of products available and about their rights as consumers
- In competitive markets only those businesses that meet customers needs are likely to survive

Answer 403

- Suppliers want to be treated fairly by businesses
- They will also want a fair price for their goods and service and to be paid in reasonable time
- In 2013/14 it will suggested in the media that some businesses might 'bully' suppliers
- For example, some stores might put pressure on suppliers and demand price cuts because of the fall in commodity prices
- They might threaten to withdraw products if suppliers refuse to comply
- IN cases such as these, an investigation might take place by the Groceries Code Adjudicator, for example

Answer 404

- The government will want businesses to grow and make more profit
- They will also want them to comply with legislation and not exploit vulnerable groups

Answer 405

- Environmental groups will want businesses to avoid having any negative impact on the environment
- For example, they will demand that business activity does not damage wildlife and its habitats, pollute the atmosphere or waste resources

Answer 406

- Local communities will want businesses to contribute to the prosperity of the community and be good corporate citizens
- Communities would probably want businesses to create employment and, depending on their size, nature of business and capabilities, build links with schools and charities, maintain open communications, and avoid or minimise congestion and pollution in the area

Answer 407

- Recognise the interests of other stakeholders and take their views into account when running the business and making decisions
- Maintain open communication channels with other stakeholders and consult with other stakeholders and consult with then before making radical changes
- Recognise the interdependence that exists between different stakeholders, ensuring that the benefits of enterprise are distributed fairly after taking into account the level of effort and risk each group contributes
- Minimise or eliminate the adverse effects of business activity, Id such effect cannot be avoided then those affected should be adequately compensated

Answer 408

- Some Businesses might claim to have adopted this stakeholder approach
- Part of the reason for this is that corporations are coming under increasing pressure form stakeholders, the media and the wider public to be more socially responsible
- It might be argued that some businesses like to give the impression that they consider the needs of wider range of stakeholders but in reality they are still more focused on shareholders needs
- For example, a business might claim to adopt an ethical stance purely to increase sales, revenue and profit

Answer 409

- Traditionally, many corporations have focused on growth or profit when making important business decisions
- The objective of shareholders have had more influence on decision making than those of their stakeholders
- This approach was based on the ideas that directors and mangers are employed by shareholders and should therefore serve their interests
- this meant that they should make as much money as possible for the owners of the business provided they comply with the law
- Some businesses still adopt this approach and their main objective is to maximise shareholders returns by raising both dividends paid to shareholders and the share price

Answer 410

- offering higher wages, better conditions, more perks and bonuses training and improving welfare comes at a cost
- If the needs of employees are met in full there is likely to be negative impact on profit and dividends
- Conflict will arise if shareholders insist tat the rewards to employees should not come at the expense of dividends
- Employees may try to put pressure on the business to ensure their objectives are met by threatening industrial action
- However, i f this action is too disruptive it may jeopardise the survival of the businesses
- Employees have to be careful not to push their claims too far

Answer 411

- Most likely to arise if a business charges prices that are too high
- Higher prices will help boost shareholders return but reduce the purchasing powers of customers e.g. in 2014 Gas prices rose even though the cost of gas paid by suppliers fell
- Customers might also come into conflict with businesses if levels of customer service are poor or if businesses fail to invest in R&D and bring out new products
- however, if businesses can cut back on R&D expenditure they can pay shareholders higher dividends

Answer 412

- Senior Managers and Directors are employed to further the interests of shareholders
- however, conflict may arise if they start to prioritise their own objectives, such as maximising remuneration, expenses, perks and other beneits
- If these are too high, profit and dividends may suffer
- This is most likely to happen if shareholders lose some of their control over the business --> there may be a 'divorce of ownership and control'
- This can happen if shares are held by a very large number of different shareholders where no single shareholder has any significant control
- A common conflict between shareholders and directors is the balance between paying dividends and retaining profits for investments

Answer 413

- in an effort to maximise profit, a business might neglect its responsibilities towards the Environment e.g. in 2011 some UK Water companies were draining rivers that were at risk of completely drying up which led to the death of some wildlife and a build up of chemicals
- The report suggested that companies were extracting water from theses sources as they were the cheapest
- Activities such as these may attract the attention of the media and environmental groups, resulting in conflicts between the company and environmentalists

Answer 414

- Conflicts between shareholders, and the government is likely if businesses break the law
- However, the judicial system should resolve such conflicts
- in 2013/14 there was evidence that some big corporations were avoiding the payment of tax in the UK e.g. Amazon only paid £4.2 mil of tax on a revenue of £4.3 bn
- If corporations can reduce the amount of tax they pay then the shareholders will enjoy bigger profits
- However, if businesses are able to avoid paying taxes the government if likely to be criticised
- In the future, governments might have to pursue such businesses for the payment of taxes or risk losing their political support

Answer 415

Pressure groups such as trade unions or environmental groups like Greenpeace may try to influence business activities. They may do this if specific activities threaten the interests of that group. Pressure groups can exert influence by finding allies in the media, by organising protest marches, and by running marketing campaigns to express their concerns.
For example, Greenpeace might publish an article in the media that draws attention to a business which is threatening a wildlife habitat.

Answer 416

a business assessing and taking responsibility for its effects on the environment and its impact on social welfare. It involves the idea that businesses bear a responsibility that stretches beyond their shareholders

Answer 417

statements about how employees in a business should behave in particular circumstances where ethical issues arise

Answer 418

in the context of business ethics, considerations of the moral 'rights and wrongs' of a decision at an often strategic level, in accordance with the law, and a businesses's code of conduct in relationship to Corporate Social Responsibility

Answer 419

an hourly rate of pay based on the basic cost of living, set independently of government and updated annually

Answer 420

the minimum pay per hour all workers are entitled to by law

Answer 421

the reward for work in the form of pay, salary or wages, including allowances and benefits, such as company cars, health insurance, pension, bonuses and non-cash incentives

Answer 422

Sanctions are Restrictions imposed on trade or investment with the aim of influencing a policy change in another country
- Trade embargoes can be included on sanctions, where commercial shipments are banned in and out of a particular country, or where an embargo is placed on a particular product

Answer 423

- Ethics in the context of business ethics considers the moral rights and wrongs of a decision, focusing more on a strategic level rather than decision made by, as an example, individual employees.
- All businesses have to make ethical decisions. Some of these will be governed by the law, but many decisions have to be made without the help of the law – should a worker be allowed a paid day off to look after their sick child?
- Every business should have a stated code of conduct within which employees operate in respect of ethical business decisions, although employees at different levels might have different opinions, for example:
- Some employees may argue about whether it is okay to manufacture violent video games or toy guns.
- Some employees may have religious concerns about selling meats or alcohol in restaurants.

Answer 424

- Ethics of strategic decisions
Strategic decisions are those that impact how a business operates in the long term. All businesses have to make some sort of ethical decision as part of their corporate strategy and these are usually the responsibility of management.
- Over the past 20 years, a number of issues have arisen for large corporations that require strategic decisions based on ethics:
- The Environment
- Animal Rights
- Workers in Developing Countries
- Corruption
- New Technology
- Product Availability
- Trading Issues

Answer 425

- in countries like the UK or the USA, the law limits the amount of pollution or damage a business can do. However, businesses must decide whether to adopt an even more stringent measure to protect the environment. Should they still recycle if it lowers profits?
-Multinational businesses often face lower environmental standards in developing countries. Should they lower their own environmental standards in such locations to take advantage of this?

Answer 426

some companies, like pharmaceutical companies or make up manufacturers might use animals to test products. Some people see this as impractical. Other businesses may play a part in ruining environments. Wildlife conservation groups argue against farming activities that destroy forests or other habitats.

Answer 427

a number of companies have been criticised for exploiting workers in developing countries. Companies manufacture in countries with emerging economies because production costs are much cheaper. However, there is an ethical question about the extent to which low costs should be at the expense of workers.

Answer 428

in some industries bribes might be used to persuade customers to sign contracts. It has been suggested that this takes place in certain emerging economies. The ethical question is whether it is right to use bribes or even if a business knows that competitors do this.

Answer 429

most new products, such as mobile phones or a new chocolate bar, do not cause ethical issues, but some technological advancements do seem to cause controversy. Examples of this are nuclear power generation and GM crops.

Answer 430

if a person cannot afford an expensive car or some other luxury goods, most would not see this as an ethical issue. But if someone is HIV positive in South Africa and they cannot afford drugs for treatment because of the price, many would argue it is an ethical issue. The direction of research is also important. Companies may choose to investigate something that only affects a few people in the industrialised world, or they may choose to look into malaria, that kills millions of people each year.

Answer 431

some countries have been condemned internationally for the policies their governments have. They may have sanctions or embargoes and companies will have to decide whether to invest.

Answer 432

Ethical codes of practice may develop from ethical objectives of businesses. For example, a large business may have its states objectives as:
- It will not test products on animals
- It will deal with suppliers fairly
- It will not accept bribes from customers

Explicit objectives will have been carefully thought out. Partly this is because the business could get bad publicity if it went against statements. A business may also have implicit rules about how they deal with customers – they are not written down but they become part of corporate cultures.

Answer 433

Some large businesses have responded to concerns about CSR, their responsibility not just to their shareholders, but to all stakeholders, by auditing relevant activities.
- These audits may then be made available to the public in a Corporate Responsibility Report.
- Auditing involves inspecting evidence against established standards. Social and environmental audits are voluntary and there are no rules as to how they should be done.
-Many businesses choose not to look into this at all.

Answer 434

- Employment indicators
-Human rights indicators
- The communities in which the business operates
- Business integrity and ethucs
- Product Responsibility
- The environment

Answer 435

how well does the business treat its staff? This might include looking at pensions, healthcare, training, accidents, payment, equality.

Answer 436

how well does the company perform on human rights issues? Does it encourage workers to join trade unions, does it have work councils, does it use child labour, does it discriminate?

Answer 437

what impact does the business have on the life of the communities in which it operates? How much does it give to charity, how much is spent locally?

Answer 438

how ethical is the business? Have they traded against legislation, do they make political contributions, have they been involved with unfair competition?

Answer 439

what was the social impact of the products sold? Were there safety issues, was the after-sales service adequate, was advertising accurate?

Answer 440

these factors can form a separate audit. Indicators may include:
- the amount of energy or raw materials,
- how much waste was produced,
- levels of gas and pollution,
- the damage it caused.
-Some of these measures are financial, but some are not.
-Due to the fact that sociaql and environmental audits are qualitative, it can be harder to compare performances over the years

Answer 441

- To attract employees with the right skills, experience and knowledge. Where jobs are less skilled the available number of workers is high, meaning pay can be low. Where skills are high, pay needs to be high.
- To reward and motivate staff. The ultimate aim of businesses is to make profit. Rather than pay the lowest rates of pay ensure that staff are motivated to work to the best of their ability.
- Maximise productivity levels. Pay is an important motivator are highly motivated staff are more productive.

Answer 442

- It can raise costs – for example, paying higher wages to workers overseas may increase costs. Finding ways to test products that doesn’t include animals may be more expensive. Adopting an ethical code of conduct can be expensive, as all staff have to be aware of it. It takes management time to prepare.
- It can reduce revenues – a business might lose a contract if it refuses to give a bribe. Selling medicines at lower prices to emerging economies may increase sales but reduce profits. Acting ethically can result in the destruction of a company; for example, if a cigarette manufacturer took full account of the costs it causes to customers it would probably cease trading.

Answer 443

- Some companies have used their ethical stance for marketing purposes, but having an ethical stance is no guarantee of sales.
- For most companies that have taken Corporate Social Responsibility seriously, informed by ethics, it can also act as the equivalent of an insurance policy. In 2002, Enron, a US energy trading company collapsed after it was found to have manipulated accounts to look more profitable.

Answer 444

- business have responsibilities to a wide range of shareholders not just shareholders, while profit may satisfy shareholders, employees may be less happy if they are paid low wages
- A business that treats its workers well be it with pay or opportunities in the workplace is more likely to retain its employees. This is important when recruitment is costly
-Being good actually increases the chance of being profitable. an ethical stance can bring reputation benefits

Answer 445

- UNprofitable business do not survive - ethical stance is a luxury that can be indulged when the business is established and successful
- A trade-off can exist between being ethical and profitable e.g. paying the living wage will increase costs of business that would otherwise have paid them the minimum wage
- Profitable businesses are more able to invest and innovate products that improve society e.g. new medicines. these development and advancements wouldnt happen without profits

Answer 446

interest paid by a business on any borrowed money

Answer 447

interest received by a business on any money help in deposit accounts

Answer 448

There are 2 main financial statements that all companies are required to produce, by law for each financial year. They are:
- Statement of financial position (balance sheet)
- Statement of comprehensive income (profit & loss account)

Unincorporated businesses are also required to create financial statements, but they will not be as detailed as those required by companies. However, they will usually take a similar format to those listed above.

Answer 449

- Otherwise known as an income statement or profit and loss account, the statement of comprehensive income will record the income and expenditure of a business over a period of time.
- The period of time is usually 1 year (but can vary from 6 months to 18 months)
- It will be used to calculate whether a business has made a profit or a loss over the accounting period.

Answer 450

- Revenue
- Cost of Sales
- Gross Profits
- Selling Expenses
- Administrative expenses
- Operating Profit
- Finance Costs
- Profit for the Year (net profit)
- Profit for the year (net profit) after tax

Answer 451

- This is the money the business receives from selling goods and services.
- Revenue must not include VAT. This is because VAT does not belong to the business

Answer 452

- This refers to the production costs of a business
- More specifically it relates to direct costs, such as raw materials and labour

Answer 453

- This is the cost of sales subtracted from the revenue
- It is the profit made before the deduction of general overheads

Answer 454

A business is likely to incur a range of expenses that are directly related to the selling its products e.g. sales commissions, advertising, distribution and promotional costs.

Answer 455

- These are the general overheads or indirect costs of the business e.g. office salaries, expenses claimed by senior staff, stationery supplies, IT expenses etc.

Answer 456

- If the selling and administrative costs are subtracted from gross profit we get the operating profit
- The operating profit is the profit generated from the firm's core acitivites
- It does not include any income from financial investments made by the business

Answer 457

- If a business borrows money it will have to pay interest to the lender.
- The amount paid will be entered in the statement as a finance cost
- However, a business may also recieve interest if it has money in deposit accounts this will appear as finance income in the account

Answer 458

- If the cost of finance is subtracted from the operating profit the net profit for the year is determined
- This is the profit before taxation

Answer 459

- This is the amount of money that is left over after all expenses, including taxation, have been deducted from revenue
- It is often referred to as the 'bottom line'
- The money belongs to the owners of the business,
- In case of a limited company it belongs to the shareholders, Some of it may be retained

Answer 460

- Shareholder
- Managers & Directors
- Employees
- Suppliers
-Government

Answer 461

- Naturally the owners of a business will be interested in its performance
- Shareholders are likely to be interested in the profit made by the business - particularly the profit for the year (net profit) after tax
- Rising profits are an indicator of improving performance --> probably calculate the net profit and gross profit margin from the statement of financial income to assess performance more rigorously
- It is also possible to gauge the growth of the business by looking at the statement of comprehensive income --> if the revenue is rising this suggests that the business is growing

Answer 462

- Since managers and directors are responsible for running the business, they are likely to use key information in the statement of comprehensive income to monitor progress
- For example, they might be setting annual targets for growth in revenue or profit for the year (net profit).
- Changes in the revenue, for example will show how fast a company has grow and whether targets have been met

Answer 463

- If employees, or their representatives, are seeking a wage increase, it may be helpful to have access to some of the information in the statement of comprehensive income when presenting a claim

Answer 464

- Before a supplier accepts an order form a new customer on trade credit, it is prudent to carry out a check on their creditworthiness
- One way to do this is to look at the trading history of the customer
- If the customer can provide several years of authenticated accounts, this might help to show whether the customers is able to pay what is owned at the end of the credit period
- If the statement of comprehensive income show that a customer is consistently profitable, this might be enough proof for the supplier

Answer 465

- Companies have to produce a statement of comprehensive income by law
-It is needed by the tax authorities to help assess how much tax a business has to pay
- HMRC collects taxes on behalf of the government and requires all business owners to provide documentary evidence of the profits or losses made by the business ever year
- Also, the ONS (Office for National Statistics), a government agency, may have an interest in business accounts because it collects economic data, which is collated and presented for public consumption

Answer 466

Previously known as the balance sheet, the Statement of Financial Position catalogues the a businesses assets and liabilities on a particular date in time.

It is broken down into 3 section:
- Assets
- Liabilities
- capital

Answer 467

- These are items that a business owns or uses. They are divided into current or non-current assets.
- Current assets, such as raw materials and inventory (stock) are used up in the production process.
- Non-current assets, such as factories and machinery, are used repeatedly over a period of time. A business would expect to retain these assets for beyond the next accounting period.

Answer 468

- These are debts that of a business, money owed to other parties. Again they will be categorised as either current or non-current.
- These may be short term, an overdraft or a supplier who’s provided trade credit, or long term, such as a mortgage, bank loan or hire purchase agreement

Answer 469

This is the money provided to the business by the owners or shareholders. It is a source of funds usually used to purchase assets.

Answer 470

- Non-current Assets
- Current Assets
- Non-current Liabilities
-Current Liabilities
- Net Assets
- Equity

Answer 471

- Goodwill --> This is a non-physical asset of a business, it is the amount the business is worth above the value of net assets. Goodwill exists if a company has built up a good reputation and its customers are likely to return
- Other intangible assets --> e.g. brand names, copyrights, trademarks and patents
- Property, plant and equipment --> These are the tangible assets that the business owns,
- Investments --> These are the financial assets owned by the company e.g. the shares held in other companies. If investments are listed under non-current assets it means that they are not expect to be sold for at least 12 months

Answer 472

- Inventories --> This refers to stocks of raw materials and components, stocks of finished goods and work in progress
- Trade and other receivables --> These are trade debtors, prepayments and any other amount owed to the business that are likely to be repaid within 12 months
- Cash at bank and in hand --> This is the money held by a business on the premises or in bank accounts

Answer 473

- Borrowing --> Any short-term loans or bank overdrafts taken out by the business
- Trade and Other Payables --> Trade creditors and other amounts owed by the business to suppliers or goods services and utilities
- Dividends Payable --> When the balance sheet is prepared *(at the end of the financial year perhaps) it is possible that the company has decided how much it will pay the shareholders in dividends. However the money has not yet been paid so it appears in the balance sheet as dividends payable
- Current Tax Liabilities --> Corporation tax, employees' income tax and any other tax owed by the business that must be repaid within 12 months

Answer 474

- Other loans and borrowings --> Money owed by the company that does not have to be repaid for at least 12 months e,g, bank loans and mortgages
- Retirement Pension Obligations --> Companies need to show any money owed to past employees in the form of pension obligation
- Provisions --> Provisions have to be made if a company is likely to incur expenditure in the future, such expenditure might arise as a result of agreements in contract or warranties.

Answer 475

- Net assets is simply the value of all assets minus the value of all liabilities
- It will be the same value as shareholders' equity at the bottom of the balance sheet

Answer 476

- Share Capital --> The amount of money paid by shareholders for their shares when they were originally issued. It does not represent the current value of those shares on the stock market. Share capital is not usually repaid to the shareholders in the lifetime of a company
- Share Premium Account --> this shows the difference between the value of new shares issued by the company and their nominal
- Other reserves --> Refers to any amounts owing to the shareholders not covered by the other entries under equity
- Retained Earnings --> The same as retained profit. It is the amount of profit retained by the business to be used in the future

Answer 477

- Shareholders
- Managers and Directors
- Suppliers
- Others

Answer 478

- Shareholders might use the balance sheet to analyse the asset structure of the business
- This shows how the funds raised by the business have been put to use
- The balance sheet also shows the capital structure of the business, i.e. the different sources of funds used by the business
- the balance sheet can also be used to assess the solvency of the business
- A business is solvent if it has enough liquid assets to pay its bills
- The value of working capital will help to assess solvency of the business
- the value of a business is roughly equivalent to the value of net assets in the business
-This means that shareholders can use the balance sheet to see if their investment is growing

Answer 479

- the balance sheet might be used by the management of a business e.g. it is important for senior managers to be aware of the firm;s financial position at any given point in time
- It will need to monitor working capital levels to ensure that the business does not overspend
- Also, if the business is considering raising some more finance, it will have consider the current capital structure before choosing a suitable source

Answer 480

- Suppliers will be most interested in the solvency of the business
- Suppliers are not likely to offer trade credit to a business that only has a limited amount of working capital

Answer 481

- It is possible that employees might use the balance sheet to assess whether a business can afford a pay rise or whether their jobs are secure
- The office for National Statistics (ONS) sheet to compile national statistics

Answer 482

Exploration of the capital structure of the business by comparing the proportions of capital raised by debt and equity.

Answer 483

Illustration of the relative profitability of a business.

Answer 484

A numerical approach to investigating accounts by comparing two related figures.

Answer 485

The profit of a business as a percentage of the total amount of money used to generate it.

Answer 486

The legal manipulation of accounts by a business to present a financial picture that is to its benefit.

Answer 487

Ratio analysis – a method of assessing a firm’s financial situation by comparing two sets of linked data.
- Analysts use ratios to compare the relative performance of one company against another, or within a company, of departments against budgets.

Answer 488

If ratios are to be useful its important to use the right one. The following process allows for this:
1 - Identify the reason for the investigation
2 - Decide on relevant ratio(s)
3 - Gather the information required, then calculate the ratio
4 - Interpret the ratio
5 - Make the appropriate comparisons
6 - Take action based on results
7 - Repeat process again

Answer 489

Ratios are meaningless on their own, they need to be compared with other results:
1 - Inter-firm comparisons – comparisons between companies. A company compares itself against others in order to asses their relative performance. Ideally selecting the competitors with the most in common.
2 - Intra-firm comparisons – comparisons within the company. The efficiencies of different divisions or locations can be compared
3 - Comparisons to a standard – certain ratios are recognised as efficient within the business community
4 - Comparisons over time – comparing quarterly or annual data allows you to assess progress over time.

Answer 490

- The Gearing Ratio measures the levels of borrowing within a business ( the relationship between loans on which interest is paid and shareholder's equity on which dividends might be paid) in which . It is important for a business to measure the amount of debt as too much can impact on the ability of the business to service (pay) that debt.
- If the company can’t meet the interest and capital repayments, it will impact on the company’s solvency.

Answer 491

GR = (Non-current Liabilities)/(Capital Employed) x 100

Capital Employed = (NCA + CA - CL)

Answer 492

- If the gearing ratio is greater than 50%, then the business is said to have a high capital gearing.
- If the gearing ratio is less than 25%, then the business is said to have a low capital gearing.
- Between 25% and 50% is said to be a normal level of capital gearing.

Answer 493

High capital gearing offers several benefits:
- There are relatively few shareholders, so easier for existing shareholders to keep control
- If interest rates are low, it can be a very cheap source of finance.
- In times of high profits, interest payments would likely be lower than dividend expectations of shareholders, allowing the business to retain more profits for investment.

Answer 494

Low capital gearing also has advantages:
- With more capital provided through shares, less opportunity for payables (creditors) to force business into liquidation.
- Low geared companies avoid large interest repayments in times of high interest rates
- The company avoids the pressure of having to repay all the debt at some stage in the future.

Answer 495

- Highly profitable businesses prefer high gearing to shareholder funds as a source of finance, as interest payments can be managed from profits, but little shareholders to take those profits as dividends
- Lower gearing tends to suit businesses that are less profitable, where the ability to adapt to increased interest payments if rates change is limited.

Answer 496

- Return on capital employed shows the operating profit (before tax) as a percentage of capital employed.
- Tax is ignored because it is determined by the government and is therefore outside the control of the company
- Interest is excluded because it does not relate to the business's ordinary trading activities
- Operating Profit is used as it only covers profits from trading, not exceptional items.
- Capital employed is the total equity provided by shareholder funds (share capital and retained profit) plus non-current liabilities (long term loans + debentures)

Answer 497

ROCE = (OP before tax)/ (NCA + CA - CL) x 100

Answer 498

- The ROCE will vary between industries, but the general rule is, the higher the better.
- It is effectively measuring the return made from an activity based on the capital being used. You could consider it as an investment appraisal method.
- Much like a ARR calculation, you are comparing the return against other potential uses for the capital, the opportunity cost.

Answer 499

- The basis for comparison --> Comparison over time, Inter-firm comparisons and Other Differences
- The quality of final account
- Limitations of the balance sheet
- Qualitative information is ignored
- Window Dressing

Answer 500

- Care must be taken when comparing ratios from the same company over time
- Many companies remain broadly in the same industrial sector overtime, but other can diversify and change very rapidly
- Equally, some companies remain the same size over time, Other, grow rapidly or shrink quickly
- Such factors can affect the way in which ratios can be used as a measure of performance

Answer 501

- Caution must also be used when comparing ratios between companies at a point in time
- Comparing Ratios between comparing ratios between companies at a point in time
- Comparing the ratios of two companies that make broadly the same product is likely to say something about their relative performance
- But comparing the ratios of a supermarket chain with those of a cement manufacturer is unlikely to be helpful

Answer 502

- Even when companies are well matched in their activities and operating circumstances, there may be other difference between them that must be observed e.g. two similar companies may use different accounting techniques, different ends to the financial year etc.

Answer 503

- Ratios are based on financial accounts, such as as balance sheets and income statements
- Consequently ratio analysis is only useful if the accounts are accurate
- One factors that can affect the quality of accounting information is the change in monetary values cause by inflation
- Rising prices can distort comparisons made between different time periods e.g. in times, of high inflation there might be no increase in real terms
- There is also the possibility that the accounts have been window dressed

Answer 504

- Because the balance sheet is a 'snapshot of the business at the end of the financial year, it might not be representative of the business's circumstances throughout the whole of the year
- For example, a business experiences its peak trading activity in the summer and it has its year end in January when trade is slow, figures for stock and debtors will be unrepresentative

Answer 505

- Ratios only use quantitative information
- However, some important qualitative factors may affect the performance of a business that are ignored by ratio analysis
- For example, in the service industry the quality of customer service may be an important performance indicator
- However, ratio analysis cannot isolate the impact that good customer service might have on sales
- Sales might be higher as a result of good customer service but there might be other factors that have helped to increase sales, such as advertising

Answer 506

- Account must represent a 'true and fair record' of the financial affairs of a business.
- Legislation and financial reporting standards place limits on the different ways in which a business can present financial information
- These limits are designed to prevent fraud and misrepresentation in the compilation and presentation of accounts
- However, businesses ca manipulate their accounts legally to present different financial pictures
- This is know as window dressing

Answer 507

- Managers of companies might want to put as good a financial picture forward as possible for shareholders and potential shareholders . Good financial results will attract praise and perhaps rewards. They might also prevent criticism from shareholders and the financial press
- If a business wants to raise new capital from investors, then it will want its financial accounts to look as good as possible
- Where a business has experienced severe difficulties during the accounting period, it may decide to take action that will make the financial position look even worse now, bur which will improve figures in the future
- Making the financial picture look worse may be way of lowering the amount of tax that is paid
- If the owners of a business want to sell it , the better the financial position shown on the accounts the higher the price they are likely to get

Answer 508

- a business may manipulate its sales by increasing the level of revenue recorded in the income statement
- This will increase profit in that accounting period. It may be able to suppress costs by changing its accounting policies or choosing when to 'write off' unprofitable activities.
- It can also 'write off' bad debts revalue property, boost liquidity through the sale and leaseback of assets, and manipulate current assets and current liabilities

Answer 509

illustrate the profitability of a business compared to other business
They usually focus on profit, capital employed and revenue,

Answer 510

gross profit x 100 / revenue

Answer 511

net profit before tax x 100 / revenue

Answer 512

Higher gross margins are preferable to lower ones because it means that more gross profit is being made per £1 of sales.
The gross profit margin will vary between different industries. The quicker the turnover of inventory, the lower the gross margin that is needed.
For example, a supermarket with a fast inventory turnover is likely to have a lower gross margin than a car retailer with a much slower inventory turnover. Some supermarkets are therefore very successful with relatively low gross profit margins because of the regular and fast turnover of inventory.

Answer 513

Gross profit margins may be used by businesses to help make decisions. For example, if gross margins are below the industry average, action might be needed. The business may look for new suppliers of key raw materials or find new working practices to improve efficiency in production.
Alternatively, a business may decide to raise the price of the product — if the market can stand such an increase.

Answer 514

The profit for the year (net profit) margin focuses on the 'bottom line' in business. The bottom line refers to the very last line in the statement of comprehensive income. It shows the profit that is left after all deductions have been made, i.e. the final amount of profit left over for the owners

Answer 515

a business is able to meet its short-term debts. This means that a business must have enough liquid resources to pay its immediate bills

Answer 516

current assets / current liabilities

Answer 517

current assets - inventories / current liabilities

Answer 518

A business is said to have enough liquid resources if the current ratio is between 1.5:1 and 2:1.
If the current ratio is below 1.5 then the business may not have enough working capital. This might mean that a business is over-borrowing or overtrading (doing more business than can be supported by the resources available).
However, some businesses, such as retailers, often have very low current ratios, such as 1:1 or below. This is because they hold fast-selling stocks and generate cash from sales.
In contrast, operating above a ratio of 2:1 may suggest that too much money is being used unproductively.

Answer 519

If a business has an acid test ratio of less than 1:1, it means that its current assets minus stocks do not cover its current liabilities. This could indicate a potential problem.
However, as with the current ratio, there is variation between the typical acid test ratios of businesses in different industries. Again, retailers with strong cash flows may operate comfortably with an acid test ratio of less than 1.

Answer 520

Output per worker in a given time period.

Answer 521

The number of employees that remain in a business over a period of time.

Answer 522

The rate at which staff leave a business.

Answer 523

The number of staff who are absent as a percentage of the total workforce. This can be calculated for different periods of time.

Answer 524

- Productivity is an important measure is an important measure of the efficiency of a workforce.
- If 2 identical teams, with the same equipment, worked for the same period of time, the group that makes the most would be deemed to be more productive.
- However, it not so easy when comparing businesses. A company’s figures may be distorted if they have a large amount of robotics involved in their production as workforce would be lower, but the infrastructure costs would be far higher.
- Increasing labour productivity can be seen as increasing competitiveness. This is because increased production will allow a business to drive down its unit cost.
- This would allow them to either reduce prices and potentially gain more sales, or keep prices the same and increase the profit per unit.

Answer 525

Labour productivity is defined as the output produced per worker.

- LP = Total output (per period of time)/ Average No. of employees (per period of time)

Answer 526

- Rivals may improve productivity even faster
- New businesses may set up again, with lower wage costs, reducing cost per unit
- Other factors – a business may produce a new, more attractive product, which customers prefer to buy

Answer 527

- Staff turnover can be another method of measuring a businesses effectiveness.
- It measures the number of staff leaving a business, relative to the whole workforce over a period of time.

Its calculated as follows:
(No. of Staff Leaving (per period of time))/(Average No, of Staff (per period of time)) x 100

Answer 528

- Relatively low paid jobs mean employees leave for higher paid jobs
- Little training or promotion opportunities may lead people to leave to further their careers
- Poor working conditions, low job satisfaction, bullying or harassment in the workplace
- Poor recruitment selection mean staff are not suited to the role
- Economic cycles – in recession, people are afraid to leave their jobs in case they don’t get another. In a boom, more opportunities are created, which leads to greater turnover.

Answer 529

- Staff recruitment is costly
- New staff need to become familiar with procedures and practices, this reduces productivity
- Larger companies will usually provide corporate inductions, which increase costs further.
- If internal appointment, training may be needed for a worker moving from a different role.

Answer 530

- New staff bring fresh ideas and experience
- Some old staff may need to leave – getting rid of ineffective staff will increase turnover, but may also increase productivity
- If a business is shrinking, it will need to lay ff staff, this will increase turnover.
- In low skilled jobs, it may be more effective to have a high turnover of low paid staff, than increase wages and working conditions

Answer 531

The opposite of labour turnover, labour retention measures how many people stay with an organisation over a period of time. It is calculated as follows:

- (No. of staff staying (per period of time))/(Average No. of Staff (per period of time)) x 100

Answer 532

The benefits to a business of a high retention rate are the same as the advantages of a low staff turnover rate, such as lower recruitment and selection costs, more continuity and a stable workplace

Answer 533

Absenteeism is linked to the number of staff taking time of work through sickness or injury. This is a problem because:
- If staff are off ill, the business needs to pay sick pay
- If temporary staff are recruited to cover, this increases costs further.
- Equally, permanent staff working overtime to catch up will increase wage costs
- Output can fall if those replacements are not as effective as the original worker
- There may be quality issues
Can be a symptom of low morale and demotivated staff
- The higher the absenteeism, the more people report as ill. It may lead to a culture of people taking “sick days” for holiday

Answer 534

(Number of staff absent on a day)/(total number of staff employed) x 100

Answer 535

Differences in rates can occur for different reasons:
- Smaller businesses tend to have lower rates of absenteeism as there is much more teamwork and commitment. Workers in larger businesses will feel there’s less issue if they’re off.
- Health & safety. Businesses with good H&S procedures tend to suffer less absenteeism. However, some jobs are inherently more dangerous than others.
- Nature of the job can lead to increased absenteeism. Boring repetitive jobs can lead to low job satisfaction and motivation.
- Workplace culture will have an impact. Overworked employees tend to suffer from work-related stress, which can lead to long term absence.
- Stress related illness can also occur more frequently where staff are over-supervised and feel like they’re not trusted to do a job.
- Poorly paid workers tend to have higher absenteeism as they feel undervalued.

Answer 536

- Financial Rewards
- Share Ownership
- Consultation
- Empowerment

Answer 537

- Employees who are involved, or feel they are involved, in the business’ decision making will feel more motivated and as such, tend to be more productive.
- Staff will feel demotivated if they are given tasks to do, or decisions are made, without consultation or explanation.
- If staff are consulted when decisions are being made, they are more likely to accept it, even if the decision is contradictory to their own idea.

Answer 538

- Psuedo Consultation
- Classical Consultation
- Integrative Concultation

Answer 539

- Managers make decisions and workers are informed about it through representatives, such as unions.
- Employees have no influence over the process
- Some would say it more giving information than consultation

Answer 540

- Is a method that involves employees giving their views to a representative, who collates and reports those views to the management.
- This allows the views of the employees to be heard and may influence management decisions

Answer 541

- The other methods do not directly involve the employees whereas this method is about a more open democratic process.
- Whist every employee may not be directly consulted, management and representatives may consider solutions and then put it to the staff for consideration.

Answer 542

Empowerment is about allowing the employees to make the most of their knowledge, experience and creative talents. It is also a way of improving morale, which can have a positive effect on productivity.

- Training
- Providing Resources
- Delegation
- Inspire Confidence
- Positive Feedback

Answer 543

It is not really possible to empower staff effectively without first equipping them with the skills needed to take on more advanced tasks
- A business needs to identify any 'skills gap'
- This is this difference between an employee's current skills and those required to undertake new tasks
- This gap can be bridged by training

Answer 544

There is little point empowering staff if they are not given the resources and information needed to undertake more complex task
- For example, if an employee is tasked with leading a small team to solve a problem, such as improving the response time to customer complaints, they will need a range of information and enough resources to make improvement

Answer 545

- Once employees have been empowered they must be confident they have complete authority to make decisions
- The methods they choose and approaches they take must not be questioned
- If employees are challenged or asked to explain themselves each time they make a decision, empowerment is not likely to work

Answer 546

If employees are being empowered it is important that they feel confident about their new role
-A lack of confidence can lead to anxiety, hesitancy and mistakes
- Senior managers can help to inspire confidence by emphasising the strengths that an individual has, showing trust, and by recognising and praising achievements

Answer 547

- At an appropriate time it will be necessary to provide positive feedback to empowered workers
- Workers need to know how they have performed in their new roles
- Feedback will help you guide them in the future and build more confidence

Answer 548

a type of performance measurement that evaluates the success of an organisation or of a particular activity

Answer 549

The method used to calculate labour turnover may not be very effective as it can be difficult to measure the output of workers accurately. This is particularly the case when trying to measure the output of some service providers. For example, how do you measure the output of those working in research and development, product creation, healthcare and maintenance? Their output is often intangible (i.e, not a physical thing) and so very difficult to quantify.
There may also be problems in manufacturing when several people are involved in the production of a single unit. For example, how do you measure the output of a dozen different workers all contributing to the construction of a house?
Calculating labour productivity is also limited in highly automated businesses that employ large quantities of plant and machinery. One problem is that different plants are likely to be at different technological stages. Labour productivity in a brand-new car plant will be much higher than that in an old plant. Labour productivity is not likely to be very meaningful in business activities such as oil refining, chemical processing and food processing.
Another problem with measuring labour productivity is that it usually ignores the quality of work, Workers may be able increase their output by working faster.
However, if they make mistakes then the quality of output declines. This is likely to have a negative impact on sales,

Answer 550

The method used above to calculate labour turnover may be limited. One reason is because of the difference in labour turnover between part-time and full-time workers, Labour turnover amongst part-time workers will be higher than that of full-time workers, even when doing the same job. This may be because many part-time workers are looking for a full-time job and will leave as soon as they get one.
Alternatively, some part-time workers leave their part-time jobs regularly, One example might be students at the end of the college year. This means the labour turnover for businesses that have more part-time workers will be distorted.
Similar distortions may arise if businesses use more temporary or seasonal staff. These workers are only employed for short periods. This means that the labour turnover of seasonally or temporary workers will be high

Answer 551

Absenteeism rates can become distorted very easily. For example, a small business may have a very low rate of absenteeism. However, if a single member of staff is of on long-term sickness due a serious illness, this will raise the absenteeism rate.
The way absenteeism is defined or recorded by a business may also distort calculations. For example, if an employee leaves work at lunchtime to collect a sick child from school, some businesses might ignore that absence. However, others might record this as a half day absent. This means an employer's policy or culture will have an effect on the official absenteeism rates,

Answer 552

F.W. Taylor (an American engineer and businessman), outlined his theory of scientific management. Taylor suggested identifying the best way to carry out a task then paying workers according to what they produce. He suggested that people should be paid 'a fair day's pay for a fair day's work'.
He argued that people are motivated mainly by money and would work harder to earn more.
Therefore, employees should be paid piece rates (i.e. an amount of money paid for the amount of work produced).
The main benefit of piece rates for businesses is that it rewards productive workers. Slow or lazy workers will not earn as much as those who work hard and are more productive.
This system helps to motivate workers, and businesses are likely to get more out of their employees.

Answer 553

performance-related pay
bonus systems
profit-related pay
commission systems

Answer 554

All of these methods reward employees for their effort —both in terms of results and attendance. It is unlikely that staff will want to leave a business if the financial rewards are large, so staff turnover will be lower. For example, bonuses can be paid in addition to the basic wage or salary. Operatives may be paid a bonus if they reach a weekly production target.
The main advantage to businesses of bonus payments is that they are only paid if targets are met. This means that money is only paid if it has been earned. Some businesses pay their staff loyalty bonuses that are usually paid annually.
Such bonuses are not necessarily linked to productivity but they are designed to reward workers for their loyalty and to help to reduce staff turnover

Answer 555

For example, in Australia absenteeism is a major problem. In 2016 it was estimated that the cost to the Australian economy of lost productivity through absenteeism was AUS$33 billion. A total of 92 million working days were lost through unexpected absences.

Answer 556

These schemes are often used to reward senior managers and executives in plcs. The idea is that certain employees will be paid a portion of shares (sometimes in addition to cash bonuses). This happens if the business reaches important performance targets, such as growth in turnover, profit or share price.
Some businesses offer shares to a wider range of employees. A common method of share distribution is to use a sharesave scheme, sometimes called a savings related share option scheme. These involve employees saving some of their monthly pay for a fixed number of years. At the end of the period, employees can use the money saved to buy shares at a price that was fixed from the beginning, often at a discount. If the share price has increased over the time period, employees can often make a capital gain.
However, if the share price has fallen to below the price that was fixed at the outset, employees get their cash back, perhaps with a small cash bonus. Such schemes are considered to be safe and so are very popular with employees.
The benefit to employers is that workers are likely to be
better motivated and more loyal to the company if they own
shares. They may work harder, take less time off sick and are
less likely to leave. For example, once staff have signed up
for a five-year sharesave scheme, they may not want to leave
halfway through the term and miss out on possible gains

Answer 557

A process in which a large company or organisation changes its working methods or aims, for example in order to develop and deal with new situations or markets

Answer 558

Where new leadership such as a new CEO brings about change with the purpose of improving business performance

Answer 559

- Changes to organisational size
- Poor business performance
- New ownership
- Transformational leadership
- The market and other external factors (PESTLE)

Answer 560

There are significant advantage to growth in the form of EoS, brand recognition and financial security

Answer 561

- Firms are certainly more productive as they grow in size
- However, in order to capitalise on size a business will have to alter the scale and methods of production
-For some organisation this may require investment in automated production facilities and the loss of a highly skilled small workforce

Answer 562

- With growth comes the need to invest
- This investment could come from the reinvestment of profits, but more often than not, a firm will need to finance growth through borrowing
- A highly geared business is a risky business
- Nevertheless, growth will often bring with it increased profit in real term and this is likely to please shareholders

Answer 563

- Growth brings with it new opportunities for employees through bonuses and promotion prospects
- It may also be necessary to recruit new employees and this is another important change to manage, individual workers might be concerned that they will no longer work with 'friends', or may be moved to a job that they dislike
- As a firm grows there is danger of losing connections with its customer base
- Larger organisation sometimes find it more difficult to offer a personal service
- Trying to maintain a personal service has been focus of many high street banks
- The expansion of business can also create pressures for local communities

Answer 564

- The size of an organisation will naturally change as it seeks to grow
- growth is a key corporate objective as it allows a firm to satisfy shareholders and create security for its stakeholders
- One of the most significant drivers of change as a business grows is the need to restructure and adopt policies and processes to manage expansion
- Sometimes a business will look to grow externally by merger or takeover
-This can bring a very sudden change to all aspects of the business
- How an organisation manages growth can be difference between success and failure
- Most businesses are unable to operate as thy once did where they were a small business, which can be lost as companies grow

Answer 565

- This poor performance of an organisation will invariably bring with it a period of change as the company strives to regain customers, sales , profit or reputation
- Often the change after a period of poor performance will happen quickly as the business leaders try to 'turn the tide' and improve the fortunes of the company before failure and possible closure
- For this reason, change will often be very quick and may focus on corporate strategy
- Sometimes when a large business has a period of poor performance, a change of higher management or the CEO is made
- New leadership usually bring significant change as the new boss attempts to assert themselves and strike a new course for the business

Answer 566

Poor performance will often go hand in hand with a loss of competitiveness

Answer 567

With poor performance comes a fall in sales, productivity and profitability
- A fall in production will leave the business with a low rate of capacity utilisation
-the key question is hoe will the firm manage its excess capacity and the threat of rising unit costs?
- Business must take account of changes in their human resource planning
- This could mean employing a more flexible workforce that could be changed quickly to meet the needs of the business for example , employing part-time workers, introducing job sharing.
- It might also mean employing workers in low-cost countries, such as in call centres abroad

Answer 568

- A firm going through a period of poor performance is likely to be subject to liquidity problems
-A reduction is sales will result in a reduction in cash flow and this might lead to cost cutting
-In times of financial difficulty it is important for a business to find ways of being leaner and more efficicent

Answer 569

- Poor performance brings uncertainty and this can have a negative impact on motivation within the workforce
- A firm can find itself manage low morale and giving reassurances
- Nevertheless, poor performance sometimes signals redundancies and this can be an extremely difficult process to manage
- All corporations are answerable to their shareholders and a poor performing company is likely to lose value on the stock markets

Answer 570

- The introduction of new technology can affect a business in many ways
- Advances in even more powerful computer components
- Telecommunications and the power of handheld devices change not only how businesses communicate with their customers and suppliers, but also the pace of innovation and business processes

Answer 571

- Businesses must be prepared for changes in the tastes of consumers e.g. include the increasing demand for environmentally friendly products, the desire for greater knowledge and products or the need for more convenient methods of shopping , such as purchasing via the internet
- Population changes will also affect the age and make-up of the workforce
- The ageing of the population in the UK in the early part of the twenty-first century is likely to result in changing recruitment policies for businesses
- A falling population is also likely to change how a business plans its human resources

Answer 572

- Government legislation can force changes in business activity,
- Taxation of pollution for instance, would affect the production methods of many firms.
- Safety standards, such as EU regulations, the minimum wage or the governance of zero hour contracts are likely to determine how businesses operate

Answer 573

- It is argued that economies go through periods of boom and slump, recession and recovery
- This is known as the business cycle
- Income, spending, saving, investment and economic variables, such as unemployment and inflation, are all likely to be different at different stages in the cycle
- Business have to deal with these economic factors e.g. the financial crisis of 2008 many firms had to find ways of becoming leaner and more efficient in order to survive

Answer 574

- This impact on competitiveness of PESTLE factors is very much determined by how quickly a business is able to respond to these changing forces
- For example, if a business is the first to innovate or adopt a new technology, responds fastest to consumer needs or embeds policies that adhere to new legislation, it might be able to gain an advantage over its competitors

Answer 575

- New technology can feed into the production processes of a business
- Whether that be a manufacturer or service provider, new technology brings with it the opportunity to increase scale, productivity and efficiency.
- As the economy goes through periods of boom and slump, businesses will be required to adapt to changing demands for their products and services
- As productivity rises and falls a business must change to cope with different levels of capacity utilisation
- These can require fast expansion or the need to rationalise

Answer 576

- In most instances any change in these external forces means an increase in costs for a business
- From simply having to adapt its packaging to meet new consumer legislation or the complete revamp of its product line to introduce new technology, these changes are not going to be cheap
- However, it is likely what the costs will have to be absorbed by the whole industry and not just one firm

Answer 577

- The impact of change as a result of business having to respond to external influences is likely to be felt by all stakeholders
- Any impact of rising costs though legal implications is likely to be passed on to consumers
- New technology may require retaining or, in a worse case scenario. could lead to parts of the workforce becoming redundant

Answer 578

- The change in ownership of a business may come fro internal growth, the transition from a private limited company to a public limited company and flotation of a firm's shares on the stock market
- With the flotation of a business on the stock market comes the opportunity to raise fresh capital for further investment and expansion, again fuelling more change ahead
- A change in ownership may also become necessary as a business goes through the process of a merger or acquisitions which can bring very sudden change to a company

Answer 579

- the impact on competitiveness will very much be determined by how the companies integrate and complement one another
- However, significant economies of scale may come from two firms merging

Answer 580

- Productivity may eventually rise as a result of a merger, but in the short term it is likely that business operations will be disrupted as the two firms work out how to get along and integrate all aspects of the business

Answer 581

Acquisitions can be very expensive, and should the venture fail it can lead to huge losses being incurred by the buyer
- However, acquisitions are good for share prices and the announcement of an acquisition or merger can increase demand for the company's stock

Answer 582

- With a merger or acquisition comes the danger of a clash between two corporate culture
- One of the most famous merger failures occurred in 1998 when Daimler and Chrysler attempted to merge
- The merger was quoted as being like 'trying to mix oil and water'
-The occurrence of a merger will always lead to restructuring of the two companies (or at least one of them) and may also lead to redundancies

Answer 583

- Occasionally change occurs as a result of a change in management or leadership
When a new CEO takes the helm of a business it is often because the previous CEO has retired, stepped down or has been replaced due to poor performance
- In these circumstances the new CEO will being in their own ideas and changes to the company
- This transformational leadership might be in the form of a new vision or strategic direction for the business
- If the new CEO has been brought in following a challenging period of performance, they might have been chosen as a catalyst for change to bring and fresh ideas
New leaders can have a very positive impact on a company. They may have been appointed because they have a proven track record. They are expected to inspire the whole organisation. They are likely to make big changes and motivate the workforce

Answer 584

The process of organising and introducing new methods of working with a business

Answer 585

- Change Management is the process of organising and introducing new methods of working a business
- These changes can be driven from with the business or as a result of responding to the external environment
- the management of change in business is becoming increasingly important
- Under pressure from competitors, higher costs and tougher economic conditions, many firms in the UK have development company-wide change programmes
- Some firms have made only minor changes to their business operations and remained successful
- Some company still retains many of their original production methods and design feature that they have had for years arguing that these 'original' features that attract consumers
- However, many businesses need to change to stay successful in business

Answer 586

- Organisation Culture
- Size of the Organisation
- Speed of Change
- Managing Resistance to Change

Answer 587

- Organisational culture in its simplest form can be described as 'the way things are done around here'.
- this is a simplistic view of extremely powerful phenomena that play a significant role in the success of a business
- Customs and practices are embedded in systems that reflect the norms and values may give stability, but it also presents problems of rigidity when a business needs to change
- While a strong culture may give a company a competitive advantage, it can also be its downfall for example, changes in the digital market moved quickly and some competitors had organisational culture that responded at a faster pace than Kodak to meet market demand.
- This led for the previously dominant Kodak to them filing for bankruptcy in 2012
- One of the most significant drivers for organisational change is external growth as a result of a M&A
- In such cases two organisational culture will come together and their compatibility will often be the key factor that leads to success or failure

Answer 588

- the size of a business may significantly affect its ability to manage successful change
- it is a fair generalisation that the larger the organisation the less adaptable
- This might simply be because there is more change to manage and on a larger scale, but also because decision making takes longer in firms with a longer chain of command and subdivision
- In contrast, smaller businesses are far more flexible because decisions can be taken quickly and implemented without the involvement of a large number of stakeholders
- As companies expand it is also necessary for them to change the way decisions are made e.g. MNCs or regional businesses may be required to adapt their approach to suit the local context
- Where is it necessary for a business to move from a centralised decision- making approach to a decentralised strategy, change management may be more difficult to implement
- Culture is a key factor in any change process, However, it is also true that in large organisations it is easier for sub-cultures develop.
- Multiple culture are more difficult to manage through nay change than simple ones

Answer 589

- Size is just one factor that can determine the pace of change in a business. Other factors also play their part e.g. in some contexts change can take its time and happen organically
- The development of new products, technology and processes can then evolve in the knowledge that the business is in a safe position e.g. Apple have been the forefront of innovation in the personal computing market through continual change at a steady, but regular pace.
- By contrast, other organisations have to go through change very rapidly such as the Fashion Industry that is forever involved in product development and innovation
- Similarly crisis can also lead to very fast change e.g. after the financial crash many organisations had to change very quickly to rationalise and improve efficiency in order to survive

Answer 590

- Workforce
- Owner
- Customers and Suppliers
- Stakeholders

Answer 591

- Business are likely to face a certain amount of resistance to change form parts of the workforce for a number or reasons:
- Fear of the unknown. people often feel safe with familiar work practices conditions and relationships
- Employees and managers may fear that they will be unable to carry out new tasks, may be made redundant or may face a fall in earnings
- Individual workers might be concerned that they will no longer work with their preferred colleagues or may be moved to a job that they dislike
If change is to be carried out effectively, they business must make certain that these fears are taken into account. Only if employees feel they can cope with change will the business be able to adjust to new situations be forced out of business

Answer 592

- Owners of businesses may also be resistant to change for similar reasons.
- they might fear operating in unknown markets and conditions
- They might not want the cost of any changes
- they may also fear that they might not be able to adjust to new situations and be forced out of business

Answer 593

- These too may resist change
- They may be unwilling to change their own practices when they business they are dealing with changes
- For example, a company may reorganise its sales force and decide that it will no longer visit clients that give it less that £5000 worth of orders per year
- Instead, it will develop a website and telesales operation to deal with small customers,
-Inevitably, the company will lose some customers who are not prepared to place order in the new way

Answer 594

- Generally speaking therefore, stakeholders in a business may resist change for any of the following reasons
- Disagreement with the reasons for or necessity to change
- Fear of the impact
- Lack of understaing
- Disagreement with the process involved in delivering the change
- Lack of involvement
- General inertia - satisfaction with the current situation/ way of working
- John Kotter a Professor at Harvard Business School proposed in Leading Change , a process which creates a sense of urgency - getting people to actually see and feel the need for change
- Stakeholders must understand the need for change through effective communication if anger and fear are to be overcome and the management of change has any chance of succeeding

Answer 595

- Need to be approached with care in any examination because it can incorporate all aspects and functions of a business
- It is therefore worth examining change and the management of change in a systematic way:
- What are the driving forces behind the change? Are these internal or external?
- What is the likely impact of the change?
- What factors might determine its success?
- What are the key steps the business must take to ensure the change is successful? This will often come from the context of the business you are analysing

Answer 596

Identify and analyse cultural differences before a merger goes ahead. This might be done by analysing process flow charts to see how work is done; interview customers to see how they view the two businesses, interview managers to find out about their styles; and get feedback from the workforce to identify norms and beliefs,
Communicate with employees to explain the purpose of the merger and its possible effects, but also gather feedback from the workforce to identify their concerns and feelings.
Define and implement a new culture by clarifying behavioural norms, the structure of the organisation and the organisation's strategy. Ideally, the new culture should make employees feel that they are starting a new and better job.

Answer 597

Shows how a business will operate after a serious incident and how it expects to return to normal in the quickest time possible.

Answer 598

Identifying and evaluating the potential risks that may be involved in an activity that a business proposes to undertake, ensuring compliance with health and safety legislation.

Answer 599

Identify, assess and prioritise risks, and plan responses to deal with the impact of these risks on the operation of the business.

Answer 600

A strategic planning method designed to explore uncertainties, learn how to protect the business from their worst consequences and prepare how to exploit any opportunities that might present themselves.

Answer 601

Identifying and developing people who have the potential to occupy key roles in a business in the future.

Answer 602

- Many business undertake scenario planning in an effort to deal with unforeseen events
- Scenario is not about trying to predict future events
- It is a strategic planning method designed to explore uncertainties,, work out how to protect the business from their worst consequences and prepare how to exploit any opportunities that may present themselves

Answer 603

- clarify some of the future uncertainties in business identify risk and opportunities and prepare for their eventuality
- teach managers how events may transpire, develop and affect the business
- understand the causes and effects of change in business and how to manage

Answer 604

1 - Identify possible trends and issues --> scanning internal and external environment - using PESTLE analysis
2 - Build possible scenarios --> imagine a range of possible scenarios that might affect operations
3 - Plan response --> identifying the impact the scenarios will have on the business and developing plans to deal with them
4 - Identify the most likely scenarios --> priorities the most likely and thoroughly plan for each
5 - Capitalise on Scenarios --> implementing the planned response when scenarios appear - not all scenarios end with a negative outcome

Answer 605

- After a business has identified possible scenarios it might face in the future it might use a risk assessment
- Involves examining what might cause harm to people and identify the precaution that might be take to protect them from harm
- One of the main purposes of risk assessment is to help comply with health and safety legislation
- However the use of risk assessment might be extended to assess risk on the business in general --> therefore helpful with scenario planning

Answer 606

- Natural Disasters
- IT system failure
- Loss of Key Staff

Answer 607

- set up in a location that is not vulnerable to flooding, earthquakes, bush fires and other natural disasters
-take out adequate insurance policies to cover losses resulting from disasters
- ensure that data strewed on computers is as secure as possible and that back-up systems are adequate
- organise back-up power, such as a generator, to ensure that vital machinery an other equipment can still be used in the event of a power interruption
- ensure that there are adequate communication channels are set up to deal with crises
- produce a business continuity plan to deal with crises

Answer 608

- whwen an incident occurs, a business will want to minimise disruption, after safeguarding human life, on of the most important priorities is to get the business 'up and running' again
- Some firms produce business continuity plans, these show how a business will operate after a serious incident and how it expects to return to normal in the quickest time possible, there are four stages:
1 - Carry out a business impact analysis
2 - Formulate Recovery Stategies
3 - Plan development
4 - Testing and Training`

Answer 609

- identifies those functions and processes that are essential to the running of the business
- This involves gathering information so that appropriate recovery strategies can be designed - -This process also involves identifying the financial consequences of such incidents, like loss of revenue, customer defections etc.

Answer 610

- these are actions to restore the business to a minimum acceptable level after an incident
- This will involve identify the resources needed such has people, facilities, equipment, utilities, IT and material to aid recover
- Some examples may include: maintaining higher stock levels, shifting production form one plant to another, setting up agreements with another business to share resources and support each other should either part encounter a serious disruption

Answer 611

- this involves developing a detailed plan to ensure that the recover strategies are carried out in an organised way
- A business is likely to appoint recovery teams, develop relocation plans, and document recovery strategies and procedures so that key staff are aware of what is expected of them

Answer 612

- Once the recovery plan has gained approval it is necessary to design testing exercises and train staff in their roles during the execution of the recovery plan
- The recovery teams will be the main focus of such training
- After testing and training it maybe necessary to update the business continuity plan to take into account any discoveries made during this process
- Finally it may be necessary to review and update the plan on a regular basis to take into account any changes that have occurred in the business, such as key personal, vital equipment or premises

Answer 613

- Part of risk mitigation involves identifying and developing current employees who have the potential to occupy key roles in the future
- Succession Planning is an important process because it will help a business deal with the problems of losing key staff members while helping develop the staff needed to fill the post when the business expands
- Failing to do so could lead to a business promoting a person who is not equipped to do the job or recruiting an unknown outsider at a far greater risk and expense

Answer 614

- Identify the characteristic a successor should possess
- Decide how the successor will be found
- Undertake a rigorous selection process
- Make the decision
- Communicate the decision
- Implement a training and preparation plan

Answer 615

Natural disasters are extremely bad events that usually happen suddenly. They are caused by factors beyond our control.
Examples include floods, hurricanes, volcanic eruptions, tsunamis, earthquakes, forest fires, snowstorms and epidemics.
Such events can result in high levels of damage, death and disruption (i.e. when things are unable to happen in the normal way).
Many firms are multinationals with operations in places where some of these events are more likely to occur, So, multinationals are likely to be more exposed to the risk of natural disasters.
Another common problem around the world is flooding. In recent years, flooding in the USA has been responsible for reduced shipping, damaging crops and shutting down ports. Last year, three-quarters of Louisiana's rice fields were affected by flooding. It was estimated by experts that the cost to Louisiana rice fields alone would be approximately US$14.3 million.
Volcanic eruptions can cause large-scale disruption to business. If a volcano erupts, business activity in the immediate area will be affected by lava (extremely hot liquid rock) and huge clouds of ash. However, the clouds of ash can sometimes be so large that flight paths are made unusable, In 2010, Eyjafjallajokull volcano in Iceland erupted, sending millions of cubic feet of ash over Europe. This posed a threat to aircraft and many airports in Europe were closed for a period of time. Estimates suggested that the cost of grounded flights to the global airline industry was over £1 billion.
However, some businesses actually benefited from the closure of European airspace, Airport hotels were full of travellers who were unable to leave, and trains, buses and coaches were extremely busy. Eurostar trains between London and Paris or Brussels were sold out.

Answer 616

Most businesses employ IT systems in their organisation. The extent to which businesses depend on such systems will vary,
Generally, the larger the business, the more investment it will have in IT. This means that an IT systems failure or a cyberattack could be a serious disaster.
Many small businesses may have only modest investments in IT systems, For example, computers are used for data storage. email communication, research and website display. However, even smaller businesses are increasing their reliance on IT, such as for online sales and other transactions. This makes them more likely to experience breakdowns.
Businesses and the public are becoming more and more concerned about the threat of cyberattacks, Most people don't know the consequences of such attacks,
However, as the number of attacks increases, awareness of their effects is being raised,
One problem is personal data being stolen by hackers from businesses. It has been reported that these data breaches' happen on a daily basis, but most of the incidents are small. However, some are large and worrying.
Finally, IT systems can be attacked by hackers that use ransomware, This is where the control of a computer is lost to a hacker. The only way users can get back control and recover all their stolen files is to pay a ransom

Answer 617

People leave businesses all of the time. This may not be a problem but losing key members of staff can cause difficulties — especially if the business has not prepared well enough for it.
It can also be a very serious problem in small businesses, which are often dominated by a single person. It has been reported in the past that around 55 per cent of businesses would stop trading if they lost one or more key people, Unexpected losses through illness, long-term incapacity or death are the most common causes of such an event.
In a small business, where the owner employs only a few other people, the loss of the owner could result in the closure of the business. This is because the other employees may not have the resources or the desire to take ownership of the business. Finding an outsider (i.e, somebody who is not already part of the business) to take over the business might also be difficult.