IB Business Management Notes and Revision

IB Business & Management HL

Business & Management Higher Level IB Notes

1

IB Business & Management HL Topic Topic 1: Business organization and environment 1.1 Nature of business activity 1.2 Type of organizations 1.3 Organizational objectives 1.4 Stakeholders 1.5 External environment 1.6 Organizational planning tools 1.7 Growth and evolution 1.8 Change and the management of change 1.9 Globalization Topic 2: Human Resources 2.1 Human resource planning 2.2 Organizational structure 2.3 Communication 2.4 Leadership and management 2.5 Motivation 2.6 Organizational and corporate cultures 2.7 Employer and employee relations 2.8 Crisis management and contingency planning Topic 3: Accounts and finance 3.1 Sources of finance 3.2 Investment appraisal 3.3 Working capital 3.4 Budgeting 3.5 Financial accounts 3.6 Ratio analysis Topic 4: Marketing 4.1 The role of marketing 4.2 Marketing planning 4.3 Product 4.4 Price 4.5 Promotion and place (distribution) 4.6 International marketing and e-commerce Topic 5: Operations management 5.1 Production methods 5.2 Costs and revenues 5.3 Break-even analysis 5.4 Quality assurance 5.5 Location 5.6 Innovation 5.7 Production planning 5.8 Project management

Page 2 4 10 14 16 21 25 31 35 38 44 49 52 56 63 65 68 69 73 76 80 82 88 92 95 107 112 116 118 119 122 125 127 130 132 134 138

2

IB Business & Management HL Topic 1: Business organization and environment Unit 1.1 – Nature of business activity What is a business?  An organization that uses resources to meet the needs of customers by providing a good/service that they demand  Business activity involves adding value to resources such as raw materials and semi-finished goods and making them more desirable to the purchaser Business inputs:  Land – renewable and non-renewable resources of nature  Labor – manual and skilled labor, some businesses are more labor intensive  Capital – finance needed to set up and pay for operations of a business, including resources used in production  Enterprise – driving force of a business, provided by risk-taking individuals, which combines other factors of production into a unit that can produce goods and services Business functions: Effective strategic decision-making develops from the functions working closely together. This requires good communication, co-operation and close interrelationships between functions.  





Marketing - Responsible for market research to analyze what consumers want and then create a product that will be distributed for sale in the right market Finance - Monitoring the flow of finance into and out of a business, keeping and analyzing accounts and providing financial information to other departments Human resource management - Identifies what a workforce needs, recruits selects and trains appropriate staff and provides motivation systems to help retain and encourage staff Operations management - Responsible for ensuing adequate resources are available for production, maintaining production and quality levels and achieving high efficiency

Sectors of industry: Primary sector business activity Firms engaged in farming, fishing, oil extraction and all other industries that extract natural resources so that they can be used and processed by other firms Secondary sector business activity Firms that manufacture and process products from natural resources, including computers, brewing, baking, clothing and construction 3

IB Business & Management HL

Tertiary sector business activity Firms that provide services to consumers and other businesses, such as retailing, transport, insurance, banking, hotels, tourism and telecommunications Changes in economic structure: Industrialization The growing importance of the secondary sector manufacturing industries in developing countries. The relative importance of each sector is measured in terms of employment levels or output levels as a proportion of the whole economy.  GDP increases, raising living standards  Increased output leads to lower imports and higher exports  Expanding manufacturing businesses creates jobs  Expanding and profitable firms pay more tax to the government  Value added to country’s output of raw materials rather than only exporting these  Chance of work in manufacturing, causes huge migration from countries to towns, which leads to housing and social problems associated with overpopulation  Expansion of manufacturing industries may make it difficult to recruit and retain sufficient staff  Imports of raw materials needed can increase country’s import costs  Increased pollution  Much growth in the secondary sector is due to multinationals Deindustrialization General decline in the importance of secondary sector activity and an increase in the tertiary sector. Reasons:  Rising incomes associated with higher standards of living, causing consumers to spend more  World-wide industrialization increases competition, thus rising imports of goods are taking market away from secondary sector firms  Employment patterns change – manufacturing workers find it difficult to find employment in other sectors (structural unemployment) Additional definitions: Consumer goods Physical and tangible goods sold to the general public, such as cars and washing machines (durable consumer goods) and food, drinks and sweets (non-durable goods) Consumer services Non-tangible products that are sold to the general public, including hotel accommodation, insurance services etc. Capital goods

4

IB Business & Management HL Physical goods that are used by industry to aid in the production of other goods, such as machines and commercial vehicles Unit 1.2 – Types of organization Public and private sector organizations: Private sector Comprises of businesses owned and controlled by individuals or groups of individuals Public sector Comprises of organizations accountable to and controlled by the state Mixed economy Economic resources are owned and controlled by both private and public sectors Free-market economy Economic resources are owned largely by the private sector with very little state intervention Command economy Economic resources are owned, planned and controlled by the state Links between sectors:  Public sector organizations often have objectives other than profit - Ensuring supply of essential goods and services, perhaps free of charge (e.g.: education, health etc.) - Preventing private monopolies (single firms that dominate an industry) from controlling supply - Maintaining employment - Maintaining environmental standards Privatization The sale of public sector organizations to the private sector Starting a business: Role of the entrepreneur Entrepreneur Someone who takes the financial risk of starting and managing a new venture      

Innovative – needs ability to carve a new ‘niche’ into the market Commitment and self-motivation Multi-skilled – promotion, selling, production, financial aspects, technology Leadership skills – lead by example and to motivate employees Belief in oneself – many start-ups fail, hence you need belief to continue Risk taker – investing ones savings into a business for instance

Why start a business?  Losing a job – motivated to start a business, applying skills/interest they have 5

IB Business & Management HL   

Desire for independence – They have work flexibility and control Discovering a business opportunity A wish to make more money than in the current job

Start-up businesses  Identifying an industry with a high likelihood of success  Indentifying market opportunities, based on ideas for products, generate from own skills/hobbies, previous employment experience, franchising conferences and exhibitions offering a range of start-up ideas, small budget market research Problems face by start-ups  Competition - Competition from older, established businesses with more resources and market knowledge  Building customer base - Needs to establish brand loyalty, through personal customer service, knowledgeable pre- and after-sales service, providing for one-off customer requests that larger firms may be reluctant to offer  Lack of record keeping - Often entrepreneurs fail to pay enough attention to keeping records on taxes, bills and chasing up debtors as they believe its less important or they can remember everything  Lack of working capital - Without enough capital, the business can’t buy more stocks or pay suppliers or offer credit to important customers - This can be prevented through cash-flow forecasting, injection of sufficient capital, establishment of good relationships with banks for potential loans, use of effective credit control over customers’ accounts  Poor management skills - Not enough experience of leadership skills, cash handling and cash management skills, planning and coordinating skills, decision-making skills, communication skills, marketing, promotion and selling skills  Changes in the business environment - New competitors, legal changes, technological changes that make the methods used by the new business old-fashioned and expensive Profit-based organizations Sole trader A business in which one person provides the permanent finance and, in return, ahs full control of the business and is able to keep all of the profits   Easy to set up – no legal formalities Unlimited liability and lack of continuity Owner has complete control Often faces intense competition from bigger firms Owner keeps all profits Owner is unable to specialize in areas of business that are most interesting as owner is responsibly for all aspects of

6

IB Business & Management HL management Able to establish close relationship with Difficult to raise additional capital staff and customers Business based on interest of owner Long hours necessary to make business pay

7

IB Business & Management HL Partnership A business formed by two or more people to carry on a business together, with shared capital investment and, usually, shared responsibilities  Partners may specialize in different areas of business management Shared decision-making Additional capital injected by each partner Business losses shared between partners

 Unlimited liability and no continuity for all partners Profits are shared All partners bound by the decision of any one partner Not possible to raise capital through shares Greater privacy and less legal formalities Sole trader, taking on partners, loses than corporate organizations independence of decision-making Private limited company A small to medium-sized business that is owned by shareholders who are often members of the same family. This company cannot sell shares to the general public.  Shareholders have limited liability Separate legal personality and continuity Able to raise capital from sale of shares to family, friends and employees Original owner often able to keep control Greater status business

than

 Difficult for shareholders to sell-shares Legal formalities involved in establishing Capital can’t be raised through sale of shares to the general public End-of-year accounts must be sent to Companies House – available for public unincorporated inspection

Public limited company (plc) A limited company, often a large business, with the legal right to sell shares to the general public. Its share price is quoted on the national stock exchange 

 Limited liability Legal formalities in formation Seperate legal identity Cost of consultants and financial advisers when creating a plc Continuity Share prices subject to fluctuation Ease of buying and selling of shares for ‘Divorce between ownership and control’ shareholders encourages investment - Risk of takeover - Shareholders prefer short-term maximum-profit strategies - Directors aim for long-term growth to increase own power and status Access to substantial capital due to Legal requirements concerning disclosure ability to issue a prospectus to the public of information to shareholders and public and offer sale of shares

8

IB Business & Management HL Public sector enterprises Public corporation A business enterprise owned and controlled by the state – aka nationalized industry  Managed with social objectives rather than solely with profit objectives Loss-making services kept operating for social benefits Finance raise mainly from government

 Tendency towards inefficiency due to lack of profit targets Subsidies from government encourage inefficiencies Government may interfere with business decisions for political reasons

Non-profit and non-governmental organizations Non-profit organization Ant organization that has aims other than making and distributing profit and which is usually governed by a voluntary board. Objectives:  Aiming to increase their income in order to put more money back into achieving charitable objectives  Informing the public, persuading them to support their causes and trying to convince governments to give more attentions to the problems the charities are trying to solve Impact:  Many only have a national or local presence, but still have a significant impact on the people they’re trying to support Non-governmental organization (NGO) A legally constituted body with no participation or representation of any government Objectives:  Often charities as well and involved in development, health and humanitarian issues  Support and add to the efforts made by government organizations (e.g.: disaster and debt relief)  Not profit-based but specifically focused on social or humanitarian objectives Pressure groups An organization created by people with a common interest or objective who lobby businesses and governments to change policies so that the objective is reached Objectives:  Governments to change their policies and to pass laws supporting the aims of the group  Businesses to change policies so that, for instance, less damage is caused to the environment 9

IB Business & Management HL 

Consumers to change their purchasing habits so that business that adopt ‘appropriate’ policies see an increase in sales, but those that continue to pollute or use unsuitable work practices see sales fall

Ways to achieve this:  Publicity through media coverage  Influencing consumer behavior  Lobbying of government – putting arguments of the pressure group to government members and ministers because they have the power to change the law Social enterprises A business with mainly social objectives that reinvests most of its profits into benefiting society rather than maximizing returns to owners  Directly produce goods and services  Have social aims and use ethical ways of achieving them  Need to make a surplus or profit to survive as they cannot rely on donations as charities do Objectives: Triple bottom line The three objectives of social enterprises: economic, social and environmental   

Economic – to make a profit or surplus to reinvest back into the business and provide some return to owners Social – to provide jobs or support for local, often disadvantaged, communities Environmental – to protect the environment and to manage the business in an environmentally sustainable way

Public-private partnership (PPP) Involvement of the private sector, in the form of management expertise and/or financial investment, in public sector project aimed at benefiting the public Three types: 1. Government funded – The government provides the funding, but the project is managed by the private sector. 2. Private sector funded – The private sector provides large required sums of capital, but the government manages the project. Private Finance Initiative (PFI) Investment by private sector organizations in public sector projects 3. Government directed but with private sector finance and management – it encourages private sector funding and management control, of public projects.

10

IB Business & Management HL Costs Private sector business managing project could try to increase profits by cutting staff wages and benefits. In effect, workers would no longer have the security of being employed by the public sector PFI schemes have been criticized for earning private sector businesses large profits from high rents and leasing charges, paid for by taxpayers Private sector organizations may lack experience needed to operate large public sector projects, such as social housing schemes, and failure of the scheme could leave vulnerable groups at risk

Benefits Many schools, roads, prisons etc. have been built through PPP/PFI schemes, it is said these wouldn’t have been constructed without the private sector involvement Private sector businesses aim to make profits – therefore operations are highly efficient, meaning that costs to the public sector are lower than if the projects were run purely by the state By using private sector finance, the government can claim that public services are being improved, without an increase in taxes (in the short-run)

Additional definitions: Limited liability The only liability – or potential loss – a shareholder has if the company fails is the amount invested in the company, not the total wealth of the shareholder  Shareholders are prepared to provide finance to help expansion  Risk of company failing to pay debts is transferred from investors to creditors, thus these are interested in working with limited companies and seeking for any potential future weaknesses in the company Legal personality A company is legally recognized as having an identity separate from that of its owners, meaning if the company’s products are found to be dangerous/faulty, the company can be prosecuted and not the owners themselves Continuity When the death of an owner or director does not lead to the break-up or dissolution of a company, but the inheritance of ownership by shared Shareholder A person or institution owning shares in a limited company Share A certificate confirming part ownership of a company and entitling the shareholder to dividends and certain shareholder rights

11

IB Business & Management HL Unit 1.3 – Organizational objectives Importance of objectives  Helps to direct, control and review the success of business activity  Appropriate strategy needed to ensure resources are correctly used to achieve objective  Effective business objectives meet the following criteria: - Specific – objectives should focus on what the business does and should apply directly to business - Measurable – objectives with quantitative targets are more effective - Achievable – objectives must be achievable - Realistic and relevant – objectives must be realistic compared with resources of the company and should be express in terms relevant to the people who have to carry them out - Time-specific – a limit should be set when an objective is established Mission statements and vision statements Mission statement A statement of the business’s core aims, phrased in a way to motivate employees and to stimulate interest by outside groups  Overall purpose of the organization  Quickly inform groups outside the business what the central aim and vision are  Help motivate employees  Ethical statements can guide and direct employees behavior at work  Too vague and general so they say little about specific objectives  Based on public relations exercises to make stakeholders feel good about the business  Impossible to analyze or disagree with  Mission statements alone are insufficient for operation guidelines Vision statement A statement of what the organization would like to achieve or accomplish in the long term  Outlines how the future of the organization will look Corporate objectives Corporate or strategic objectives Important, broadly defined targets that a business must reach to achieve its overall aim Common objectives include:  Profit maximization – greatest positive difference between total revenue and costs. However this objective has some drawbacks: - High short-term profits may lead competitors to enter the market - Many businesses seek to maximize sales to gain the greatest market share, rather than maximizing profit - Owners of smaller businesses are more concerned with independence and keeping control

12

IB Business & Management HL -

 



 

 

Most business analysts assess business performance by capital employed - Profit maximization may be the preferred objective of owners/shareholders, but other stakeholder will give priority to other issues. Employees may concern over job security and local resident over environmental issues, the management can’t ignore these issues - Very difficult to assess whether the point of profit maximization has been reached, and constant changes to prices or output to attempt to achieve it may lead to negative consumer reactions Profit satisficing - Earning enough profits to make the owners happy, instead of aiming to make maximum profit Growth – it has some problems: - Over-rapid expansion can lead to cash-flow problems - Sales growth might be achieved at expense of lower profit margins - Larger businesses can experience diseconomies of scale - Using profits to finance growth can lead to lower short-term dividends - Growth into new business area can result in loss of focus and direction Increasing market share – benefits resulting from being a brand leader include: - Retailers keep to stock and promote best-selling brand - Profit margins offered to retailers lower than competing brand, leaving more profit to producer - Effective promotional campaigns based on this Survival Corporate social responsibility This concept applies to those businesses that consider the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities and the environment Maximizing short-term sales revenue – this could benefit staff when salaries and bonuses depend on sales revenue. But if this is achieved by lowering prices, actual profits might decrease Maximizing shareholder value – increasing share price and dividend payments to shareholders. Puts shareholders interest over other stakeholders

Interrelated objectives, strategies and tactics Tactical or operational objectives Short- or medium-term goals or targets, which must be achieved for an organization to attain its corporate objectives Set to ensure:  Co-ordination between all divisions  Consistency with strategic corporate objectives  Adequate resources are provided to allow for successful achievement of obj. Strategic/corporate objectives vs. Tactical/divisional objectives Strategic objectives Tactical objectives Set by board of directions/seniors Set by senior managers of each division Set long-term goals Set short-term goals High-risk objectives with many resources Fewer resources involved

13

IB Business & Management HL Difficult to reverse or change once Easier to change established established

or

reverse

once

Reasons for changing business objectives  The business might’ve achieved survival through operating for several years and now owners wish to pursue objectives of growth and increasing profit  The loss of a senior manager responsible for international expansion, might lead to the business focusing on domestic growth until a replacement is found  External competitive and economic environment may change  Short-term objectives of growth in sales or market share may be replaced by a longer-term objectives of maximizing profits from higher sales numbers Ethical objectives Ethical Moral guidelines that determine decision-making Ethical code (code of conduct) A document detailing a company’s rules and guidelines on staff behavior that must be followed by all employees  Avoids potentially expensive court cases Ethical policies will lead to good publicity and increased sales Ethical businesses attract ethical customers and this group of consumers is increasing Ethical businesses are more likely to get government contracts Well-qualified staff want to work for ethical companies Corporate social responsibility  Image of business and product is improve, which could become a major competitive advantage to attract new customers and create brand loyalty Attracts best motivated and efficient employees Bad publicity and pressure group activity shouldn’t arise Goodwill of other stakeholder groups could lead to better relations with stakeholders

 Using ethical and Fairtrade suppliers can be expensive Not taking bribes to secure business contracts can mean losing out on sales Accepting that its wrong to fix prices with competitors might lead to lower prices and profits Paying fair wages raises costs and may reduce competitiveness

 Loss of cost and price competitiveness if rivals don’t adopt CSR and have lower costs Shareholders may be reluctant to accept lower short-run profits Short-run costs could increase

Consumers may be prepared to pay higher prices for products made in CSR manner, but in recession they want low prices and care less about CSR Higher long-term profitability resulting Considerable social backlash against 14

IB Business & Management HL from all the above factors

businesses that claim to be socially responsible but aren’t truly

Environmental audits Assesses the impact of a business’s activities on the environment  Favorable consumer reaction leading to increased sales  Positive media coverage giving free publicity  Working towards common aim of reducing harm to the environment could bring workers and managers closer as a team Social audit An independent report on the impact a business has on society. This can cover pollution levels, health and safety record, sources of supplies, customer satisfaction and contribution to the community  Health and safety record  Contributions to local community events and charities  Proportion of supplies that come from ethical sources  Employee benefit schemes  Feedback from customers and suppliers on how they perceive the ethical nature of the business’s activity  Identifies what social responsibilities the business meets and which need to be worked on Sets targets for improvement in social performance by comparing social audits Gives direction to the action plans a business needs to achieve social obj. Improves a company’s public image, which may be used as a marketing tool

 If the social audit is not independently checked it may not be taken seriously Time and money consuming Many consumers only want cheap products, not socially responsible ones Social audit doesn’t prove that a business is socially responsible

Evaluation of audits  Until they’re made compulsory and a way to verify contents, stakeholders won’t take them seriously  Companies have been using them as a publicity stunt or screen to hide their true intentions  Hey can be time consuming and expensive, limiting their value to small businesses or businesses with limited finance Changes in corporate responsibility  Increasing publicity from international pressure groups  The UN Millennium Development Goals, agreed by more than 120 countries in 2000, which includes ‘environmentally sustainable growth’ has forced many developing nation to ask businesses to take environmental concerns into consideration

15

IB Business & Management HL  

Global concert over climate change and its potential impact on social and economic development forces companies to confront the climatic consequences of their actions Legal changes at local, national and EU level forced businesses to refrain from certain practices (e.g.: low wages, avoiding legal responsibility for products)

Unit 1.4 – Stakeholders Stakeholders People or groups of people who can be affected by, and therefore have an interest in, any action by an organization Stakeholder concept The view that businesses and their managers have responsibilities to a wide range of groups, not just shareholders Stakeholder Employees

 

Managers

  

Shareholders

    

Customers

  

Suppliers

 Special groups

interest   

Competitors



Responsibilities of business Internal stakeholders Adhere to countries laws  Provide training, job security,  minimum wages, good working  conditions, involvement in business Job security  Competitive salaries and other benefits  Opportunities for responsibility and  career advancement Incorporated business to operate in  company law Annual accounts presented  Actions taken to increase shareholder value over time External stakeholders Follow laws on consumer protection  Don’t take advantage of vulnerable customers and not using high-  pressure selling tactics  Giving assurances about quality,  delivery dates, service levels, continued supply of vital parts Establish effective two-way relation  Avoid excessive pressure on smaller/weaker suppliers to cut  prices  Pay fair prices and promptly 

Benefits of accepting them Loyalty and low labor turnover Motivated staff = efficiency Easier to recruit new workers as they’re attracted to responsibility Low turnover of management staff Work incentive Easier to attract well-qualified managers to business Reluctant to sell shares, helping to avoid drop in share prices Willing to buy new issues of shares to invest further capital into company

Essential to satisfy customers’ demands to survive in the long term Consumer loyalty and repeat purchases Good publicity Positive feedback helps improve goods and services

Supplier loyalty – meeting deadlines and special orders High quality supplies Reasonable credit terms ‘Payment holidays’ offered to struggling businesses Banks: payment of interest and  Banks: more willing to lend money repayment of loans  Pressure groups: less likely to engage Pressure groups: recognition of genuine in practices damaging to business concern – respond by changing such as consumer boycotts decisions  Local community: more likely to agree Local community: avoid pollution and with business expansion plans damaging things, support them Compete fairly and within the law  Avoid legal action as consequence of

16

IB Business & Management HL uncompetitive practices  NOT a responsibility to provide details  Opportunities for co-operation and of strategic plans joint ventures

17

IB Business & Management HL Potential conflicts between stakeholders Business decision / activity Expansion

Takeover of competitor

New IT introduction to production

Employees  More job/career opportunities  More complex lines of communication  More secure and more career opportunities  Rationalization to avoid waste and cut costs – jobs lost  Training and promotion  Fewer untrained staff needed, those unable to learn may be made redundant

Impact on: Community  More jobs for locals and increased spending in local business  External costs due to increased traffic and loss of green fields  Local job vacancies and income may rise  Rationalization of duplicated offices etc. might lead to close and job losses  Local IT providers could benefit from increased orders  Specialist workers may not be available locally

Customers  Better service due to bigger company with more staff  Less personal therefore inferior customer service  Economies of scale reduce prices  Reduced competition increases prices and reduce consumer choice  More efficient and flexible may increase quality and reduce price  IT problems could delay supply

Methods to reduce stakeholder conflict: Method  Arbitration  Hears arguments from both To resolve industrial disputes sides and decides on fair between workers and managers solution.  Both sides can agree before accepting the solution Worker participation  Workers make contribution to To improve communication, business decisions decision-making and reduce  Motivates staff to be more potential conflicts between efficient workers and managers Profit sharing schemes  To reduce conflict between workers and shareholders over the allocation of profits and to  share the benefits of company success Share ownership scheme To reduce conflict between workers, managers and shareholders





  No one will receive exactly what wanted  Cost might rise if higher wages/better work conditions are proposed  Some managers think it wastes time and resources  Some information can’t be disclose to staff other than senior managers Workforce allocated a share of  Reduces retained profits and/or annual profits before paid out profits paid to shareholders, in dividends to shareholders unless scheme results in higher profits due to motivated Encourages workers to work to employees increase long-term profitability Aims to allow employees to  Administration costs benefit from success of  Negative impact on worker business as well as motivation of share prices fall shareholders  Dilution of ownership Helps to align the interest of  Employees have to be with employees with those of company for a while before shareholders they qualify, so effect on motivation may be limited

18

IB Business & Management HL Unit 1.5 – External environment PEST analysis An analytical framework for external environmental factors affecting business objectives and strategies in terms of political, economic, social and technological. It is sometimes rearranges as STEP and has been extended to STEEPLE (social, technological, economic, environmental, political, legal and ethical) and PESTLE (same as STEEPLE but without ethical considerations) Political (and legal) issues:  Employment laws  Consumer protection laws  Business competition laws  Political changes resulting from a new government e.g. policies towards foreign direct investment by multinationals  Major policy changes such as nationalizing some UK banks after recession Possible impact of some political and legal factors on business objectives/strategies: Examples of factors Impact on business Improved employee legal protection  Increases cost of employing staff – reluctant to expand by taking on more staff  Encourages business to increase labor productivity to pay for the costs  If employers are seen to be positive about changes and accept them fully, they’ll appear to be a caring business, which encourages well-motivated staff to work for them Consumer protection laws that constrain  Sales staff will need training in legal businesses from advertising inaccurately rights of consumers etc.  Design and production has to put customer’s safety and quality first  Full disclosure of any safety problems to minimize risk to customers  All add cost, but if business follows, it may benefit from good publicity Competition laws restricting unfair  No collusive agreements with competition etc. competitors  Internal growth less likely to lead to reports and action by competition  Expansion into other countries rather than growing in existing country, which can lead to monopoly market share

19

IB Business & Management HL Economic changes: Some policies help government achieve following objectives:  Economic growth and rising living standards  Low levels of inflation and unemployment  Balance of payments equilibrium, over time, between value of imports and exports Fiscal policy Changes in government spending levels and tax rates Monetary policy Changes in level of interest rates, which make loan capital more or less expensive Economic growth Increases in the level of a country’s GDP Inflation The rate of change in average level of prices Unemployment The numbers of people in an economy willing and able to work who can’t find work Economic factors and their influence on business Economic influences and Impact on business policies Economic growth  During economic growth, demand will increase due to higher incomes – business may expand. However inferior goods may be rejected due to higher Recession income  Recession will have reverse impact – business retrenchment, closures and redundancies  Business flexibility is important for survival and flexibility in both cases Interest rates through use of  Increase in interest rates reduces consumer demand monetary policy for products bought on credit. Businesses may offer own credit deals to customers  Increase loan capital costs reduce profits of a business with high debts. Selling assets or new shares to reduce debt considered  Business expansion delayed or cancelled – expected profit may be below interest costs on loans needed  Country’s currency likely to appreciate as more abroad investment is attracted Exchange rates  Depreciation of currency makes imported goods more expensive. Allows domestic firms to charge less for exports causing possible increase in demand if demand is price elastic  Expensive imports raise business costs of raw

20

IB Business & Management HL

   Tax changes through fiscal  policy  Unemployment

 

Inflation



 

materials – attempt to buy more local supplies Business might target foreign markets and change strategies towards exporting Foreign businesses may decide to locate in country with depreciating currency Opposite occurs when exchange rates appreciate Higher rates of income tax reduces disposable income High rates of tax on profits will reduce the profits after tax of companies Higher unemployment rates gives businesses more choice in staff recruitment. As more people are applying, business may reduce wages to cut cost Average consumer incomes likely to fall with extensive unemployment – demand for budges ranges of cheaper goods Higher wage demands from workers to maintain real incomes and higher costs of materials will lead to cost-push inflation. If businesses can’t increase prices for fear of falling demand, profit margins will fall Demand-pull inflation encourages firms to raise prices to increase profit margins Substantial increases in inflation lead to action being taken by government to increase interest rates

Recession Six months (two quarters) of falling GDP (negative growth) Exchange rate The value of one currency in terms of another currency Cost-push inflation Caused by rising costs forcing businesses to increase prices Demand-pull inflation Caused by excess demand in an economy (e.g. and economic boom) Social and cultural influences  Aging population with reduced birth rates and longer life expectancy - Large proportion over age of retirement - Smaller proportion in lower age ranges - Smaller number of workers but large number of dependants  Needs to change patterns of demand  Change the age structure of the workforce  Changing pattern of employment - Changing role of women - Improved education facilities (increases in student employees)

21

IB Business & Management HL -

Early retirement in high-income countries Rising divorce rates (flexible work times etc.) Job insecurity, created by forces of globalization Increased levels of immigration

Impact of technology Information technology The use of electronic technology to gather, store, process and communicate information Computer-aided design Using computers and IT when designing products Computer-aided manufacturing Using computers and computer-controlled machinery to speed up the production process and make it more flexible Internet The worldwide web of communication links between computers Impact of applications on business IT application Spreadsheet programs

Computer-aided design

Computer-aided manufacturing

Internet/Intranet

Impact  Flexibility and speed  ‘What if’ scenarios can be demonstrated  Saves expensive designer salaries as work is quicker  More flexibility of design a each customer’s requirements can be easily added  Labor costs reduced as machines replace workers  Productivity increased and variable costs per unit decreased  Accuracy improved  Flexibility of production increased  Benefits add to firm’s competitive advantage  Cost savings from cheap and quick internal and external communication  Access to larger potential market  Web pages project worldwide image of business  Online ordering cheaper than paperbased systems  B2B communications can obtain supplies at lower costs

22

IB Business & Management HL

Impacts on objectives and strategies Cost:  High capital costs  Labor training costs  Redundancy costs – existing staff replaced by technology  Higher future profits may be achieved Labor relations:  Damaged if technological change is not explained in a positive way with reasons justified  If jobs are lost during the process of change, remaining workers have low job security, damaging motivational levels  If issue is handled sensitively, it can improve industrial relations Management:  Some fear changes  Recognizing the need for change and managing technological change processes require a great deal of management skill  IT can improve productivity greatly and increase efficiency - Managers can obtain data frequently from all departments and regional divisions of business - Computers can be used to analyze and process data quickly for Managers to interpret and make decisions quickly - Accelerates process of communicating decisions to other managers and staff Drawbacks: - Ease of transferring data electronically can lead to ‘information overload’ - Power given to central managers could be abused leading to reduction in authority and empowerment extended to work teams and middle managers

23

IB Business & Management HL Unit 1.6 – Organizational planning tools Business plans A written document that describes a business, its objectives and its strategies, the market it is in and its financial forecasts  Executive summary  Description of business opportunity  Marketing and sales strategy  Management team and personnel  Operations  Financial forecasts Importance of business plans:  Important when setting up a business, as it needs to be updates and referred to when strategic decisions are made  Planning process is important for a clear sense of purpose, direction, marketing strategies and what employees to recruit  Financial and other forecasts can be used as targets the business should aim for Importance to stakeholders:  Corporate planning (planning for the future) includes expansion programs. If this occurs banks and other creditors will ask for a business’s corporate plan before agreeing, it helps stakeholders assess the risk and rewards before investing in the expansion  Financial forecasts act as budgets and control benchmarks for internal stakeholders  Updated versions of plan can be used to attract additional partners or supply data for the experts if a stock market floatation becomes an option. Potential shareholders won’t invest without seeing the plan  Employees use it to identify specific targets and objections giving focus to their work and motivating them  Suppliers may be able to tell if the business plan communicated externally is worthwhile for the establishment of a long-term trading relations Decision-making framework Intuitive decision-making Involves making decisions based on instinct or ‘gut feeling’ (perhaps based on the manager’s experience) for a situation and the options available  Less time consuming  Less costly – no expense of gathering and analyzing data  Innovative or non-standard situations – technology advances, where scientific approach isn’t suitable Scientific decision-making Involves basking decisions on a formal framework and a data analysis of both the problem and the options available  Based on formal structure – less likely that important points are missed  Based on analysis of data – greater chance of success

24

IB Business & Management HL  When risks are high or cost is substantial, intuitive decision-making is irresponsible The Framework 1. Set objectives 2. Assess the problem or situation 3. Gather data to analyze both the extent of the ‘problem’ and the information needed to assess the options available 4. Consider all the options available 5. Decide between the alternative ideas or options using decision-making tools 6. Plan and implement the decision 7. Control and review Internal and external constraints Internal constraints Limiting factors in decision-making that can be controlled by the organization  Organizational structure – limiting authority given to managers  Financial constraints  Labor and other resource constraints  Attitude of workforce to change External constraints Limiting factors in decision-making that are beyond the organization’s control  Changes in business cycle that may make raising finance difficult/expensive  Changes in legal constraints that could influence demand for new products manufactured as a result of a strategic business decision The Fishbone Diagram A visual identification of many potential causes of a problem 6Ms are taken into consideration:  Methods  Machines  Manpower  Materials  Measurement  ‘Mother Nature’ (the environment) Stages: 1. Agree on the problem statement and write it in the centre 2. Brainstorm the main categories of the problem, or use the normal 6Ms 3. Brainstorm all detailed reasons why problems might occur under each heading 4. Analyze the findings and investigate the most likely causes of the problem

25

IB Business & Management HL

Decision Tree A diagram that sets out the options connected with a decision and the outcomes and economic returns that may result  Forces decision-maker to consider all options and variables  Put these on an easy-to-follow diagram, which allows for numerical considerations of risk and economic returns to be included  Approach encourages logical thinking and discussion amongst managers  Accuracy of data – based on experience or forecasts  Probabilities may be based on past data – circumstances may change  Cannot replace risk or impact of qualitative factors of a decision  External impacts not taken into account  Expected values are average returns, hence not applicable for a one-off decision Construction:  From left to right  Each branch represents an option together with a range of consequences or outcomes and the chances of these happening  Decision points are denoted by a square – decision nodes  A circle shows the range of outcomes – chance node  Probabilities shown alongside each possible outcome – numerical values  Economic returns are expected financial gains or losses of a outcome  Rejected branch show by ≠ Expected value The likely financial result of an outcome obtained by multiplying the probability of an event occurring by the forecast economic return if it does occur Expected value of (0.6 × $5000)

node 1 (indoors option): + (0.4 × $7000) = $5800 Expected value of node 2 (outdoors option): (0.6 × $10000) + (0.4 × $4000) = $7600 Outcome of indoors option: $5800 (outcome) − $2000 (cost) = $3800 Outcome of outdoors option:

26

IB Business & Management HL $7600 (outcome) − $3000 (cost) = $4600  Outdoors option is advised as it gives the higher return

SWOT Analysis A form of strategic analysis that identifies and analyzes the main internal strengths and weaknesses and external opportunities and threats that will influence the future direction and success of a business  Should be used as a guide only  Helps manager assess the most likely successful future strategies and constraints to them  Business may stand a better chance of developing a competitive advantage  Senior managers gain clarification and mutual understanding  Subjectivity – no managers would arrive at the same assessment of the company  Not quantitative so the cost of correcting a weakness cannot be compared with the potential profit of pursuing an opportunity Strengths Specialist marketing expertise A new, innovative products Location of the business Internal Quality processes Any other aspect that adds value to the product or service Opportunities A developing market such as internet Mergers, joint ventures or strategic alliances External Moving into new market segments that offer improved profits A new international market A market vacated by an ineffective competitor

Weaknesses Lack or marketing expertise Undifferentiated products or services Location of the business Poor-quality goods or services Damaged reputation Threats A new competitor in the home market Price wars with competitors A competitor has a new, innovative product or service Competitors have superior access to channels of distribution Taxation is increased on the product or service

27

IB Business & Management HL Unit 1.7 – Growth and evolution Scale of operation The maximum output that can be achieved using the available inputs – this scale can only be increased in the long term by employing more of all inputs Economies of scale Reductions in a firm’s unit costs of production that result from an increase in the scale of operations  Purchasing economies – bulk-buying economies of scale  Technical economies – Only justified by large firms with high output levels through flow production, that can afford it and so that average fixed costs can be reduced  Financial economies – banks are more willing to lend money to large businesses at low interest rates and raising finance by ‘going public’ or through further public issues of shares is very expensive and thus it only reduces average costs once it’s done on a large scale  Marketing economies – Marketing costs rise with the size of a business, however large businesses with high levels of sales can spread costs  Managerial economies – As a firm grows it is able to employ specialist functional managers who operate more efficiently, thus reducing average costs Diseconomies of scale Factors that cause average costs of production to rise when the scale of operation is increased  Communication problems – communication worsens with increased size of operation, leading to poor decision-making, due to inadequate/delayed information and management inefficiency  Alienation of the workforce – workers feel insignificant, which demotivates them and thus reducing efficiency  Poor co-ordination and slow decision-making – When a firm has many departments and branches in different countries, it becomes difficult for managers to co-ordinate. Smaller businesses have tighter control and can make quicker and better decisions, benefiting from flow average costs in the end Merits of small and large organizations Small organizations   Managed and controlled by owners  Adapt quickly to changing consumer needs  Offer personal service to customers  Staff knows each other  Average costs low due to diseconomies of scale and low overheads  Easy communication

Large organizations   Afford to employ specialist managers  Benefit from cost reductions linked to large-scale production  Able to set prices that other firms have to follow  Access to different sources of finance  Diversified in several markets and products – risks are spread  Can afford R&D

28

IB Business & Management HL Small organizations   Limited access to sources of finance  Owner has to carry large burden of responsibility if unable to afford employing specialists  Not diversified so greater risks of negative impact of external change  Unlikely to benefit from economies of scale

Large organizations   Difficult to manage  Potential cost increases associated with large-scale production  Suffer from slow decision-making and poor communication due to structure  Suffer from divorce between ownership and control, leading to conflicting objectives

Recommending an appropriate scale of operation Business owners must assess:  Owners’ objectives  Capital available  Size of the market the firm operates in  Number of competitors  Scope of scale economies Business growth Possible reasons:  Increased profits  Increased market share  Increased economies of scale  Increased power and status of the owners and directors  Reduced risk of being a takeover target Internal growth/Organic growth Expansion of a business by means of opening new branches, shops or factories External growth Business expansion achieved by means of merging or taking over another business, from either the same or a different industry  Horizontal integration Integration with firm in the same industry and at the same stage of production  Consumers have less choice  Workers may lose job security as result of rationalization  Eliminates one competitor  Possible economies of scale  Scope of rationalizing production (eg.: Focusing production on one plant not two)  Increased power over suppliers Rationalization may bring bad publicity  May lead to monopoly investigation if combined business exceeds size limits

29

IB Business & Management HL 





Forward vertical integration Integration with a business in the same industry but at a later stage of production  Workers have greater job security as business has secure outlets  More varied career opportunities  Consumers resent lack of competition in retail outlet due to withdrawal of competitor products.  Able to control promotion and pricing of own products  Secures an outlet for firm’s products  Consumers may suspect uncompetitive activity & react negatively  Lack of experience in this sector of retailing Backward vertical integration Integration with a business in the same industry but at an earlier stage of production  Greater career opportunities  Improved quality and more innovative products for consumers  Control over supplies to competitors may limit competition and choice for consumers  Control over quality, price and delivery times of supplies  Encourages joint R&D into improved quality of supplies of components  Control supplies of materials to competitors  Lack experience of managing a supplying company  Supplying business may become complacent having a guaranteed customer Conglomerate integration Merger with or takeover of a business in a different industry  Greater career opportunities  More job security as risks are spread across industries  Diversifies the business away from original industry/markets  Spreads risk and takes business into faster-growing market  Lack of management experience in acquired sector  Lack of clear focus and direction now that business is spread across more than one industry

Merger An agreement by shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business Takeover When a company buys over 50% of the shares of another company and becomes the controlling owner – often referred to as ‘acquisition’ Joint venture Two or more businesses agree to work closely together on a particular project and create a separate business division to do so  Costs and risks of new business venture are shared  Different companies have different strengths and experiences, thus fitting well  Having own major markets in different countries could help exploit these with the new product more effectively

30

IB Business & Management HL  Styles of management and culture might clash  Errors and mistakes might lead to arguments  Business failure of one of the partners puts the whole project at risk Strategic alliances Agreements between firms in which each agrees to commit resources to achieve an agreed set of objectives Can be set up with:  A university – finance provided by business allows new training courses to increase supply of suitable staff for company  A supplier – to design and produce components and materials used in a new range of products, helping to reduce total development time of getting the new products to market and gaining competitive advantage  A competitor – reduce risks of entering a market new to both firms. Care must be taken that actions aren’t seen as ‘anti-competitive’ and against the law in the specific country Franchise A business that uses the name, logo and trading systems of an existing successful business   Fewer chances of new businesses failing Share of profits or sales revenue is paid as it’s an already established brand to franchisor Advice and training offered by franchisor Initial franchise license fee can be high National advertising paid for by Local promotions still paid for by franchisor franchisee Supplies obtained from established and No choice of supplies or suppliers to be quality-checked suppliers used Franchisor agrees not to open another Strict rules over pricing and layout of the branch in local area outlet reduce owner’s control Ansoff’s matrix A model used to show the degree of risk associated with the four growth strategies of market penetration, market development, product development and diversification

31

IB Business & Management HL

Market penetration The objective of achieving higher market shares in existing markets with existing products Product development The development and sale of new products or new developments of existing products in existing markets Market development The strategy of selling existing products in new markets Diversification The process of selling different, unrelated goods or services in new markets Analysis of Ansoff’s matrix:  Allows managers to analyze the degree of risk associated with each strategy  However it only considers two main factors in the strategic analysis of a business’s options – it’s important to also consider SWOT and PEST  Further research into the selected strategy is vital Evaluation of growth strategies Internal growth  Avoids problems such as the need to finance expensive takeovers, offer new share issues or expensive additional loans  Management issues in bringing together different businesses with their own attitudes and cultures are avoided  It is very slow, with perhaps only a few branches opening each year External growth  Rapid expansion, which might be vital in a competitive and expanding market  Takeovers can be very expensive and may result in management problems  Conflicts between two teams of managers and conflicts of culture and business ethics

32

IB Business & Management HL Porter’s generic strategies

1. Cost leadership strategy  Being the lowest-cost producer allows company to make higher profits than competitors  Allows firm to lower prices below competitors to increase market share Stems from internal strengths:  High levels of investment in advanced production methods, requiring access to much capital  Efficient production methods  Efficient distribution channels 2. Differentiation strategy  Value added to product may allow premium pricing Stems from internal strengths:  Excellent R&D facilities and track record in developing unique goods  Corporate reputation for innovation and quality  Strong sales team able to promote perceived strengths of brand 3a&b. Focus strategy  High degree of customer loyalty within the market segment  Can lead to imitation by rivals, so continued success depends on continuing to tailor a broad range of products to a relatively narrow market segment that the business knows well

33

IB Business & Management HL Unit 1.8 – Change and the management of change Change management Planning, implementing, controlling and reviewing the movement of an organization from its current state to a new one Causes of change External causes: Incremental change – Occurs slowly over time. Such change can be either anticipated or unexpected. Dramatic change – Dramatic or revolutionary change. In some cases it might lead to a total rethink of the operation of an organization – business process re-engineering Business process re-engineering Fundamentally rethinking and redesigning the processes of a business to achieve a dramatic improvement in performance Nature of change Examples Strategies for management Globalization  New opportunities to sell  Use pan-global marketing products overseas or localization  Increased competition  Achieve and maintain a from products made competitive advantage cheaply overseas Technological advances  Products: iPods/iPhones,  Staff retraining hybrid-powered cars etc.  Purchase new equipment  Processes: robots in  Additions to product production etc. portfolio  Quicker product development needed Macro-economic changes  Change in consumers’  Flexible production disposable incomes and systems and staff demand patters flexibility  Boom/recession  Need for extra capacity or need to rationalize  Deal with stuff cutbacks in a way that encourages staff that remains Legal changes  Changes to what can be  Staff training on company sold policy  Changes to working hours  Flexible working hours and conditions and practices Competitors’ actions  New products  Encourage new ideas from staff  Lower prices – due to  Increase efficiency by staff higher competitiveness/ lower costs accepting changes  Higher promotional budget  Ensure resources available to meet change Environmental factors  Increasing ‘green  Social and environmental consumers’ audits supported by strategic changes  Growing concern about 34

IB Business & Management HL climate change and industry’s contribution Internal causes: Nature of change Organizational changes

Examples  Delayering  Hierarchical structure replaced by matrix structure

  

Relocation

 Moving operations to another region/country

 

Cost cutting to improve competitiveness

 Capital-intensive rather than labor-intensive methods  Rationalization of operations

  

Strategies for management Retraining of less senior staff to accept more responsibility Reassurances on job security Retraining of staff in teamwork and project management Redundancy schemes Relocation grants for those willing to move Retraining staff to operate advanced equipment Redundancy schemes Flexible employment contracts and working practices

Factors causing resistance to change: (Exam tip: think about leadership styles)  Fear of the unknown  Fear of failure  Losing something of value – workers could lose income etc.  False beliefs about the need for change  Lack of trust  Inertia – many people suffer from inertia or reluctance to change and try to maintain the status quo Strategies to reduce impact of, and resistance to, change: Change management Exam tip: Ask yourself the following  Is the change anticipated or unexpected?  Is the change likely to have a dramatic or less significant impact on the firm?  Have managers planned for change?  To what extent can management control the change process? Key stages in successful change management 1. Identify where the business is not and why it needs change 2. New visions and objectives needed 3. Ensure resources are in place to enable change to happen 4. Give maximum warning of change 5. Involve staff in the plan for change and its implementation 6. Communication!!! Exam tip: Link to Communication chapter (2-way) 7. Introduce initial changes that bring back quick results

35

IB Business & Management HL 8. Focus on training and retraining 9. Sell the benefits of change 10. Always remember the effects on individuals 11. Check on how individuals are coping and remember to support them Lewin’s Force-field analysis An analytical process used to map the opposing forces within an environment (such as a business) where change is taking place 1. Outline the proposal for change – insert in the middle of a force-field diagram 2. List forces for change in one column and forces against change in the other 3. Assign an estimated score for each force, with 1 = weak and 5 = strong

Using Lewin’s model:  Helps managers weigh up importance of two types of forces  Helps identity the people most likely affected by change  Encourages an examination of how to strengthen the driving forces and reducing the restraining forces  Use of a leadership style reducing opposition and resistance to change is more effective than forcing unpopular changes in a autocratic manner Project champions People assigned to support and drive a project forward. Their role is to explain the benefits of change and assist and support the team putting change into place Project groups Created by an organization to address a problem that requires input from different specialists

36

IB Business & Management HL

Promoting change: 1. Establish a sense of urgency 2. Create an effective project team to lead change 3. Develop a vision and a strategy for change 4. Communicate this changed vision 5. Empower people to take action 6. Generate short-term gains from change that benefit as many people as possible 7. Consolidate these gains and produce even more change 8. Build change into the culture of the organization so that it becomes natural Exam tip: When discussing effective management of change, focus on the positive benefits of change to the stakeholders most affected by it, it’s very easy to be too negative about change.

37

IB Business & Management HL Unit 1.9 – Globalization Globalization The growing trend towards worldwide markets in products, capital and labor, unrestricted by barriers Multinational companies Business organizations that have their headquarters in one country, but with operating branches, factories and assembly plants in other countries Free international trade International trade that is allowed to take place without restrictions such as ‘protectionist’ tariffs and quotas Tariff Tax imposed on an imported product Quota A physical limit place on the quantity of imports of a certain product Multinational companies: Why become a multination? 1. Closer to main markets  Lower transport costs for finished goods  Better market information regarding consumer tastes  Looked upon as local company and gain customer loyalty 2. Lower costs of production  Lower labor rates due to lower demand for local labor  Cheaper rent and site costs  Government grants and tax incentives designed to encourage industrialization 3. Avoid import restrictions 4. Access to local natural resources 5. Take advantage of expanding markets in other countries, which will lead to increased sale and profits Problems of multinationals  Poor communication links with headquarters  Language, legal and cultural differences  Co-ordination of plants in multinational group need to be carefully monitored to ensure products that might compete with each other on world markets aren’t produced and no conflicting policies are adopted  High costs of training local staff, which is likely to have low skill levels

38

IB Business & Management HL Benefits and drawback of multinationals to host countries   Investment brings foreign currency Exploitation of local workforce Employment and training opportunities Pollution from plants might be higher than allowed in countries Local firms benefiting from supplying Local competing firms squeezed out of services and components to company business Local firms forced to bring up quality and Large western-based businesses accused productivity of imposing western culture on other societies Tax revenues boosted Profits sent back home to country of origin Management expertise in community Extensive depletion of limited natural improve resources of some countries GDP will increase Globalization and the growth in international trade The world trade organizations (WTO)  China is major contributor to rapid growth of WTO Regional trade blocks 1. Free trade areas – NAFTA – exist where countries agree to trade with each other with no tariffs, quotas or other restriction. Each country is allowed to decide own level of import controls on goods coming from non-members 2. Customs unions – Mercosur – Free trade areas, but members agree t set same level of restrictions on imports from non-members. Aim to prevent individual free trade area member from gaining competitive advantage over other members 3. Common markets – EU – extended version of customs unions and aim to create trading conditions that would be presenting just one country. Allow free movement of capital and people between member states and imposing common product sale standards 4. Economic and monetary unions (EMU) – Euro-zone – Common currency, single interest rate and agreed limits on individual governments’ fiscal deficits Trade bloc Free trade area

  Access to larger markets  Increased economies of scale

Customs union



Common market

 

Economic and monetary union

  

  Increased competition from members  No protection of special cases like infant industries Compete on equal basis with business  No advantages gained from cheaper from other member state in terms of imports than other members import costs Common product/ health/ safety  Increased cost and bureaucracy regulations prevent unfair associated with standards and competition regulations Attract labor and capital from other  May lose quality labor and capital to members other members No exchange rate risks when trading  Conversion to common currency with members may’ve been at uncompetitively high exchange rate Greater exchange and interest rate  Common interest rate and fiscal rules stability assume same economic conditions of Able to compare costs and prices with all members

39

IB Business & Management HL other members

40

IB Business & Management HL Topic 2: Human resources Unit 2.1 – Human resource planning Human resource management (HRM) The strategic approach to the effective management of an organization’s workers so that they help the business gain a competitive advantage Human resource or workforce planning Analysing and forecasting the numbers of workers and the skills of those workers that will be required by the organization to achieve its objectives Demographic change: Demographic change   Natural population  Easier to recruit as working  Increase birth rates take long growth (or decline) population increases before they impact working population Net migration  Easier to recruit cheap staff  ‘Brain drain’ to other countries  Highly qualified staff can be  Immigrants need more recruited from overseas training Ageing population  Older staff more loyal and  Older staff less flexible and reliable than younger staff adaptable Labor mobility: Occupational mobility of labor Extent to which workers are willing and able to move to different jobs requiring different skills Geographical mobility of labor Extent to which workers are willing and able to move geographical region to take up new jobs Workforce planning Workforce audit A check on the skills and qualifications of all existing employees Workforce plan Thinking ahead and establishing the number and skills of the workforce required by the business to meet its objectives Two methods: 1. Forecasting the number of staff required  Forecasting demand for the firm’s product  Productivity levels of staff  Objectives of the business  Changes in law regarding workers’ rights  Labor turnover and absenteeism rate 2. Forecasting the skills required  Pace of technological change in the industry 41

IB Business & Management HL  Need for flexible or multi-skilled staff Recruitment The process of identifying the need for a new employee, defining the job to be filled and the type of person needed to fill it, attracting suitable candidates for the job and selecting the best one Steps in recruitment: 1. Establish exact nature of the job vacancy and draw up a job description  A detailed list of the key points about the job to be filled, stating all the key tasks and responsibilities of it 2. Draw up a person specification  A detailed list of the qualities, skills and qualifications that a successful applicant will need to have 3. Prepare a job advertisement reflecting the requirements of the job and the personal qualities looked for 4. Draw up a short list of applicants 5. Conduct interviews Benefits of internal and external recruitment Exam tip: The benefits of internal recruitment are the drawbacks of external recruitment and vice versa Internal recruitment External recruitment Applicants are well known to selection External applicant brings new ideas and team practices Applicant knows organization and Wider choice of applicants methods, thus no need for induction training Culture of organization is well Avoids resentment felt by existing staff if understood by applicant one former colleague is promoted Quicker than external recruitment Standard of applicants is higher Cheaper Gives internal staff career structure and chance for progress Staff won’t have to get used to new management approach is post is a senior post Training Work-related education to increase workforce skills and efficiency  Expensive  Staff might seek better-paid jobs once they’ve learned additional skills – poaching  Not training is worse, as untrained staff is less productive, thus less flexible and give less satisfactory customer service  Provides a sense of achievement  motivation according to Maslow and Herzberg  Accidents can be avoided

42

IB Business & Management HL

On-the-job training Instruction at the place of work on how a job should be carried out Advantages:  It provides new recruits an opportunity to learnt whilst doing  It is less time consuming and costly, since new recruits are not sent externally to be trained  It is in a convenient location, on the site its self. Disadvantages:  The trainers may not be experts and may pass down inaccurate information to workers,  There is disruption of operations since workers have to be pulled out of work to help train new recruits. Off-the-job training All training undertaken away from the business, eg.: work-related college courses Advantages:  It makes staff indispensible because they acquire a technical skill and knowledge by experts that other do not possess.  It motivates them to work efficiently since they are pushed to acquire new skills and qualities.  There is also networking, employees get to meet other people who form the basis on their contacts. Disadvantages:  Cost and Time: A lot of cost is required to train workers externally. Competition: Workers may use acquired skill, and leave the business. This is called “poaching”. Induction training Introductory training programme to familiarize new recruits with the systems used in the business and the layout of the business site It is too time-consuming  There may be information overload (counter productive since workers may not absorb all information)  Key personnel may not be free on all occasions.

43

IB Business & Management HL Staff appraisal The process of assessing the effectiveness of an employee judged against pre-set objectives Advantages:  Sets targets: provides a clear sense of direction to guide an employee towards efficiency, as well as motivates them from working productively.  Praises: Helps to praise employees for commendable strengths and contributions; this helps to motivate them to work efficiently.  Constructive criticism: Constructive criticism aims to improve employees, so that staff can focus on areas of weaknesses.  Feedback: Collects honest feedback from peers. Disadvantages: Time consuming and costly A lot of time, and cost is required especially considering the procedures and administration cost such as paper cost. There is also confidential meetings; this leads to follow up meetings and therefore a lot of time is spent.  Difficult to regularly monitor progress or performance of staff since appraisal is only annually; the overall progress reflected may therefore be inaccurate.  May be a daunting experience staff may get offended/de-motivated by negative comments this affects motivation, and hence productivity in the future.  Appraiser may lack experience/be biased The appraiser may lack experience, and therefore, the credibility of his results is diminished. This process is also subjective, and thus, may not reflect the actual performance of the staff member.  Linked to pay This causes unnecessary stress and anxiety in staff members. Furthermore, if their performance is not up to mark, they do not receive bonuses and this may demotivate them in future tasks. Dismissal Being removed or ‘sacked’ from a job due to incompetence or breach of disciple Contract of employment A legal document that sets out the terms and conditions governing a worker’s job Unfair dismissal Ending a worker’s employment contract for a reason that the law regards as being unfair Redundancy When a job is no longer required so the employee doing this job becomes redundant through no fault of his or her own  Announcements of redundancies can cause a loss of job security for employees who remain  If a company seems to be acting uncaringly or unethical, external stakeholders might react negatively to the firm

44

IB Business & Management HL

Changing employment patterns and practices:  Part-time and temporary employment contracts  Teleworking from home  Flexible hours contracts  Portfolio working Reasons for change:  Focus on competitiveness, driven by pressures from globalization, by cutting overhead labor costs  Need for greater labor flexibility with the rapid pace of technological change  Greater opportunities for outsourcing, especially in low-wage economies  Changing social and demographic patters (eg.: more single parents/mothers at work that don’t want a full-time job) Temporary employment contract Employment contract that lasts for a fixed time period Part-time employment contract Employment contract that is for less than the normal full working week Flexi-time contract Employment contract that allows staff to be called in at times most convenient to employers and employees Outsourcing Not employing staff directly, but using an outside agency or organization to carry out some business functions Teleworking Staff working from home but keeping contact with the office by means of modern IT communications Portfolio working The working patter of following several simultaneous employments at any one time Consequences of changing work patterns and practices:  For the firm  For the employees  Staff can be asked to work during busy  Ideal for certain types of workers such as periods of the day but not during slack students, single parents, elderly etc. times – saves costs and gives  May be able to combine jobs with competitive advantage as firm can offer different firms, giving greater variety good service during busy times without  Teleworking allows workers to organize extra costs their own working day at home, whilst  More staff available to call on in case of meeting pre-set objectives and absenteeism/sickness deadlines  Efficiency of staff can be measured

45

IB Business & Management HL



  



before offering a full-time contract Further savings in overhead costs can be made through teleworking from home by buying smaller office buildings  For the firm More staff to manage if they’re all  fulltime  Effective communication much more  difficult because not all staff will be at the place of work at all times Motivation may be affected as some part-  time staff is involved less than fulltime workers and things like team work are hard to establish Some managers fear teleworking will decrease productivity because workers can’t be monitored

 For the employees Earning less than full-time workers Paid a lower rate than full-time workers Security of employment and other working conditions might be inferior to full-time workers Teleworking and temporary/flexi-time contracts can lead to less social contact with other workers – social interaction is an important human need

Handy’s Shamrock organization 1. Core managerial and technical staff – fulltime employment contracts with competitive salaries and benefits. They’re central to the survival and growth of the organization. In return to high rewards etc. they’re expected to be loyal and work for long hours. As they’re expensive, they’re reduced in many businesses 2. Outsourced functions – ‘contractual fringe’ – they offer specific services that don’t have to be kept within the core including payroll services, transport, catering and IT 3. Flexible workers on part-time contracts, who are called on when needed – Organization demonstrates little concern or loyalty towards them and vice versa. They’re most likely to lose their job in a time of economic downturn.

46

IB Business & Management HL Unit 2.2 – Organizational structure Organizational structure The internal, formal framework of a business that shows the way in which management is organized and linked together and how authority is passed through the organization Hierarchical or bureaucratic structure  Different layers of organization with fewer and fewer people on each higher level  Decision-making power starts at the top but may be passed down  Role of each individual will be clear and well defined  Clearly identifiable chain of command  Suggests one-way (top downards) communication, which isn’t always efficient  Managers accused of tunnel vision as they only look at the problems of their department and not at the organization as a whole  Inflexible and leads to change resistance as managers like to defend own position and level of their department in the hierarchy Level of hierarchy A stage of the organizational structure at which the personnel on it have equal status and authority Disadvantages of a tall organizational structure (many levels of hierarchy):  Communication difficulty and failure  Narrow spans of control  Greater sense of remoteness from the decision-making power for workers at the lower levels of hierarchy Chain of command This is the route through which authority is passed down an organization – from the chief executive and the board of directors Span of control The number of subordinates reporting directly to a manager (wide = many subordinates; narrow = few subordinates) Advantages of a wide span of control and short chain of command  Fewer layers of hierarchy; this would mean low costs since less managerial positions.  Short structure will mean communication is more efficient because it passes less levels.  Motivation: There is a smaller psychological distance between top and the bottom, and hence, and workers are less intimidated, alienated and feel more relevant to the organization. This boosts motivation and hence efficiency. A short structure means delegation is more important there are more opportunities for delegation and if tasks are SMARTER, efficiency is boosted since workers are also motivated.

47

IB Business & Management HL Advantages of a narrow span of control and long chain of command  Aids management and control because less people to manage. There is also less time, effort and cost spent on monitoring the team.  Quicker and efficient communication within a small team; aids workers to work better in the team, and effective feedback is achieved, so as to enhance efficiency  A narrow span of control will achieve specialization economies of scale/division of labor.  There is a high probability of promotion, and keeps workers motivated. Factors influencing organizational structure  Size of business  Style of leadership and culture of management (autocratic – narrow span of control in a hierarchical structure. Democratic – few levels of hierarchy and much delegation)  Retrenchment caused by economic recession/competition might lead to delayering to reduce overhead costs  Corporate objectives  New technologies Delegation Passing authority down the organizational hierarchy  Gives senior managers time to focus on more important, strategic roles Shows trust in subordinates, thus motivating them Develops and trains staff for senior positions Helps staff achieve fulfillment (selfactualization) Encourages staff to be accountable for work-based activities

 If task is not well defined or there’s a lack of training, delegation won’t be successful Managers only delegate boring jobs that they don’t want to do – de-motivating Delegation is unsuccessful if insufficient authority is given to subordinate doing job

Accountability The obligation of an individual to account for his or her activities and to disclose results in a transparent way

48

IB Business & Management HL Delayering Removal of one or more of the levels of hierarchy from an organizational structure  Reduces business cost – less managers needed Shortens chain of command, thus improving communication Increases spans of control and opportunity for delegation Increase workforce motivation due to less remoteness from top management and greater chances of more responsible work

 Could merely be one-off costs of making managers redundant Increased workloads for managers who remain – overload and stress Fear that redundancies are used to cut costs reduce sense of job security – one of Maslow’s needs

Bureaucracy An organizational system with standardized procedures and rules  Used in government organizations  Main attributes: rationality and efficiency  Discourages initiative and enterprise – decisions taken centrally  Impersonality and ineffectiveness when a decision needs to be adapted to suit an individual case Centralization Keeping all of the important decision-making powers within head office or the centre of the organization Decentralization Decision-making powers are passed down the organization to empower subordinates and regional/product managers     

 of centralization Fixed set of rules and procedures everywhere should lead to quick decision making Consistent policies throughout, preventing conflicts Senior managers take decisions in interest of whole business Central buying allows greater economies of scale Senior managers are experiences decision-makers

   

 of decentralization Moral local decisions made with reflect to local conditions Junior managers develop skills preparing them for serious situations Delegation and empowerment made easier – good motivation Decision-making in responses to local changes – more flexible

49

IB Business & Management HL Matrix structure An organizational structure that creates project teams that cut across traditional functional departments  Project teams made up of people from all departments and divisions  Task- or project-focused  Flexible sturucture that removes as much bureaucracy as possibly by getting rid of many rigid rules and regulations  Project teams are more innovative and create and staff will be motivated  Total communication enhanced  Less chance of people focusing on just what’s good for their department, but focusing on what’s good for the project and entire business  Cross-over of ideas from different areas creates more successful solutions  Project teams created quickly, hence good for response to changing markets or technological conditions  Less direct control  Some resistance to change by managers who don’t want to give up authority  Workers have two leaders  possible conflict The flexible future Henry Mintzberg  An organization’s structure emerges from the interplay of the organization’s strategy and the environmental forces it experience (have to fit well!) Types of organizations 1. Entrepreneurial organization – flat structure, informal, lack of standardized procedures, flexible 2. Bureaucracy/Machine organization – standardization and formalized work, tight, inflexible, vertical structure 3. Professional organization – high degree of specialization, experts demanding control, decentrialized decision-making, high proportion of knowledge workers 4. Divisional organizations – many different product lines and business units, central-head quarters, autonomous divisions 5. Innovative organizations – project-based industries, team of experts from variety of areas to form creative, flexible, fast moving, functional teams Tom Peters  Seven-S model o Hard S’s = Structure, Strategy, Systems o Soft S’s = Skills, staff, style, shared value  Helps to increase managers’ awareness of the less tangible but critically important factors required for an organization’s success

50

IB Business & Management HL Informal organizations The network of personal and social relations that develop between people within an organization  Main focus is the employee as an individual  Conduct of individuals in these groups monitored by norms/standards  Effectiveness at work can be affected by workers around  Managers might use informal groups when making teams – avoiding personality clashes etc.  However, informal group leader may have more power and influence over team than formal leader Outsourcing HR Functions  Reduces costs  Increases efficiency by using specialist HR companies Provides greater expertise  Aids corporate growth by removing HR resources as constraint factor  Remaining internal HR staff can focus on strategic policy and decisions  In small businesses, allows owner(s) to focus on gaining new markets and increasing profits  Local knowledge of labor market/HR processes etc. may be lost  Costs savings may not be as significant  Process of outsourcing may give employees a sense of being controlled, recruited and paid by outside agencies  Even outsourcing HR functions doesn’t remove the managements responsibility of forming good working relationships with employees

51

IB Business & Management HL Unit 2.3 – Communication Effective communication The exchange of information between people or groups, with feedback Importance of effective communication  Staff motivation and labor productivity  Number and quality of ideas generated by staff – help in problem solving  Speed of decision-making  Speed of response to market changes  Reduced risk of error  Effective co-ordination between departments Communication media The methods used to communicate a message Oral

    

     Visual     Electronic      Written

Direct Can be varied to suit receiver Easy to understand Can be questioned quickly

    

Recorded More structured Easy to distribute Cannot be varied Can be referred to again Interactive Demands attention Easier to remember Greater interest High speed Interactive / creates interest Encourages response Ignores boundaries Good image for external com.

             

Need to listen carefully Affected by noise No permanent record Can be quickly forgotten / passive Difficult to read/Misinterpreted Message identical to all receivers No body language No immediate response Costly & time consuming Needs close attention Sometimes too fast Not always clear Interpretations can vary Cannot always be received Relies on receiver Hardware is expensive Information overload Can be intercepted/Diminishes personal contact

Information overload So much information and so many messages are received that the most important ones cannot be easily identified and quickly acted on Non-verbal communication Messages sent and received without verbal information such as facial expressions, eye contact, tone of voice, body posture and gestures and position within a group

52

IB Business & Management HL

Factors influencing choice of media  Importance of a written record that the message has been sent and received  Advantages gained from staff input/two-way communication  Cost & Speed  Quantity of data  Size and geographical spread of business Informal communication Unofficial channels of communication that exist between informal groups within an organization   

Damaging  Wastes valuable working time  Spreads gossip  unsettling  May result in informal groups banding  together to resist management decisions

Useful  Create feelings of belonging Management can use grapevine to ‘test out’ new ideas Can help clarify official messages

Communication barriers Reasons why communication fails Reason and Solution Failure in stages of communication  Medium is inappropriate o Choose correct medium  Receiver forgot part of message given orally o Use written medium when message is long and complex  Misleading/incomplete message o Consider clarity of message  Excessive use of technological jargon o Avoid using it  Too much information o High light important points  Channel of communication too long o Shorter chains of command reduce risk of distortion Poor attitude of sender/receiver  Sender not trusted o Establish trust  Intermediaries may not pass on message o Keep communication channel short  Sender has poor opinion of receiver o Train and motivate staff to take active part in communication Physical reasons

53

IB Business & Management HL  

Noisy factories o Physical conditions appropriate for messages to be heard and received Geographical distance o Modern technology overcome this barrier

Formal communication networks The Chain Network For hierarchical structures and authoritarian leaders  Gives leader control and overview  Doesn’t encourage two-way communication  Individuals at end can feel isolated and demotivated The vertical network  Leader with subordinates  Used in small department with narrow span of control  One-way communication & little communication between subordinates The wheel network  Leader is the centre  Regional manager communicating to branch/site managers  Two-way communication  Leader is in control and can limit formal contact between others  Horizontal communication is poor The circle  Each person can only communicate with two others  Decentralized with no obvious leader – difficult to agree; slow  Receiver can’t question message  No assurance for sender that message was understood The integrated or connected network  Typical for team-work  Full two-way communication  Participative style of decision-making  Assist in solving complex problems

Speed of learning new procedure Speed of solution with simple problems Speed of solution with complex problems Originality of ideas Number of messages sent Satisfaction/morale

Centralized (Chain, wheel, vertical)

Decentralized (Circle, Integrated)

Fast

Slow

Fast

Slow

Slow

Fast

Low Few Low

High Many High

54

IB Business & Management HL Unit 2.4 – Leadership and management Leadership The art of motivating a group of people towards achieving a common objective Autocratic leadership A style of leadership that keeps all decision-making at the centre of the organization  Tells you what you have to do and makes sure you do it o Thinks employs should work to the fact of your job o Says exactly what one wants o Very formal approach to work (not their friend)  Good when rapid decisions needed  Good if all in organization need to give same message – crisis management  When managers oversee large numbers of unskilled workers  Lower management avoid decision making in fear of disciplinary action if wrong  Senior management overworked, staff turnover high Democratic leadership (Paternalistic or democratic) A leadership style that promotes the active participation of workers in taking decisions  Paternalistic o Still autocratic but decisions take into account workforce interests o Limited delegation and little empowerment o Treats workers like family – emphasis on meeting social needs `  Staff offer constructive ideas  Low labor turnover  Still no encouragement of employee creativity or initiative  Low labor turnover means no injection of new ideas or ways of thinking 

Democratic o Decisions based on majority view o Leader delegates, encourages development of subordinates skills o Employee participation encouraged o Leader acts on advice, explains reasons for decisions  Staff offers constructive ideas  Staff highly motivated requires little supervision  Requires a lot of communication skill  Quick decisions cannot always be made

Laissez-faire leadership A leadership style that leaves much of the business decision-making to the workforce – a ‘hands-off’ approach and the reverse of the autocratic style  Sets peoples goals and targets but interferes in as little work as possible o Wants to make the employees feel as though they’re the “masters of their own destiny” o Doesn’t really get involved in the employees job o Very interested/caring/sensitive/intuitive but lazy o Reputation for avoiding tricky decisions  Good when working with skilled workers (confidence and motivation)

55

IB Business & Management HL  Doesn’t work well with unskilled workers Situational leadership Effective leadership varies with the task in hand and situation leaders adapt their leadership style to each situation Effectiveness of leadership styles Choice of leadership style depends on following:  Training and experience of workforce  Amount of time available for consultation  Management culture and business background of managers  Personality of managers  Importance of the issue What makes a good leader  Desire to succeed and natural self-confidence that they’ll succeed  Ability to think beyond the obvious and encourage others to do the same  Multi-talented enabling to understand discussions about variety of issues  Incisive mind enabling heart of an issue to be indentified Leadership Theories Trait theories and situational theory Leadership styles depends on the personal characteristics (traits) of individual leaders and managers Contingency theories The style of leadership depends on the situation Likert: Four styles of management and leadership: 1. Exploitative autocratic  Leader doesn’t have trust & confidence in the workers and uses threat & punishment to get the work done 2. Benevolent autocratic (paternalistic)  Leader has got some compassion & trust in the worker and they offer some kind of reward to employee – like a parent – considers the needs of the workers 3. Participative  Workers participate in decision-making and there’s a great deal of trust & confidence in the workers, but decision-making still lies in the hands of the leader 4. Democratic  Absolute confidence & trust in the workers and leader leaves the decisionmaking in the employees’ hands – like brainstorming  The bottom two styles of management can be applied to any situation

56

IB Business & Management HL  Likert failed to realize, that exploitative autocratic leadership can also be applied in some situations Fiedler  There’s no best way of leading  Effectiveness of leaders depends on their personality and the situation under consideration  3 principles that will determine the most effective leadership style: 1. Relationships 2. Situation 3. Authority Blake Mouton 1. Country Club Management a. Thoughtful attention to the needs of people for satisfying relationships leads to a comfortable, friendly organization atmosphere and work tempo 2. Impoverished Management a. Exertion of minimum effort to get required work done is appropriate to maintain organization membership – has no system of getting work done nor is the work environment satisfying or motivating for employees 3. Middle-of-the-Road Management a. Adequate organization performance is possible through balancing the necessity to get the work done with maintaining morale of people at a satisfactory level – settles for average performance from employees 4. Team Management a. Work accomplishment is from committed people, interdependence through a ‘common stake’ in organization purpose leads relationships of trust and respect – stresses high production by employees and believes employees who are highly satisfied leads to high productivity 5. Produce or Perish Management a. Efficiency in operations results from encouraging conditions of work in such a way that human elements interfere to a minimum degree – stresses production with little concern for people

57

IB Business & Management HL

58

IB Business & Management HL Key Functions of Management: Manager Responsible for setting objectives, organizing resources and motivating staff so that the organization’s aims are met Henri Fayol  Planning  Organizing  Commanding  Coordinating  Controlling Charles Handy  Managers have: Intelligence, initiative and self-assurance  3 key roles of management: - Managers are general practitioners – not specialists - Managers are confronters of dilemmas - Managers are balancers of cultural mixes  Micro-managing (looking it everything) is mismanagement  Managers need to delegate and be generalists rather than specialists Peter Drucker  Decentralization is encouraged in the workplace  5 basic functions of a manager: - Setting organizational objectives - Organizing tasks and people - Communicating with and motivating employees - Measuring performance - Developing people

59

IB Business & Management HL Unit 2.5 – Motivation Motivation The intrinsic and extrinsic factors that stimulate people to take actions that lead to achieving a goal Intrinsic motivation Comes from the satisfaction derived form working on and completing a task Extrinsic motivation Comes from external rewards associated with working on a task (e.g.: Pay etc.) Indicators of poor staff motivation  Absenteeism o Deliberate absence for which there’s no satisfactory explanation  Lateness o Becomes habitual  Poor performance o Poor-quality work; low levels of work / wastage of material  Accidents o Poorly motivated staff is more careless, concentrate less and distract others, increasing the likelihood of accidents  Labor turnover o People leave for negative reasons; even if they don’t get other jobs  Grievances o More within the workforce and hence more union disputes  Poor response rate o Workers don’t respond well/slow Motivational Theories Content theories F.W. Taylor – Scientific management Improving worker productivity 1. Select worker to perform task 2. Observe worker 3. Record time taken to perform task 4. Identify quickest method recorded 5. Train all staff in this method 6. Supervise workers to ensure they’re adopting right procedure 7. Pay workers on basis of results – ‘Economic man’ 

Man was motivated by money alone and the only factor that could stimulate further effort was the chance of earning extra money  ‘Piece rate’ – wage levels based on output  Promoted the use of specialization and division of labor  Neglects needs other than extrinsic needs – money isn’t the only motivator  Involves giving instructions to workers without discussion – worker participation not encouraged  Difficult to measure output of specialists (only factory workers)

60

IB Business & Management HL  Scientific management can lead to boring monotonous task

61

IB Business & Management HL Maslow’s hierarchy of human needs 1. Physical needs – food, shelter, water, rest a. Income from employment high enough to meet essential needs 2. Safety needs – protection from threats, job security, health & safety at work a. Contract of employment with some job security – structured organization that gives clear lines of authority to reduce uncertainty. Ensuring health and safety conditions are met 3. Social needs – trust, acceptance, friendship, belonging, social facilities a. Working in teams and ensuring good communication to make workers feel involved 4. Esteem needs – respect, status, recognition a. Recognition for work done well – status, advancement and responsibility will gain respect of others 5. Self-actualization – reaching one’s full potential a. Challenging work that stretches the individual – gives sense of achievement. Opportunities to develop and applying new skills will increase potential  Not everyone has the same needs  Can be difficult to identify to what degree a need has been met  Money is necessary to satisfy physical needs but might also be needed for other needs  Self-actualization is never permanently achieved McGregor’s Theory X and Theory Y  Workers will behave in such a way as a result of the attitudes management have of them Theory X managers believe that workers:  Dislike work  Will avoid responsibility  Are not creative  Managers will adopt an autocratic style – close supervision, tight control, no delegation Theory Y managers believe that workers:  Can derive as much enjoyment from work as from rest and play  Will accept responsibility  Are creative  Managers will adopt a democratic style

62

IB Business & Management HL Herzberg and the ‘two-factor theory’ Hygiene factors Aspects of a worker’s job that have the potential to cause dissatisfaction such as pay, working conditions, status and over-supervision by managers 1. Company policy and administration 2. Wages, salaries and other financial remuneration 3. Quality of supervision 4. Quality of inter-personal relations 5. Working conditions 6. Feelings of job security Motivator Factors Aspects of a worker’s job that can lead to positive job satisfaction such as achievement, recognition, meaningful and interesting work and advancement at work 1. Status 2. Opportunity for advancement 3. Gaining recognition 4. Responsibility 5. Challenging / stimulating work 6. Sense of personal achievement & personal growth in a job  Pay and working conditions can be improved, but they don’t provide motivation to enjoy doing the job  Motivators needs to be in place for people to willingly do the job  Job enrichment Aims to use the full capabilities of workers by giving them the opportunity to do more challenging and fulfilling work  Assign workers complete units of work  Provide feedback on performance  Give workers a range of tasks  Business could offer higher pay, improved working conditions and less heavyhanded supervision, however this would quickly be taken for granted Evaluation  Team work is now more widespread due to his findings, with whole units of work being delegated to these teams  Workers tend to be made more responsible for quality of work rather than being closely supervised  Firms continually look for ways to improve effective communication Mayo and the human relations theories – Hawthorne effect  Changes in working conditions and financial rewards have little effects on productivity  Motivation is improved when management takes an interest in workers  Working in teams with team spirit increases productivity  Some control over working lives given to workers (e.g.: deciding when to take breaks) create a positive motivational effect

63

IB Business & Management HL 

Groups can establish own targets and norms and they’re greatly influenced by informal group leader Evaluation for today  Giving workers more of a role in business decisions  Personnel departments to encourage Hawthorne effect  Team working and group working encouraged  Idea of involving workers, taking an interest in their welfare and finding out individual goals opened new research fields  Development of ‘people’ side of business takes industry away from engineerfocused and money-motivated views of Taylor McClelland and motivational needs theory Need for achievement  Seek to reach realistic and challenging goals – not willing to take high risks  Need constant feedback  Need for a sense of accomplishment Need for power/authority  Desire to control others  Need to be influential, effective and to make an impact  Strong leadership instinct bringing personal status and prestige Need for affiliation  Need for friendly relationships  Motivated by interaction with other people  Good team members – need to be liked, popular and held in high regard  Only takes intrinsic factors into account  Need to satisfy needs may not be entirely accurate Process theories Vroom and expectancy theory  Positive link between effort and performance  Favorable performance leads to desirable reward  Reward satisfies important need  Desire to satisfy need is strong enough to make work effort worthwhile  If one belief is missing, workers won’t be motivated to do job well  Managers have to ensure that employees believe increased work effort will improve performance and lead to valued rewards Based on three beliefs 1. Valence – depth of want for an extrinsic reward 2. Expectancy – degree to which people believe putting effort into work will lead to a given level of performance 3. Instrumentality – confidence of employees to get what they desire despite what has been promised by manager

64

IB Business & Management HL Adams and equity theory  Employees are not motivated if they feel inputs outweigh outputs o Inputs: effort, loyalty, commitment, skill o Outputs: financial rewards, recognition, security, sense of achievement  Negative inequity occurs when input outweighs output (Work > Pay)  Positive inequity occurs when output outweighs input (Work < Pay)  Managers must achieve a fair balance  Once employees feel the balance is fair, they will have positive attitudes and high levels of motivation Payment or financial reward systems Hourly wage rate  Payment to a worker made for each hour worked and usually paid weekly  More income security  Speed of work isn’t rewarded – chance of earning overtime might make workers extent work unproductively Piece rate  Payment to worker for each unit produced – increases with output  Encourages greater effort and faster working  Labor costs for each unit determined in advance, helping set price of product  Requires output to be measureable and standardized  May lead to falling quality/safety as workers rush to complete units  Workers may settle for certain pay level and aren’t motivated to work for more  Provides little security over pay level Salary  Annual income that’s usually paid on a monthly basis  Security of income  Gives status compared with piece and time rate  Aids in costing – won’t vary for one year  Suitable for jobs where output isn’t measurable  Suitable for management positions, where extra effort is expected  Income isn’t related to effort/productivity  May lead to complacency  Regular appraisal may be needed to assess if individual should get higher or lower salary – could be an advantage if appraisal is positive Commission  A payment to a sales person for each sale made  Encourages greater effort and faster working  Risk of high-pressure selling, which could create bad impression  Doesn’t encourage team work  Reduces security as no flat-rate payment is existent

65

IB Business & Management HL

Performance-related pay (PRP)  A bonus scheme to reward staff for above-average work performance  Motivates staff to improve performance  Gives purpose and direction  Annual appraisal offers opportunity for feedback  Doesn’t motivate those not driven by extrinsic needs  Team spirit damaged and rivalry generated  Claims of manager favoritism can harm relationships  Increased control over staff by manager due to danger that bonus won’t be awarded if they don’t conform Profit-related pay A bonus for staff based on the profits of the business – usually paid as proportion of basic salary Employee share-ownership schemes Workers get to own part of company shares  Potential conflict reduced as everyone wants higher profits  Designed to lead to higher worker efforts and greater cost reduction to increase profits  Business likely to attract better recruits drawn by chance to share profits/own shares  Doesn’t add business cost as bonuses are paid out of profits  If successful in motivation schemes lead to overall profitability  Reward offered is not related to individual effort  Schemes can be costly to set up and operate (esp. for large firms)  Small profit shares paid are unlikely to motivate workers  Profit-sharing schemes will reduce dividend to owners and retained profits  Worker share-ownership schemes can increase number of shares issued, thus diluting value of existing shares Fringe benefits Non-cash forms of reward such as free insurance, health insurance, discounts on company products etc. Non-financial methods of motivation Job enlargement Attempting to increase the scope of a job by broadening pr deepening the tasks undertaken Job enrichment Aims to use the full capabilities of workers by giving them the opportunity to do more challenging and fulfilling work (see Herzberg’s theory) Often involves: Job re-design Involved the restructuring of a job – usually with employees’ involvement and agreement – to make work more interesting, satisfying and challenging 66

IB Business & Management HL

Team working Production is organized so that groups of workers undertake complete units of work  Lower labor turnover  More and better ideas from workers on improving product and production  Consistently higher quality, esp. if TQM is incorporated  More motivated as social and esteem needs (Maslow) are met and job enrichment can be achieved (Herzberg)  Better-motivated staff increases productivity and reduce labor turnover – reducing business costs  Makes full use of workers’ talents  Reduce management costs, as it’s associated with delayering  Complete units of work can be given to teams – job enrichment  Not everyone is a team player  Teams can develop set of values/attitudes that may contrast/conflict with the organizations  Introduction of team working requires training costs and disruption in production as teams establish themselves Exam tip: You should be able not just to describe and explain different methods of financial and non-financial motivation, but to suggest which ones might be most suitable in different business situations – and why

67

IB Business & Management HL Unit 2.6 – Organizational and corporate cultures Organizational culture The values, attitudes and beliefs of a the people working in an organizations that control the way they interact with each other and with external stakeholder groups Exam tip: It’s a powerful force in any organization so take time to relate it in your answer to for example managers’ decisions and behavior Influences on organizational culture  Mission and vision statements  The appointment of senior staff  Organization’s ethical code of conduct  Strategies on social and environmental issues  Example senior management sets Types of organizational culture according to Hardy Power culture Concentrating power among a few people in the centre of the organization Role culture Each member of staff has a clearly defined job title and role Task culture Based on co-operation and team work Person/People culture When individuals are given the freedom to express themselves and make decisions Zeus Power - Paternalistic - Hierarchical structure - Optimistic - Hardworking - Charismatic - Impulsive

Apollo Role - Autocratic - Bureaucratic

Athenian Task - Laissez-faire - Flexible

- Reliable - Rational - Little creativity

Ways to motivated

- Power - Money

- Promotions - Recognition - Clear career path

- Sociable - Anxious to solve problems - Extrovert - Creative - Dynamic problem solving - Team working

Issues/ Problems

- Hates to be constrained by rules and regulations

- Inflexible - Hates change - Can be excellent at crisis – stable - Slow decision making - Little risk taking

Culture Leadership style Characteristics of individuals

- Can be indecisive during crisis

Dionysus Person/People - Anti-management - They operate alone - Rigid but loyal - Most creative - Work alone - No emphasis on team work - Minimum interference - Professional respect - Selfish - Organization should help them and not the other way around - conflict between individual goals

68

IB Business & Management HL and organization’s Entrepreneurial culture Encourages management and workers to take risks, to come up with new ideas and test out new business ventures  Success is rewarded  Failure is not criticized as it’s a consequence of enterprise and risk taking  Found in flexible organizational structures  Motivation levels are high amongst people who enjoy challenge of innovative risk taking Exam tip: Not all departments have the same culture! Consequences of culture clashes Businesses need to make changes to culture if their business environment changes  Power cultures become irritated with role culture’s rational thinking and insistence to sticking to rule  Task cultures need to be challenged or they become bored  People cultures are very hard/impossible to manage  Role culture seems to be dull and inflexible  If a family business changes to a public limited company and new investors demand more transparency, it might lead to conflict – hence business culture needs to be altered Changing organizational culture  Concentrate on the positive aspects of the business – people will be more open to change  Obtain full commitment of people at top of the business and key personnel – they need to agree or else they can’t influence others to adopt to change  Establish new objectives and a mission statement that reflect the new values  COMMUNICATE IT WELL  Train staff in new procedures etc. so that they’re more confident with change  Change the staff reward system to suit the new system – workers need to be reassured that adjusting to the new system brings them rewards Evaluating organizational culture  The values of a business establish the norms of behavior of staff  Culture determines the way in which company managers and workers treat each other  A distinctive organization culture can support a business’s brand image and relationships with customers  Culture determines not just how decisions are made (with participation of staff or just top managers) but also type of strategic decisions taken  Organizational culture has been linked to economic performance and longterm success of businesses – businesses dedicated to continuous improvement have shown to be more profitable in the long-run

69

IB Business & Management HL Unit 2.7 – Employer and employee relations Collective bargaining The negotiations between employees’ representatives (trade unions) and employers and their representatives on issues of common interest such as pay and conditions of work  Growing power of trade unions lead to national collective bargaining, where all workers in a region followed industrial actions – very powerful Trade union An organization of working people with the objective of improving the pay and working conditions of its members and providing them with support and legal services Why workers join trade unions:  ‘Power through solidarity’ basis of union influence – ability to engage in collective bargaining. Puts workers in stronger position  Individual industrial action – one worker won’t have much effect, hence collective industrial action is more powerful  Unions provide legal support  Unions pressurize employers to ensure all legal requirements are met Industrial action Measures taken by the workforce or trade union to put pressure on management to settle and industrial dispute in favor of employees Trade union recognition When an employer formally agrees to conduct negotiations on pay and working conditions with a trade union rather than bargaining individually with each worker  For employers:  Ability to negotiation with one union officer rather than each individual worker  Useful channel of communication with workers  Unions can impose discipline on members planning to take hasty industrial action  Provides an invaluable forum for discussing issues of common interest and making new workplace agreements  often leads to increased productivity, helping to secure jobs and raise profits Action taken by employees  Negotiations – see arbitration  Go slow – workers keep working but at minimum pace. Bonuses might be lost, but it can be very disruptive and costly for employers  Work to rule – workers refuse to do any work outside the precise terms of employement – over time won’t be worked and non-contractual co-operation withdrawn  Overtime bans – employees don’t work more than contracted number of weekly house  Much lost output by employer

70

IB Business & Management HL 

Strike action – Most extreme, where employees totally withdraw their labor for a period of time  can lead to production stopping and businesses shutting down

Action taken by employers  Negotiations – aim to reach a compromise solution. If face-to-face doesn’t work, it may require arbitration  Public relations – using media to try to gain public support for the employer’s position in dispute  Threats of redundancies – puts pressure on unions to afree to settlement, but might inflame opinions about employer and seen as ‘bullying’  bad publicity  Changes of contract – if employees are taking advantage of employment contracts to work to rule or ban overtime, a new contract would solve the issue  Closure – leads to redundancy and no output and profit for business – extreme measure only used if demands of unions would lead to serious loss made by business  Lock-outs – short-term closure of business to prevent employees from working and being paid. Employees not keen on losing pay may put pressure on unions to agree to reasonable settlement Relative strength of unions and employers Union/employee power strong when: Most workers belong to union All workers agree to industrial action Industrial action rapidly costs employer much lost output/revenue/profits Public support for union case Inflation is high so high wage increase seems ‘reasonable’ to maintain living standards Labor costs are low proportion of total costs The business is very busy and can’t afford disruption

Employer power strong when: Unemployment is high Employers takes action – lock-out etc. Profits are low and threats of closure are taken seriously Public support for the employer Threats of relocation to low-cost countries are taken seriously

Sources of conflict  Business change o Management view: Necessary to remain competitive and profitable o Employee view: Potential job losses, retraining in new skills causes uncertainty, demands for increase flexibility reduce job security  Rationalization and organizational change o Management view: Needs to cut overheads and be flexible and adaptable to deal with ‘globalised’ low-cost competition o Employee view: Consequences fall on workers, reduced job security will damage employee motivation

71

IB Business & Management HL Strategies to reduce conflict Single-union agreement An employer recognizes just one union for purposes of collective bargaining  Can lead to inter-union disputes over which skills or grades of workers should get highest wage rise  Reduces flexibility of workforce if workers are in different unions – members in one union can’t do work of other workers in other union – demarcation dispute  reduces total productivity  Causes competition amongst unions  Newly united workforce and union representatives can exert more influence during collective bargaining  One union may not effectively represent the range of skilled staff and their needs at work  Growth of single union agreements lead to further mergers between unions No-strike agreement Unions agree to sign an agreement with employers not to strike in exchange for greater involvement in decisions that affect the workforce Reasons for union to agree  Improves image of union  Deals agreed to in exchange for greater union involvement in decision-making and representing employees  union-employer agreements to change working methods and increase labor flexibility leading to higher productivity, profits and pay and worker participation – win-win settlement  Conciliation The use of a third party in industrial disputes to encourage both employer and union to discuss an acceptable compromise solution 

A conciliator would listen to both sides of an argument and then attempt to find common group. This might then be used as a basis for an eventual compromise agreement

Arbitration Resolving an industrial dispute by using an independent third party to judge and recommend an appropriate solution    

Arbitrator listens to both sides of a dispute, but will make a decision for resolving the disagreement. This might be a compromise between the opposing views of employer’s and union’s officials If both parties agree, it becomes binding arbitration If arbitrator sets compromise close to one side, it can lead to both groups establishing extreme negotiating positions – union sets its demand very high for instance so that the compromise is close to what they wanted initially Pendulum arbitration is used to prevent this – both sides must accept decision of arbitrator and he/she is then forced to accept either the union’s claim or the employer’s offer because no compromise is allowed

72

IB Business & Management HL

Employee participation and industrial democracy  Reducing industrial conflict by achieving closer working relationship: 1. Industrial democracy – workers’ control over industry, perhaps linked to workers’ ownership of the business 2. Employee or trade union directors on board of directors – present workers’ approach to company issues at highest decision-making level 3. Works councils – discuss issues regarding employees 4. Autonomous work groups and quality circles – employee participation in decision-making, helping to avoid the ‘them and us’ environment Unit 2.8 – Crisis management and contingency planning Crisis management Steps taken by an organization to limit the damage from a crisis by handling, retaining and resolving it Contingency planning Preparing the immediate steps to be taken by an organization in the event of a crisis or emergency (aka: ‘business continuity planning’ or ‘disaster-recovery planning’)  Reassures staff, customers, local residents that concerns for safety are priority  Minimizes negative impact on customers and suppliers of major disasters  Public relations response is more speedy and appropriate with senior managers being used to promoted what the company intends to do, by when and how  Costly and time consuming – planning, training staff, practicing drills  Needs to be constantly updates as number and range of potential disasters can change  Staff training needs to be increased if labor turnover is high  Avoiding disasters still better than planning for what to do it they occur Key steps in contingency planning 1. Identify potential disasters that could affect the business 2. Assess the likelihood of these occurring 3. Minimize the potential impact of crises 4. Plan for continued operations of the business

73

IB Business & Management HL Unit 3.1 – Sources of finance Needs for finance  Setting up a business  For working capital  Business expansion  For mergers and takeovers  Speical situations – declining sales due to recession etc.  Purchasing fixed assets, paying for R&D Start-up capital Capital needed by an entrepreneur to set up a business Working capital The capital needed to pay for raw materials, day-to-day running costs and credit offered to customers (= current assets – current liabilities) Capital expenditure The purchase of assets that are expected to last for more than one year Revenue expenditure Spending on all costs and assets other than fixed assets – includes wages and salaries and materials bought for stock Internal sources of finance Retained profits  Newly formed businesses or businesses at a loss doesn’t have access  Once invested back into the business, they’re a permanent source of finance Sale of assets  Sale of assets no longer fully employed to raise cash  Sometimes assets are sold and then leased back o  Additional fixed costs in leasing and rental payment Managing working capital more efficiently  Increasing stock levels or selling goods on credits use sources of finance  Reducing these assets releases capital   Risky as it means cutting down on working capital, which may reduce a firms liquidity – ability to pay short-term debts – to risky levels External sources of finance Short-term finance Bank overdrafts  Most flexible SOF – Bank agrees to a business borrowing up to an agree limit as and when required  If finance is needed for short periods – customers don’t pay or a delivery of stock needs to be paid for  High interest charges

74

IB Business & Management HL  Bank can request payback immediately – potential business failure

75

IB Business & Management HL Trade credit  Delaying of payment of bills to creditors who don’t request immediate payment  Not for ‘free’ – discount for quick payment and supplier confidence lost of business takes too long to pay Debt factoring  Selling of claims over debtors to a debt factor in exchange for immediate liquidity – only a proportion of the value of the debts will be received as cash  Debt factor decides how much it is worth and buys it for that value. His risk lies with whether the debts will be repaid or not Medium-term finance Hire purchase and leasing  BOTH: Not cheap but improve short-term cash-flow position  Hire purchase – an asset is sold to a company which agrees to pay fixed repayments over an agreed time period (the asset belongs to the company)  Avoids high initial cash payment  Leasing – Contract with a leasing or finance company to acquire, but not necessarily to purchase, assets over a fixed period. Ownership stays with leasing company  Avoids need to raise long-term capital to buy asset  Risk of purchasing unreliable/outdated equipment is reduced as leasing company repairs and updates it Long-term finance Long-term loans  Loans that don’t have to be repaid for at least one year  Variable or fixed interest rates o Fixed rates  More certainty  Can be expensive if money is bought at time of high interest  Companies have to provide security or collateral for loan – bank has right to sell asset if company can’t pay debt  Businesses w/ few assets may find it hard to get a loan or have to get one at high interest payments Debentures/Long-term bonds Bonds issued by companies to raise debt finance, often with a fixed rate of interest  Firm issues debenture to investors, once sold, company receives requested amount  Firm agrees to pay fixed annual rate of interest over life of debenture to investor  At end of lifetime of debenture, full amount is paid back  Nestle issues a debenture of $1 million for 10 years. Investor Bob buys this debenture and requests for 3% interest rate. Nestle pays interest rate to Bob and receives $1 million upon Bob’s purchase. At end of 10 years, Nestle pays back $1 million to Bob.

76

IB Business & Management HL

 Cheaper than bank loans  Not acquirable by small firms because it’s expensive for them and if it’s an unknown company, no one will buy the bonds  If company goes bankrupt, investor doesn’t get money back Sale of shares – equity finance  Permanent finance raised by companies through the sale of shares  Limited companies can sell shares to raise capital to buy assets  Capital never has to be repaid  Private limited companies can sell shares to existing shareholders, without changing control/ownership of company (shares must be bought in same proportion as those already owned)  Cheaper as no public promotion needs to be made  By ‘going public’ more shares can be sold  There’s the risk of dilution of ownership  Rights issues – existing shareholders can buy additional shares at discounted price  Increases supply or shares, thus decreasing share price  not confident to buy Debt vs. equity capital Debt capital  No shares sold, hence ownership doesn’t change  Loans repaid eventually, hence no permanent increase in liabilities  Lenders have no voting rights in general meetings  Interest charges are an expense paid before corporation tax is deducted  Gearing of company increases, giving shareholders chance of higher returns  Interest on loans must be paid when demanded by lender Equity capital  Never has to be repaid  Dividends don’t’ have to be paid every year  Dividends on shares have to be paid from profits after tax Other sources of finance Grants  Certain agencies grant funds to businesses under certain conditions  Given to small businesses or those expanding in developing regions  Comes with ‘strings attached’ – location and number of jobs etc.  If requirements are met, grand don’t have to be repaid Venture capital  Risk capital invested in business start-ups or expanding small businesses, that have good profit potential, but don’t find it easy to gain finance from other sources  Venture capitalists take great risks as they could lose all money, but rewards can be big

77

IB Business & Management HL o Some businesses grow rapidly and they expect a share of future profits or a sizeable stake in business in return for investment

Finance for sole traders and partnerships  Have access to bank overdrafts, loans and credit from suppliers  Borrow from family and friends, or use savings and profits made  Sole traders can take on partners to inject further capital  Lenders are reluctant to lend to small businesses, unless owners give personal guarantees  Grants are usually available as governments’ assistance Exam tip: Analyze the type of legal structure of the business and sources of finance available to it Micro-finance  Providing small capital funds to entrepreneurs with no start-up capital  As small as $20  Mostly in developing countries Factors influencing decision in source of finance  Risky to borrow long-term finance for short-term needs  Permanent capital needed for long-term expansion  Short-term finance needed for short-term need like increasing stocks or paying creditors Cost  Never free – internal finance might have opportunity cost  Loans can become expensive when interest rates increase  Stock exchange flotation can be very expensive Amount  Share issues/sales of debentures have many administration cost etc. hence only suitable for large capital sums  Small bank loans/reducing debtors’ payment days – raise small funds Legal  Share issues only for limited companies – public limited companies structure/desire can sell to public – risk of dilution of ownership (except if rights to maintain issue was used) control  If owner wants to maintain control, issue of shares isn’t advised Size of existing  Higher the existing debts of a business, the greater the risk of borrowing lending more  Gearing Flexibility  If there’s a variable need for finance, a flexible for of finance is better than a long-term and inflexible source Use

78

IB Business & Management HL Unit 3.2 – Investment appraisal Investment appraisal Evaluating the profitability or desirability of an investment project Annual forecasted net cash flow Forecasted cash inflow – forecasted cash outflow Payback method Payback period Length of time it takes for the net cash inflows to pay back the original capital cost of the investment Year 0 1 2 3 4

Annual net cash flow ($) (500 000) – cost of investment 300 000 150 000 150 000 100 000

Cumulative cash flow ($) (500 000) (200 000) (50 000) 100 000 200 000

50,000  12 150,000 Last negative cashflow  12 Next net cashflow Payback is after 2 years and 4 months Importance of payback  Finance might be borrowed – interest rates increase with time   If internal finance, there’s an opportunity cost of other purposes  The longer the payback, the greater the uncertainty – influences of the external environment  ‘Risk adverse’ managers want to reduce risk to minimum payback period  Cash flows received in future are worth less than today, due to inflation  Quick and easy to calculate  Easily understood  Emphasis on speed of return gives benefit on focusing on accurate short-term forecasts of project’s profitability  Helps eliminate projects with too long payback  Useful for business where liquidity is of great importance for profitability  Doesn’t measure overall profitability of a project – ignores cash flows post payback  Concentration on short term may lead business to reject very profitable long term investments  Doesn’t consider timing of cash flows during payback period

79

IB Business & Management HL Average rate of return (ARR %) Measures the annual profitability of an investment as a percentage of the initial investment (Total cashflow - initial cost)  no. of years  100 Initial cost

Year 0 1 2 3 4

Net cash  flow (5 million) 2 million 2 million 2 million 3 million

1. Add up positive cash flows = $9 million 2. Subtract cost of investment = $9 million - $5 million = $4 million (total profit) 3. Divide by life span = $4 million ÷ 4 = $1 million (annual profit) $1 million  100  20% 4. Calculate ARR = $5 million

 ARR can be compared with:  Comparing ARR on other projects  Criterion rate/level – minimum level (max. payback) set by management for investment appraisal results for a project to be accepted  Annual interest rate on loans – if ARR is less than interest rate, it won’t be worthwhile to take a loan to invest in the project  Uses all of the cash flows  Focuses on profitability – central objective of most business decisions  Result is understood and easy to compare  Result can be quickly assessed against predetermined criterion rate of business  Ignores timing of cash flows  Later cash flows, that might be inaccurate, are also taken into account  Time value of money is ignored as cash flows haven’t been discounted Net present value (NPV) Today’s value of the estimated cash flows resulting from an investment Year 0 1 2 3 4

Cash flow (10 000) 5 000 4 000 3 000 2 000

Discount factors at 8% 1 0.93 0.86 0.79 0.74

Discounted cash flows (10 000) 4 650 3 440 2 370 1 480

1. Multiply discount factors by cash flows – exclude cash flow in year 0 2. Add the discounted cash flows 3. Subtract the capital cost to give the NPV Total discounted cash flows = $11 940 Original investment = ($10 000)

80

IB Business & Management HL NPV = $1 940 

If the finance needed can be borrowed at an interest rate of less than 8%, the investment will be profitable

 Considers timing and size of cash flows  Rate of discount can be varied to allow different economic circumstances  Considers time value of money and takes opportunity cost of money into account  Reasonably complex to calculate and to explain  Final result depends greatly on discount rate used  may be inaccurate  NPV can be compared with other projects, but only if initial capital costs are the same, as method doesn’t provide a percentage rate of return on investment Qualitative investment appraisal - PORSCHE Predictions of macro-economic indicators (e.g.: property price indicators) – gut feel Objectives of the firm Risk profile – take note if company & shareholders want to and is able to take the risks  risks of industry State of economy – consumer & producer confidence levels, interest rates Corporate image – what and how important is (maintaining) the image Human relations – will it involve redundancies/affect motivation? Training? Resistance to change by internal stakeholders? Exogenous shocks – anything else: natural disasters/hazards etc.

81

IB Business & Management HL Unit 3.3 – working capital Working capital The capital needed to pay for raw materials, day-to-day running costs and credit offered to customers (current assets – current liabilities) Liquidity The ability of a firm to be able to pay its short-term debts Liquidation When a firm ceases trading and its assets are sold for cash Working capital cycle The period of time between spending cash on the production process and receiving cash payments from customers

   

The longer this period, the greater the working capital needs of the business Lengthening the time before sale is turned into cash is extending the cycle To give more credit than is received is to increase the need for working capital To receive more credit than is given is to reduce the need for working capital

Cash flow The sum of cash payments to a business (inflows) less the sum of cash payments made by it (outflows) Liquidation Turning assets into cash may be insisted on by courts if suppliers haven’t been paid Insolvent When a business cannot meet its short-term debts Why cash flow planning is vital for entrepreneurs  Business start-ups are offered less time to pay suppliers - shorter credit periods  Banks/other lenders may not believe business’s promises and expect payments at specific time

82

IB Business & Management HL  Finance is often very tight at start-up Cash inflows Payments in cash received by a business, such as those from customers (debtors) or from the bank (e.g.: receiving a loan) Outflows Payments in cash made by a business, such as those to suppliers and workers Cash flow forecasts Debtors Customers who have bought products on credit and will pay cash at an agreed date in future Cash-flow forecast Estimate of a firm’s future cash inflows and outflows Net monthly cash flow Estimated difference between monthly cash inflows and outflows Opening cash balance Cash held by the business at the start of the month Closing cash balance Cash held at the end of the month becomes next month’s opening balance Jan

Feb…

Cash sales Debtor payments Owner’s capital injection Total cash in

3 0 6

4 2 0

9

6

Lease Rent Materials Labor Total cash out Net monthly cash flow (cash in – cash out) Opening balance (last months closing balance) Closing balance (Opening balance +/– net cash flow)

8 1 0.5 1 10.5 (1.5)

0 1 1 2 4 2

0

(2)

(2)

0

Cash inflows

Cash outflows

Net cash flow

83

IB Business & Management HL

 By showing periods of negative cash flow, plans can be made to provide additional finance  If negative cash flow appears to be too great, plans can be made for reducing these  New business proposal won’t progress beyond initial planning stage unless investors/bankers have access to a cash flow forecast  Mistakes can be made in preparing revenue and cost forecasts  Unexpected cost increases can lead to major inaccuracies  Wrong assumptions can be made in estimating the sales of the business Causes of cash flow problems  Lack of planning – cash-flow forecasts are merely a planning tool  Poor credit control Monitoring of debts to ensure that credit periods are not exceeded Bad debt Unpaid customers’ bills that are now unlikely to ever be paid  Allowing customers too much credit – means reducing short-term cash inflows, which could cause cash-flow problems  Overtrading Expanding a business rapidly without obtaining all of the necessary finance so that a cash-flow shortage develops  Unexpected events – unforeseen increases in costs Ways to increase cash inflows Method How it works Overdraft Flexible loans

Short-term loan

Fixed amount borrowed

Sale of assets

Cash receipts obtained

      

Sales & leaseback

Assets sold and leased back   

Reduced credit terms

Cash flow brought forward 

 Interest rates can be high If withdrawn it causes insolvency Interest costs Repaid by due date Can result in low price Might be needed later for expansion Could’ve been used as collateral for future loans Leasing costs add overheads Loss of potential profit if asset rises in price Could’ve been used as collateral for future loans Customers may purchase from firms offering extended credit terms

84

IB Business & Management HL Debt factoring

Debt-factoring companies buy customers’ bills

Ways to decrease cash outflow Method How it works Delay payments to creditor Cash outflows fall in short-term

Delay spending on capital equipment

By not buying equipment

Leasing, not outright purchase of capital equipment

Leasing company owns asset & no large cash outlay required

Cut overhead spending that doesn’t affect output

Won’t reduce production & cash payments less

 Only 90-95% of debt paid now – reduces profit  Suggests business is in trouble   Suppliers may reduce discounts  Suppliers can demand cash on delivery or refuse to supply  May become less efficient  Expansion becomes difficult  Asset not owned by business  Leasing charges include interest  Future demand may be reduced by failing to promote products well

Exam Tip:  Writing ‘the firm should increase sales’ to improve cash flow, does NOT demonstrate a true understanding of the difference between sales revenue and cash flow  ‘Cutting staff and cheaper materials’ is inappropriate for an exam question on improving cash flow

85

IB Business & Management HL Unit 3.4 – Budgeting Budget A detailed financial plan for the future       

Planning – consider future plans carefully Effective allocation of resources Setting targets to be achieved – people work better if they have a realizable target  motivation Co-ordination – discussion about the allocation of resources to different departments Monitoring and controlling – check regularly that objective is still in reach Modifying – if there’s evidence to suggest that the objective can’t be reached and budget is unrealistic, it can be changed Assessing performance – when budgeted period has ended, variance analysis can be used to compare actual performance with original budgets

Budget holder Individual responsible for the initial setting and achievement of a budget Delegated budgets Control over budgets is given to less senior management  Review the performance of a department  Managers of the department will be appraised on their effectiveness Exam tip: When discussing delegated budgeting link this to the motivational approach of Herzberg – making work more challenging and rewarding Preparation of budgets: 1. Most important organizational objectives established a. Based on previous performance, external changes, sales forecast 2. Key/limiting factor influencing growth/success identified a. Usually sales – sales budget first to be prepared 3. Sales budged prepared after discussion with sales managers in all branches 4. Subsidiary budgets prepared, based on plans contained in sales budget 5. Budgets coordinated to ensure consistency 6. Master budget prepared containing main details of all other budgets 7. Master budget presented to board of directors for approval Setting budget levels Incremental budgeting Uses last year’s budget as a basis and an adjustment is made for coming year Zero Budgeting Setting budgets to zero each year and budget holders have to argue their case to receive finance

86

IB Business & Management HL Variance analysis The process of investigating any differences between budgeted figures and actual figures Essential part of budgeting because:  Measures difference from planned performance of each department  Assists in analyzing causes of deviations from budget  Understanding the reasons for the deviations  Performance of individual budget-holding section may be appraised in an inaccurate and objective way Adverse variance Exists when the difference between the budgeted and actual figure leads to lower than expected profit  Need to be looked at in detail – cheaper suppliers or working methods could be adopted  Adverse variance due to an increase in out put and thus higher raw material costs is of less concern Reasons  Sales revenue is below budget because units sold were fewer than planned for or selling price had to be lowered due to competition  Raw material costs are higher because output was higher than budgeted or cost per unit of materials increased  Labor costs are higher because wage rates had to be raise due to worker shortages or labor time taken to complete work was longer  Overhead costs higher because annual rent rise was above forecast? Favorable variance Exists when the difference between the budgeted and actual figure leads to higher than expected profit  Reflect a poor and inaccurate budgeting process where cost budgets were set too high Reasons  Sales revenue is higher due to higher economic growth or problems with competitor’s products  Raw material costs are lower because output was less or cost per unit of materials was lower  Labor costs are lower because lower wage rates or quicker work completion  Overhead costs were lower because advertising rates for TV reduced? Budgetary control and strategic planning  Budgeting is time consuming  Budgets can fail to reflect changing circumstances and become inflexible  Budget holders can perceive a budget as a limit But…  Budgets have to be agreed and controlled, which gives responsibility and a sense of direction to those delegated to work with them  Figures help to monitor progress and tell the business where it is  It allows the assessment of the business as a whole and the individual departments 87

IB Business & Management HL  It lets departments know how much they can produce and spend  It helps allocate who decides who receives how much money Unit 3.5 – Financial accounts Stakeholders and accounting information Business managers  Measure the performance of the business  Help the business take decisions  Control and monitor performance of each department  Set targets or budgets for the future Banks  Decide whether to lend money  Assess whether to allow an increase in overdrafts  Decide whether to continue an overdraft Creditors  Assess if business is secure and liquid  Assess if business is a good credit risk  Decide if to press for early payment of debts Customers  Calculate how much tax is due  See if business is likely to expand and create jobs  See if business is in danger of closing, causing economic problems  Confirm that business is staying within the law Investors  Assess value of business and their investment  Establish if business is becoming more or less profitable  Determine what share of profits investors get  Decide if business has potential for growth  Compare details before making decision of buying shares  Decide to consider selling all or part of the holding Workforce  See if business is secure enough to pay wages and salaries  See if business will expand or reduce in size  See if jobs are secure  Find out if profits are rising and wage increase can be afforded  Find out if average wage compares with salaries of directors Local community  See if business is profitable and likely to expand – good for the economy  See if business is making losses leading to closure

88

IB Business & Management HL Income statement/Profit & Loss account Records the revenue, costs and profit (or loss) of a business over a given time period Profit & Loss Account for ABC limited for the year ended 30 May 20__ Sales Turnover 3060 (Minus) Cost of sales/Material cost (1840) Trading account (Equals) Gross profit 1220 Expenses (Includes depreciation) (+ non(Minus) (580) op) (Equals) Net profit or profit before tax and interest 640 Profit & Loss (Minus) Interest (80) account (Equals) Pre-tax profits 560 (Minus) Tax @ 20% (112) (Equals) Net profit after tax & interest 448 (Minus) Dividends to shareholders (200) Appropriation account (Equals) Retained profit 248 Gross profit Equal to sales revenue less cost of sales Sales revenue/Sales turnover The total value of sales made during the trading period = selling price × quantity sold Cost of sales/Cost of goods sold The direct cost of purchasing the goods that were sold during the financial year Operating profit/Net profit Gross profit minus overhead expenses Profit after tax Operating profit minus interest costs and corporation tax Dividends The share of the profits paid to shareholders as a return for investing in the company Retained profit The profit left after all deductions, including dividends, have been made. ‘Ploughed back’ into company as a source of finance  Can measure and compare performance of business over time & with competitors  Actual profit data can be compared with expected levels  Information helps Bankers and creditors decide if they should lend money  Investors can assess value of investing in the business  Could have been ‘window dressed’ by managers Low-quality profit – one-off profit that cannot easily be repeated or sustained  High-quality profit – profit that can be repeated and sustained

89

IB Business & Management HL Balance sheet An accounting statement that records the values of a business’s assets, liabilities and shareholders’ equity at one point in time Assets Items of monetary value that are owned by a business Liabilities A financial obligation of a business that it’s required to pay in future $m

$m

ASSETS Fixed assets Property Vehicles Equipment Intangible assets

300 45 67 30

Key Term

Notes

Assets to be kept and used for more than 1 year Total depreciation of good

Non-current assets

Items of value that are intangible (patents/trademarks) 442

Current assets Stocks (inventories) Debtors (receivable) Cash (money in bank)

Assets that are turned into cash before next balance sheet date 34 28 4 66

CURRENT LIABILITIES Creditors (payable)

42

Short-term loans

31

Debts of business paid within 1 year Value of debts for goods bough on credit Include company’s overdrafts, provisions to pay for tax, dividends

Trade payables

73 Net current assets

(7)

NET ASSETS

435

Long-term liabilities Long-term loans

125

SHAREHOLDER’S EQUITY Share capital

200

Retained earnings

110

CAPITAL EMPLOYED

Current assets – current liabilities Fixed assets + net current assets Debts paid after more than 1 year Total value of assets – total value of liabilities Total value of capital raised from issuing shares

Working capital

Include debentures Never repaid

Retained profit 310 435

= net assets

90

IB Business & Management HL Value of intangible assets Goodwill Arises when a business is value at or sold for more than the balance sheet values of its assets – based on whether it is well know, well established and has good trading links with customers and suppliers Accounting conventions regarding goodwill  Shouldn’t appear as an assets of an existing business as it’s difficult to value and can disappear rapidly  Appears on balance sheet of business that has bough another firm and has paid for goodwill – non-current intangible asset – taken/written-off quickly as it’s not possible to maintain Other intangible assets: patents, copyrights, well-established brand names, capital spend on R&D into new profits  Difficult to value as they’re rarely bought and sold in the open market. They fluctuate wildly and disputes can arise between accountants about their valuation  Balance sheets don’t usually record these assets  For many companies they’re the main sources of future earnings  Market value of companies with many intangible assets will be much greater than the balance sheet or book value Intellectual property An intangible asset that has been developed from human ideas and knowledge Market value The estimated total value of a company if it were taken over Depreciation of assets Depreciation The decline in the estimated value of a non-current asset over time, Due to:  Normal wear and tear  Technological change making the asset or the product obsolete Net book value The current balance sheet value of a non-current asset = original cost – accumulated depreciation Straight-line depreciation A constant amount of depreciation is subtracted from the value of the asset each year

Original/historical cost of asset - residual value Expected useful life of asset (years) Annual depreciation Net book value 0 $9000 $2100 $6900 $2100 $4800 $2100 $2700

Annual depreciation charge



Year Present 1 2 3

=

91

IB Business & Management HL 4 $2100 $600  Easy to calculated and widely used by limited companies  Requires estimates to be made regarding life expectancy and residual value – mistakes made lead to inaccurate depreciation charges  Most assets (vehicles, computers) depreciate more quickly in first and second years than in subsequent years – not reflected in straight-line depreciation  No recognition of rapid pace at which advanced in technology make existing assets redundant  Repairs and maintenance costs of an assets increase with age, reducing profitability Reducing (diminishing) balance method Calculated depreciation by subtracting a fixed percentage from the previous year’s net book value

Rate of depreciation = 1- n Rate of depreciation at 30%: Forecasted residual value: $4 000  Year Depreciation 0 0 1 ($16 000 × 30%) = $4 800 2 ($11 200 × 30%) = $3 360 3 ($7 840 × 30%) = $2 352 4 ($5 488 × 30%) = $1 646  

Residual value  100 Cost

Net book value $16 000 $11 200 $7 840 $5 488 $3 842

Amount of depreciation falls but rate remains constant Residual value is just below forecasted figure because rate used was rounded up from true value of 29.29%

 More accurate  Many assets are more efficient and profitable when new, hence logical to ‘match’ higher amount of cost of asset against this higher profit  Slightly more difficult to calculate  Calculating precise rate suggests level of accuracy for process of depreciation, which is unjustified as the residual value and expected life span are always estimates

92

IB Business & Management HL Stock valuation  Stock valuation methods are not rules for physical movement of sale stock  During inflationary periods LIFO will lower profits, reducing corporation tax and improving a firm’s liquidity  During inflationary periods LIFO results in lower valuation of closing stocks and net assets  Method used has an impact on important ratios like stock turnover  Many governments don’t allow use of LIFO for calculation of published profits on which corporation tax is based Last in first out (LIFO) Valuing closing stocks by assuming that the last one purchased was sold first  In a period of rising prices, valuing stocks using LIFO will tend to reduce declared profits of business – which gives potential saving in corporation tax Date Stock purchased 1. Feb 2. Feb 10 @ $200

Stock issued

5. Feb 7. Feb 50 @ $220

10 @ $200 40 @ $220

Closing stock 10 @ $190 10 @ $190 10 @ $200 10 @ $190 10 @ $190 50 @ $220 10 @ $190 10 @ $220

9. Feb 100 @ $250 80 @ $250

10 @ $190 10 @ $220 20 @ $250

First in first out (FIFO) Valuing stocks by assuming that the first ones bough in were sold first  During period of rising prices, valuing stocks using FIFO will record higher closing stock value and a higher profit figure Date Stock purchased 1. Feb 2. Feb 10 @ $200

Stock issued

5. Feb 7. Feb 50 @ $220

10 @ $190 40 = 10 @ $200 30 @ $220

Closing stock 10 @ $190 10 @ $190 10 @ $200 10 @ $200 10 @ $200 50 @ $220 20 @ $220

9. Feb 100 @ $250 80 = 20 @ $220 60 @ $250

40 @ $250

93

IB Business & Management HL

94

IB Business & Management HL 3.6 – Ratio Analysis Profitability ratios Profit margin ratios  Assessment of how successful the management of an business has been at converting sales revenue into gross and net profit Ways to improve profit margin ratios Increase gross and operating profit by reducing direct costs 1. Using cheaper materials  Might ruin customers’ perception of quality 2. Cut labor costs by relocating production to low labor-cost countries  Quality may be at risk – communication problems 3. Cut labor costs by increasing productivity through automation in production  Purchasing machinery will increase overhead costs 4. Cut wage costs by reducing workers’ pay  Motivation levels might fall, reducing productivity and quality Increase gross and operating profit by increasing price 1. Raise the price of the product with no significant increase in variable costs  Total profit could fall if consumers switch to competitors 2. Petrol companies increase prices by more than the price of oil has risen  Consumers may consider it to be a ‘profiteering’ decision and long-term image could be damaged Increase net profit margin by reducing overhead costs 1. Move to cheaper head office location  Lower rental costs could mean moving to cheaper area – poor image 2. Reduce promotion costs  Cutting promotion costs could cause sales to drop by more than fixed costs 3. Delayer the organization  Fewer managers – or lower salaries – could reduce efficient operation Exam tip:  Don’t say to ‘increase profit margins the business should increase sales’ – poor answer unless sales revenue can be increased at a greater rate than costs  For an evaluative answer consider at least one reason why your suggestion might not be effective Return on capital employed (ROCE)  Higher value of this ratio means greater return on capital invested  Compared with other companies and the ROCE of the previous years  Can be compared with return from interest accounts  Should be compared with interest rate, if it’s less than interest rate, any increase in borrowings will reduces returns on shareholders  ROCE can only be raised by increasing the profitable, efficient use of assets  Not universally agreed method, causing problems for comparison

95

IB Business & Management HL

Liquidity ratios  Measures firm’s ability to pay short-term debts Current ratio  Result around 1.5-2 recommendable  If it’s about 1:1, the firm might have trouble paying short-term debts if they’re requested to be paid at once  Low current ratios are usual for businesses like food retailers  Current ratio above 2 suggest too many funds tied up in unprofitable inventories Acid test/Quick ratio  Results below 1 are viewed with caution  Full picture needs to be observed  Firms with high inventory levels record different current and acid test ratios – not a problem if inventories are always high for business – furniture retailers  Selling inventories for cash will no improve current ratio, but it’ll improve acid test ratio as cash is a liquid asset but inventories aren’t Ways to improve liquidity 1. Sale of assets for cash – land and property sold to leasing company  Is assets sold quickly, they may not raise true value  If assets are still needed by business, leasing charges will add to overheads, reducing net profit margin 2. Sell off inventories for cash – stocks of finished goods sold at discount/JIT stock management  Reduce gross profit margin if sold at discount  Consumers may doubt image of products sold off cheaply  Inventories might be needed to meet changing customer demand levels 3. Increase loans to inject cash into business & increase working capital – longterm loans taken out of bank  Increase gearing ratio and interest rates Exam tip: Question accuracy of data and limitations of using limited number of ratio results Financial efficiency ratio Stock (inventory) turnover ratio  The lower the amount of capital used in holding stocks, the better  The higher this ratio is, the lower the investment in stocks will be  Result is not a percentage, but number of times stock turns over  The higher the number, the more efficient they’re in selling stock quickly  ‘Normal’ results depend on the industry  For service sectors this is of limited relevance Debtor days ratio

96

IB Business & Management HL      

How long it takes the business to recover payment from customers who have bought goods on credit The shorter this time period is, the better Sometimes to gain business, long credit periods have to be offered Results will vary from business to business A high trade debtor days ratio might be used as management strategy Value of this ratio can be reduced by giving shorter credit terms

Creditor days ratio  How quickly a business pays its suppliers during the year  High number of days reduces firm’s cash outflow to pay suppliers in the short term  Suppliers may object to not being paid promptly and may offer less discount Shareholder or investment ratios Dividend yield ratio  Measures rate of return a shareholder gets at the current share price  Dividends – the share of the profits paid to shareholders as a return for investing in the company  Share price – quoted price of one share on the stock exchange  If share prices rise with an unchanged dividend the dividend yield will fall  If directors propose an increased dividend, but share prices don’t increase, dividend yield will increase  Rate of return can be compared with other investments  Results need to be compared with previous years  Shareholders might be attracted to buy shares at high dividend yield as long as share price won’t fall  Directors may decide to pay a dividend from reserves if profits are low to keep shareholder loyalty  Directors may decide to reduce the annual dividend even if profits haven’t fallen to increase retained profits  High dividend yield may not indicate a wise investment as the yield could be high as recently prices fell Earnings per share ratio – amount that each share is earning for the shareholder Profit after tax total number of ordinary shares Gearing ratio  Degree to which the capital of the business is financed from long-term loans   The greater the reliance of a business on loan capital, the more ‘highly geared’  Shows extent to which the company’s assets are financed from long-term loan  The higher the ratio, the greater the risk o Larger borrowings have higher interest payments, affecting the ability of the company to pay dividends and earn profits o Interest still have to be paid – but from declining profits

97

IB Business & Management HL   

Debts have to be repaid eventually Low gearing means it’s a ‘safe’ business strategy, but it also shows the management isn’t borrowing to expand, creating problems with shareholders if these want to increasing returns on investment Gearing ratio can be reduced by using non-loan sources of finance – issuing more shares and retaining more profits

Evaluation of ratio analysis Helps with following decisions:  Whether to invest in a business  Whether to lend more money  Whether profitability is rising or falling  Whether management is using resources efficiently  Limitations   One ratio alone isn’t helpful and more are needed for: o Inter-firm comparisons o Trend analysis of the past  Inter-firm comparisons need to be used with caution – only effective if firms are in the same industry and yet the external environment still needs to be evaluated  Trend analysis needs to take into account changing circumstances of time – economic recession/change in taxes/interest rates  Some ratios can be calculated with different formulae, caution must be taken  Companies can value assets in different ways and different depreciation methods can cause different capital employed totals – some accountants do deliberate ‘window dressing’  Ratios are only concerned with numerical values, but nowadays observers find non-numerical aspects increasingly important – human rights etc.  Ratios are useful analytical tools, but don’t solve business problems. They can merely highlight issues that need to be tackled

98

IB Business & Management HL Unit 4 – Marketing 4.1 – The role of marketing Marketing The management task that links the business to the customer by identifying and meeting the needs of customers profitably – it does this by getting the right product at the right price to the right place at the right time  Market research  Product design  Pricing  Advertising  Distribution  Customer service  Packaging Market size The total level of sales of all producers within a market – this can be measured by:  Volume of sales (units sold)  Value of goods sold (revenue) Size of a market is important because:  Manager can assess if market is worth entering or not  Firms can calculate own market share  Growth or decline of market can be identified Market growth The percentage change in the total size of a market (volume or value) over a period of time Is rapid market growth good? Yes & No, sometimes profits might not be high as there are many competitors entering a market at the same time Market growth depends on:  Economic growth  Changes in consumer incomes  Development of new markets  Changes in consumer tastes  Technological change – can boost market with innovative products  If market is saturated or not? – i.e. product is still being bought/needed/wanted Market share (%) The percentage of sales in the total market sold by one business Firm' s sales in time period  100 Total market sales in time period  Measured in units (volume) or sales value  Most effective way to measure success of business vs. competitors as higher market share usually reflects higher success   Product with highest market share is called the ‘brand leader’ Benefits of being a brand leader  Sales are higher  profits increase 99

IB Business & Management HL  Retailers are keen to stock and promote best-selling brands  Shops are keen to stock product – with increased sales it leads to profitability  Customers are more willing to buy popular brands/market leaders Consumer markets Markets for goods and services bought by the final user of them Industrial markets Markets for goods and services bought by businesses to be used in the production process of other products Marketing business to business (B2B)  Focus on industrial exhibitions and direct or personal selling to companies  Customization of products to exact requirements of business customer  Promote product as cost-saving and profitable choice – something that’ll satisfy customer desire or need  Produce technical promotions and literature that’ll recognize that business customers are likely to be knowledgeable and want to make an informed choice Marketing consumer goods and services  Services are consumed easily so when services aren’t being used they have to be occupied by charging much lower prices (Hotel rooms in off-season)  Services cannot be repaired or replaced – hence quality must be right for first time or customer won’t return  Consumers find it harder to compare services – promotion of services must be informative and detailed about precise nature of range and quality offered  Trained, approachable and helpful staff is very important for successful marketing, whereas tangible goods usually sell themselves Marketing approaches Market orientation An outward-looking approach basing product decisions on consumer demand, as established by market research. It involves market research and analysis and the consumer is always put first – the business tries to produce what consumers want.  Chances of new products failing are reduces due to intensive market research and the development of expensive products like cars proves that many businesses use this approach  Consumer needs are met with appropriate products, thus business will survive longer and make higher profits  Constant feedback from consumers will allow the product to continue to develop  Attempts to respond to all customers’ trends/market fashion might overstretch a business’s resources and it’ll end up not doing anything very well  Trying to offer a range to meet all wants/needs can be expensive

100

IB Business & Management HL Product orientation An inward-looking approach that focuses on making products that can be make – or have been made for a long time – and then trying to sell them.  R&D of innovative products can be successful, even if there hasn’t been any formal market research Reasons why it still exists:  Invention and development of products in the belief that they will find consumers to purchase them was present with the introduction of WAP phones for instance – still present in pharmaceutical and electronic industries. If they produce an innovative product of high quality, it’ll be purchased  Quality will be valued above market fashion, especially in industries where high quality and safety is important – glass bottle makers, crash helmet makers Asset-led marketing An approach to marketing that bases strategy on the firm’s existing strengths and assets instead of purely on what the customer wants  Firms like to emphasize on their strengths and make products that comply with hem  Not all market-oriented businesses are successful, thus businesses need to market with a broader picture in mind Social (societal) marketing This approach considers not only the demands of consumers but also the effects on all members of the public (‘society’) – stakeholders – involved in some way when firms meet these demands  Attempts to balance: company profits, consumer wants, society’s interests  May be differences between short-term consumer wants (low prices) and longterm consumer and society welfare (protecting the environment and paying workers reasonable wages) – social marketing considers long-term welfare  They still identify consumer needs and wants to satisfy them better than competitors – but in a way that enhances consumers’ and society’s welfare  Gives a business competitive advantage as consumers prefer to buy from socially responsible firms  This strategy, if successful, can lead to firm charging higher prices as benefiting society becomes a unique selling point (USP)  RDB! If it becomes green it can gain a USP Marketing in non-profit-making organizations Similarities to marketing consumer goods:  Market research needs to be done  Best ways to communicate with donors – charities have stopped expensive and ineffective direct-mail and went to internet and viral marketing campaigns  They also need to assess effectiveness of different promotions and campaigns to increase value for money in future Differences to marketing consumer goods:  Importance of maintaining high ethical standards to avoid alienating public  Constant feedback on success of campaigns to keep public interested & aware

101

IB Business & Management HL 

Free publicity, with aim to capture attention (eg.: fund raising events/stunts) are more important than for charities than for consumer goods Marketing plan A detailed report on an organization’s marketing strategy, which includes:  SMART marketing objectives  Strategic plans – steps to be taken to achieve these objectives  Specific marketing actions – 7Ps etc.  Marketing budget – finance needed to pay for overall cost of strategy  Provide focus to marketing department  SMART objectives increase likelihood of success  Budget should be adequate to achieve objectives  If not revised to meet changing internal or external threats, will become outdated  Insufficient on their own – need to be reviewed constantly and final outcome must be evaluated against original objectives to aid future decision-making 4.2 Marketing planning Marketing planning The process of formulating appropriate strategies and preparing marketing activities to meet marketing objectives Marketing mix The key decisions that must be taken in the effective marketing of a product  Product – consumers require the right product  Price – if it’s too low, consumers might lose confidence in the product. If it’s too high, many consumers will be unable to afford it  Promotion (packaging) – must be effective – presenting product informatively and persuasively  Place – how the product is distributed to the consumer  People – selling services require friendly people to interact with the customers and encourage them to return  Process – Satisfying customers’ wants reliably and consistently  Physical evidence – Allowing customers to see for themselves the quality of a product Coordinated marketing mix Key marketing decisions complement each other and work together to give customers a consistent message about the product  Based on marketing objectives that are affordable within the marketing budget  Coordinated and consistent with each other  Targeted at appropriate customers Marketing ethics  Pricing – ethical to sell something cheap and make needed materials expensive?  Promotion – advertise toys to kids during TV programs/use sexual images in ads in countries with deeply held religious views? 102

IB Business & Management HL 

Place – close retail branches and only sell over the internet when many elderly might not have a computer?  Product – cheap but dangerous materials? Sexually provocative products for young children? The value of a marketing audit Marketing audit A regular review of the cost and effectiveness of a marketing plan including an analysis of internal and external influences  To alert management to the progress being made Includes 3 main features: 1. Analysis of the business’s internal strengths and weaknesses and how they’ve changed since the audit 2. Analysis of the external opportunities and threats and how they’re changed since the audit – SWOT and PEST are key analyses of a marketing audit 3. Review the progress of the marketing plan. This will analyze… a. Market share – compare with objectives set at start b. Sales performance compared with original sales budget c. If the company is achieving SMART objectives Porter’s Five Forces analysis  Analyzes an industry as being influenced by five forces  Assesses the nature of competition within an industry  Suggested for management attempting to establish a competitive marketing advantage over rivals to use this to understand the industry context and take appropriate strategic decisions 1. Threat of entry – Ease with which other firms can enter an industry and compete with existing firms. It is greatest when:  Economies of scale are low  Technology needed to enter industry is cheap  Distribution channels are easy to access  No legal or patent restrictions to entry  Importance of product differentiation is low – no extensive ads needed 2. Power of buyers – The power that customers have on the producing industry. This is increased when:  There are many undifferentiated small supplying firms  The cost of switching suppliers is low  Buyers can realistically and easily buy from other suppliers 3. Power of suppliers – suppliers will be powerful against buyers when:  Cost of switching is high  Brand being sold is very powerful and well known  Suppliers could realistically threaten to open their own forwardintegration operations  Customers have little bargaining power if they’re small firms and fragmented 4. Threat of substitutes – Substitute products in other industries (demand for aluminum for cans is affected by price of glass for bottling and plastic for containers – substitutes, not rivals in the same industry). Threat exists when: 103

IB Business & Management HL     

New technology makes other options available Price competition forces customers to consider alternatives Relative price of substitutes Brand loyalty to a company Costs of switching to substitute products

104

IB Business & Management HL 5. Competitive rivalry – sums up most important factors that determine the level of competition or rivalry in an industry. Highest when:  It’s cheap and easy for new firms to enter an industry  There’s a threat from substitute products  Suppliers have much power  Buyers have much power  There many firms with a similar market share  High fixed costs force firms to obtain economies of scale  Slow market growth forces firms to take share from rivals if they wish to increase sales How does this help businesses take important strategic marketing decisions?  By analyzing new markets this way, it helps firms decide whether to enter or not – provides insight to potential profitability of markets  Analyzing existing markets help with decision about future marketing  Develop strategies to help with own competitive position o Product differentiation o Using patents and protection to prevent copying o Focusing on different less competitive market segments o Merging with or taking over suppliers or customers to reduce supplier and buyer influence o Signing exclusivity agreements and getting customers in long-term service agreements to make switching suppliers more expensive Marketing objectives and corporate objectives Marketing objectives The goals set for the marketing department to help the business achieve its overall objectives Examples  Increasing market share – perhaps gain market leadership  Increasing brand awareness  Increasing total sales level (either sales volume or sales value)  Development of new markets for existing products to spread risk Importance  Provide sense of purpose  Progress can be monitored  Can be broken down into regional ad product sales targets to focus more  Form the basis of marketing strategy Marketing strategy Long-term plan established for achieving marketing objectives Market research Process of collecting, recording and analyzing data about customers, competitors and the market  Reduce risks associated with products  Predict future demand

105

IB Business & Management HL  

Explain patterns of sales and market trends Assess most favored designs etc.

Primary research The collection of first-hand data that are directly related to a firm’s needs  Up o date and more useful  Relevant as it’s collected for specific purpose  Confidential  Costly  Time consuming  Doubts over accuracy and validity Types of primary research Qualitative research Research into the in-depth motivations behind consumer buying behavior/opinions Focus groups A group of people who are asked about their attitude towards a product, service, advertisement or new style of packaging Quantitative research Research that leads to numerical results that can be presented and analyzed  Test marketing Marketing a new product in a geographical region before a full-scale launch Consumer surveys Sample Group of people taking part in a market research survey selected to be representative of the target market overall Sampling error Errors in research caused by using a sample for data collection rather than the whole target population  If sample size is too small, info isn’t accurate  If sample selected isn’t representative of target group  If sampling method is inappropriate  If researched is biased Sampling methods  Random sampling – Equal chance of anyone being picked  May select those not in target group  Sample sizes may be too large  Stratified/Segment-random sampling – samples on the basis of a representative strata/segment; number is selected randomly  Still random but more focused – more random but relevant info  More cost effective  Quota sampling – by segment-specified number of each segment  More reliable & cheap than random sampling  Not fully representative of target group

106

IB Business & Management HL  

Cluster sampling – based on geographical clusters seen as being representative of whole population Snowball sampling – samples developed from contacts of existing customers

Secondary research Collection of data from second-hand sources  Government publications  Local libraries and government officers  Trade organizations  Market intelligence reports  Newspaper reports and specialist publications  Internal company records  The internet  Often obtainable cheaply  Identifies nature of market and assists in planning  Obtained quickly without complicated methods  Allows comparison of data from different sources  May not be updated a lot  Originally collected for another purpose  Data-collection method may not be appropriate/inaccurate  Might not be available for completely new products Market segmentation and consumer profile Market segment A sub-group of a whole market in which consumers have similar characteristics Market segmentation Identifying different segments within a market and targeting different products or services to them  Can define target market precisely  increased sales  Helps identify gaps in the market – might then be successfully exploited  Differentiated marketing strategies can be focused on target market groups – avoids wasting money  Small firms unable to compete in whole market can specialize in one or two market segments  Price discrimination can be used to increase revenue and profits  R&D costs are high  Promotional costs might be high – marketing economies of scale may not be fully exploited  Production and stock holding costs are high  Danger that excessive specialization could lead to problems if consumers in those segments change purchasing habits significantly Consumer profile A quantified picture of consumers of a firm’s products, showing proportions of age groups, income levels, location, gender and social class 107

IB Business & Management HL 

Well-targeted product will need less advertising and promotional support

Target market The market segment that a particular product is aimed at 1. Geographical differences 2. Demographic differences a. Age, sex, family size and ethnic background b. Expenditure patterns/income levels c. DINKY – double income no kids yet d. NILK – no income lots of kids e. WOOF – well-off older folk 3. Psychographic factors a. Differences between people’s lifestyles, personalities, values and attitudes, interests and opinions Market positioning mapping  Identify features of a type of product considered to be important to consumers – price, quality of materials used, perceived image, level of comfort offered (hotels) – they’re different for each product category  It identifies potential gap I the market  Identifies key feature(s) of the product that should be promoted most heavily  Monitors the position of existing brands so a firm can easily see if repositioning one of them is required – this could involve a new ad campaign

Corporate image Consumer perception of the company behind a brand  Helps build good reputation, which has a positive impact on sales and makes successful launch of new products easier Steps to achieving a good corporate image  Focus on long-term reputation not short-term profits  Insist on honesty in all business dealings  Uphold stakeholders’ right to information about company and its activities  Develop good company policies Unique selling point/proposition (USP)

108

IB Business & Management HL Differentiating factor that makes a company’s product unique, designed to motivate customers to buy  About differentiating a company form its competitors  Based on all/any aspect of the marketing mix

Sales forecasting Predicting future sales levels and trends  Risks of business operations much reduced  Production department knows how many units to produce and quantity of materials needed  Marketing department is aware of how many products to distribute and if changes to existing marketing mix are needed  HR workforce plan more accurate  Finance can plan cash flow  Precision in forecasting is impossible because of external factors Trend Underlying movement of the data in a time series Seasonal variations Regular and repeated variations that occur in sales data within a period of 12 months or less Cyclical variations Variations in sales occurring over periods of time of much more than a year – they’re related to the business cycle Random variations

109

IB Business & Management HL May occur at any time and will cause unusual and unpredictable sales figures Unit 4.3 – Product Product The end result of the production process sold on the market to satisfy a customer need Consumer durables Manufactured products that can be re-used and are expected to have a reasonably long life, such as cars and washing machines Product line A set of related products sold by a business Product mix The variety of product lines that a business produces or a retailer stocks Product range All of the types of products made by a business New product design and development  Generating new ideas  Idea screening – eliminating ideas that have a low chance of success  Concept testing – establishing most likely consumers Product life cycle The pattern of sales recorded by a product from launch to withdrawal from the market

 



Introduction – product just launched after development. Sales usually low and only increase slowly (exceptions: DVDs by major rock stars etc.) Growth – if product is correctly marketed, sales will grow significantly. It can’t last forever and eventually growth will stop/slow down due to increasing competition, technological changes, changes in consumer tastes, market saturation Maturity/Saturation – Sales fail to grow but don’t significantly decline either. It can last very long – for instance with mobile phones as they’re only replaced if own one breaks

110

IB Business & Management HL

Extension strategies Marketing plans that extend the maturity stage of the product before a brand new one is needed  Developing new markets for existing products – export markets etc.  During decline, sales will fall steadily – either no extension strategy has been used or the product is so out of date that only replacement can work Marketing mix and the product life cycle Lifecycle phase Introduction

Price High (skimming) Low (penetration)

Promotion High – informative

Growth

Rising prices (penetration) Competitive prices

Brand identification Brand imaging

Low to sell off stock

Limited

Maturity Decline

Place Restricted outlets – high-class if skimming Growing outlets Highest geographical range Eliminate unprofitable ones

Product Basic model Product improvements New models, colors, etc. (extension strat.) Replace with new products

Cash flow and the product life cycle

    

Negative cash flow during development of product as costs are high, but nothing has been sold Introduction – heavy promotional expenses that continue throughout growth. Much unused factory floor will cost. As sales increase, cash flow should improve though Maturity – most positive cash flows  sales are high, promotional costs are limited and spare factory capacity is low Decline – price reductions and falling sales reduce cash flow Firms benefit from multiple products at different stages of the life cycle, so that cash flow from maturity can be used in development and vice versa

111

IB Business & Management HL Boston Matrix – Product portfolio analysis A method of analyzing the product portfolio of a business in terms of market share and market growth

Cash cows  Well-established product in mature market  High positive cash flow and profitable  Sales are high relative to low market and promotional costs – high customer awareness  Cash from here can be ‘milked’ into other products  Business wants to maintain it as long as possible Stars  Successful product performing well in expanding market  Business wants to maintain its market position o Promotional costs are high to help differentiate product and reinforce its brand image  Generate high income, despite these costs  Cash cows of the future as market matures and market growth slows, if status and market share can be maintained Question marks/Problem child  Consumes resources but generates little return  If it’s a newly launched product, it’ll need high promotional costs – finance can come from cash cow  Future is uncertain, hence quick decisions needed if sales don’t improve – revised design / relaunch / withdrawal  Has potential as its selling in fast growing market sector  Business needs to evaluate which problem children are worth keeping and developing Dogs  Offer little in terms of existing sales and cash flow or future prospects as market isn’t growing  Need to be replaced shortly or business can withdraw from market completely and position itself in faster-growing market segments

112

IB Business & Management HL Boston Matrix and strategic analysis  Building – supporting problem child products with more advertising; finance comes from cash cows  Holding – continuing support for stars to maintain good market position; product may need to be ‘freshened’ for consumers to keep high sales growth  Milking – taking positive cash flow from established products and investing it into developing products  Divesting – identifying worst performing dogs and stopping production and supply of these Evaluation of Boston Matrix  Analyses performance and current position of existing products  Plans action to be taken with existing products  Plans the introduction of new products  Can’t tell what happens next with product on its own. Detailed and continuous market research is needed  Only a planning tool and criticized from simplifying complex set of factors determining product success  Assumption made that higher rates of profit are directly related to high market shares Branding Brand An identifying symbol, name, image or trademark that distinguishes a product from its competitors Brand awareness Extent to which a brand is recognized by potential customers and is correctly associated with a particular product – can be expressed as % of target market Brand development Measures infiltration of a product’s sales, usually per 1000 population (If 100 people in 1000 buy a product, it has a brand development of 10) Brand loyalty Faithfulness of consumers to a particular brand as shown by repeat purchases irrespective of marketing pressure from competing brands Types of branding Family branding/Umbrella branding Selling several related products under one brand name  Marketing economies of scale  New product launches are easier  Poor quality of one product under brand may damage them all Product branding/Individual branding Individual product in portfolio is given own unique identity and brand image  Each product perceived as own unique and separate brand – unconnected

113

IB Business & Management HL  Loses positive image of strong company brand Company/corporate branding Company name is applied to products and this becomes brand name  Marketing economies of scale  Product launches become easier  Loses positive image of strong company brand Own-label branding Retailers create own brand name and identity for range of products  Cheaper than name-brand products  Each own-brand label appeals to different consumer groups and tastes  Little spent on advertising – in-store promotions  Consumers perceive products to have lower quality image Manufacturers’ brands Producers establish the brand image of a product or a family of products, often under the company’s name  Establishes unique ‘personality’ for product, which customers want to be associated with – premium prices can be charged  Brand has to be constantly promoted and defended Role of branding in a global market  Brand image across national borders opens up potential for increase sales and economies of scale  Unsuccessful if international brand and image fail to link with localized culture and customer tastes

114

IB Business & Management HL Unit 4.4 – Price Pricing level will:  Determine degree of value added  Influence revenue and profit made  Reflect marketing objectives Factors determining price decision  Cost of production  Competitive conditions  Competitors’ prices  Marketing objectives  Price elasticity of demand  New or existing product Cost-based pricing – based on cost of production & value added Cost-plus pricing Adding a fixed mark-up for profit  Size of mark-up depends on strength of demand, number of competitors and age and stage life of product  Covers all costs of production  Easy to calculate for single-product firms  Suitable for firms that are ‘price makers’ due to market dominance  Not necessarily accurate for multi-product firms  Doesn’t take market/competitive conditions into account  Tends to be inflexible  If sales fall, average fixed and average total costs rise – price may be raised Marginal-cost pricing Price based on extra cost of making one additional unit of output  If an airline has one seat left, to gain additional customers, it could offer it at a price lower than usual, as long as it covers the marginal cost of carrying that additional passenger Contribution-cost pricing Setting prices based on the variable costs of making a product in order to make a contribution towards fixed costs and profit Used by:  Multi-product businesses where it’s hard to allocate/divide fixed costs accurately between products  Firms that want to attract new orders from potentially important buyers  Firms that want to sell off stock to make way for new inventories  All variable costs will be covered  Suitable for firms producing several products  Flexible – prices can be adapted to market conditions  Fixed costs may not be covered  If prices vary too much, customers may become unhappy

115

IB Business & Management HL

Premium/prestige pricing Firm permanently setting high price because of their image, reputation or status associated with its products - For customers of such products, the price itself is not of major concern to a large extent - YET still, competition will influence this – if there’s a competitor’s product of same quality etc. but lower price… Full-cost/absorption-cost pricing Setting a price by calculating a unit cost for the product and then adding a fixed profit mark-up  Covers all costs of production  Easy to calculate for single-product firms  Suitable for firms that are ‘price makers’ due to market dominance  Not necessarily accurate for multi-product firms  Doesn’t take market/competitive conditions into account  Tends to be inflexible  If sales fall, average fixed and average total costs rise – price may be raised Competition-based pricing A firm will base its price upon the price set by its competitors  Price leadership: One dominant firm in a market sets a price and all other firms follow that price  Essential for firms with little market power  Flexible to market and competitive conditions  May not cover all costs  May have to vary price frequently due to changing market and competitive conditions Predatory pricing Deliberately undercutting competitors’ prices in order to try and force them out of the market  Illegal in the EU Going-rate pricing Price charge is based upon study of the conditions prevailing in a market and prices charge by competitors  The internet made this more common due to greater transparency  Essential for firms with little market power  Flexible to market and competitive conditions  May not cover all costs  May have to vary price frequently due to changing market and competitive conditions Market-based pricing Penetration pricing Setting relatively low price often supported by strong promotion to achieve a high volume of sales 116

IB Business & Management HL

Market skimming Setting a high price for a new product when a firm has a unique or highly differentiated product with low price elasticity of demand

117

IB Business & Management HL Price discrimination – method of market-based pricing  Occurs in markets where it’s possible to charge different consumer groups different prices for the same product  Uses price elasticity knowledge to charge different prices to increase sales  Administrative costs  Customers may switch to lower priced market  Consumers paying higher prices may object and look for alternatives Loss leader Product sold at a very low price to encourage consumers to buy other products Psychological pricing Setting prices that take account of customers’ perception of the value of the product (eg.: $999) Promotional pricing Special low prices to gain market share or sell of excess stock (eg.: BOGOF) Supply and demand  Market/Equilibrium price is determined by supply and demand Factors affecting supply  Good harvest conditions  More growers entering market  Government subsidies to growers  Release of unsold stocks on to the market Factors affecting demand  Increasing consumer incomes  More advertising  Increased prices of alternatives  Rising population Price elasticity of demand (PED) Measures the responsiveness of demand following a change in price: Percentage change in quantity demanded Percentage change in price  MINUS SIGN IS ALWAYS IGNORED  0-1: Inelastic demand – percentage change in demand is less than percentage change in price, hence if company increases price, demand doesn’t change a  lot  0: Unit elasticity – Percentage change in demand = percentage change in price, hence change in price will lead to equal change in demand  1-infinity: Elastic demand – percentage change in demand is greater than percentage change in price, hence an increase in price will decrease demand Influencing factors:  Necessity of the product  Number of substitutes  Level of consumer loyalty

118

IB Business & Management HL 

Price of product as proportion of consumers’ income

Income elasticity of demand (YED) Measures responsiveness of demand for a product following a change in consumers’ incomes % change in demand % change in income  Normal products (DVDs, airplane tickets) have positive income elasticity – when income rises, the demand also rises  Necessity goods have low income elasticity – increase in income won’t have  an effect on the demand for salt for instance  Luxury goods have a high income elasticity  Inferior goods have negative income elasticity – if there’s a preferred alternative product, demand for inferior goods drops. For instance, usage of public transport drops when incomes rise as people can afford cars Cross elasticity of demand (XED) Measures responsiveness of demand for a product following the change in price of another product % change in demand for product X % change in price of product Y  Two products that are similar have a positive cross elasticity (e.g.: PlayStation and X-Box)  Products that complement each other have a negative cross elasticity (e.g.:  iPhone and Applications) Advertising elasticity of demand (AED) Measures responsiveness of demand for a product following a change in advertising spending on it % change in demand for product % change in advertising spent on product  Usually consumer goods have a high AED – demand is responsive to more ads Not always the case…  If rivals are spending even more on ads   If campaign is expensive but poorly received  If other elements of the marketing mix aren’t working  Industrial product sales are less responsive to advertising in general – more responsive to quality, after-sales service and delivery dates

119

IB Business & Management HL Elasticity and the product life cycle Launch and growth  PED likely to be low – consumers ready to pay high prices  AED likely to be high – informative advertising  XED depends on number and closeness of substitutes – if unique, then low  YED depends on whether product is launched at prestige niche market (high) or mass market (low) Saturation/Maturity  PED might be increasing  AED likely to be low – consumers are aware of the product  XED high and positive – increased competition  YED depends on product nature Decline  PED might be low – prices might be lowered, but consumers want new product  AED low – unless advertising is used for extension  XED high and positive – rivals’ substitutes increase in number  YED negative – product might become an inferior good

120

IB Business & Management HL Unit 4.5 – Promotion Promotion The use of advertising, sales promotion, personal selling, direct mail, trade fairs, sponsorship and public relations to inform consumers and persuade consumers to buy  Increase sales by raising consumer awareness  Remind consumers of an existing product  Encourage increased purchases by existing consumers  Demonstrate superior specification/qualities of a product  Create or reinforce brand image  Correct misleading reports  Develop or adapt public image of business  Encourage retailers to stock Above-the-line promotion Promotion that is undertaken by a business by paying for communication with consumers (e.g.: Advertising) Advertising Communicating information about a product or business through the media  Informative advertising – new products etc.  Persuasive advertising – creating brand image, for markets with little differentiation Advertising decisions – which media to use?  Cost  Profile of target audience in terms of age, income levels, interests, gender etc.  Type of product and message to be communicated  Other aspects of the marketing mix  The law and other constraints Below-the-line promotion Promotion that is not a directly paid-for means of communication but based on shortterm incentives to purchase (e.g.: Sales promotion techniques) Sales promotion Incentives such as special offers or special deals directed at consumers or retailers to achieve short-term sales increases and repeat purchases by consumers Method explained  Price promotions – temporary reductions in price  Increased sales gained from reduction affect gross profit on items sold  Negative impact on brands reputation Money-off coupons  Simply encourage customers to buy what they would’ve bought anyway  Retailers might run out of stock quickly  unhappy customers  Proportion of customers using coupon is small hence reduction is limited Customer loyalty schemes  Discount offered cuts gross profit

121

IB Business & Management HL  Administrative costs outweigh benefits  Consumers have many loyalty cards from different shops, hence ‘loyalty’ reduced Money refunds

BOGOF

Point-of-sale displays Public relations Sponsorship

 Involve consumer filling and positing forms, which may be a disincentive  Delay before refund is received    Substantial reduction in GPM  Consumers may think that the actual price of product is too high  If its used to sell off stock that can’t be sold at normal price its suspicious  Current sales might increase, but future sales drop as customers stock up  Usually offered to market leaders only  New products struggle for best position in store  Not easily controllable as ‘free publicity’ might not be positive  Success of sponsorship is out of company’s control  if sponsored team performs badly, it reflects bad upon company

Promotion mix The combination of promotional techniques that a firm uses to communicate the benefits of its products to customers 1. Decide on image of product 2. Profit target market 3. Decide on messages to communicate 4. Appropriate budget 5. Decide how to communicate message 6. How is the success of the promotion mix assessed? 7. Undertake promotion plan 8. Measure its success Promotional mix and the product life cycle Introduction  Informative advertising  Sales promotion offering free samples Growth  ‘Brand building’ and persuasive advertising  Sales promotion to encourage repeat purchases  Develop brand loyalty Maturity  Advertising to emphasize on differences to competitors  Sales promotion incentive to encourage brand development and loyalty Decline – assuming no extension strategy  Minimal advertising  Sales promotion

122

IB Business & Management HL Unit 4.6 – Place Channel of distribution The chain of intermediaries a product passes through from producer to final consumer  Consumers need easy access to products  Manufacturers need outlets for their product  Retailers are needed to sell product Channel strategy Factors influencing choice of distribution channel:  Industrial products tend to be sold directly  Geographical dispersion of target market  Level of service expected by consumers  Technical complexity of the product  Unit value of the product – if it’s worth employing staff to sell or not  Number of potential customers Distribution channels Agent A business with the authority to act on behalf of another firm (e.g. market products) Direct selling to consumer: Manufacturer  Consumer  No intermediaries, so no mark up or profit margin taken  Producer has complete control over marketing mix  Quicker  Fresher food products  Direct contact with consumers  Storage and stock costs have to be paid for by producer  No retail outlets limits chances for consumers to ‘see and try’  May not be convenient for consumer  No advertising or promotion paid for by intermediaries and no after-sales service  Can be expensive to deliver Single-intermediary channel: Manufacturer  Retailer  Consumer  Retailers keep and pay for holding stocks  Retailer has product displays and after-sales services  Producers can solely focus on production  Retailers located in convenient distance to consumers  Intermediary takes a profit mark-up – can make product more expensive  Producers lose some control over marketing mix  Retailers may sell products of competitors too  Producer has delivery cost to retailer Two-intermediaries channel: Manufacturer  Wholesaler  Retailer  Consumer  Wholesales holds goods and buys and breaks bulk  Reduces stock-holding costs of producer  Wholesaler pays for transport to retailer  Best way to enter foreign markets where producer has no direct contact  Another intermediary takes a profit mark-up – product becomes more expensive

123

IB Business & Management HL  Producer loses further control of marketing mix  Slows down distribution chain Appropriate distribution channels Recent trends:  Increased direct selling via internet  Large supermarket chains function as wholesalers and retailers  Businesses are increasingly using a variety of channels  Increasing integration of services where complete package is sold to consumer Supply chain management (SCM) – Logistics Managing the network of businesses that are involved in the provision of products to the final consumers  To ensure that products are consistently made available on time to consumer by integrating supply and demand management across all companies involved Efficiency of SCM can be increased by:  Ensuring all supply companies are kept well informed  Making appropriate transport arrangements  Reducing total number of suppliers  Planning production to meet consumer demand  Ensuring adequate supplies are delivered on time to required retailers

124

IB Business & Management HL Unit 4.7 – International marketing International marketing Selling products in markets other than the original domestic market Why sell in other countries?  Saturated home markets  Potential to increase profits through rapid sales growth and low costs in emerging markets  Spreading risk between different markets  Poor trading conditions in the home market Why international marketing is different  Political differences – changes in governments can cause instability and increase risk of doing business there; acts of terrorism or threats of civil violence might lead to destruction of company’s assets  Economic and social differences – average living standards, tax rates, interest rates, age structure, role of women, importance of marriage  Legal differences – some goods might be illegal in other countries, some forms of advertisement may be illegal in other countries, product safety and labeling controls are stricter in some regions  Cultural differences – failure to recognize cultural and language differences can have a disastrous effect on marketing strategies  Differences in business practices – Accounting standards and rules can differ; the ease of setting up a limited company varies widely Entry into international markets  Exporting – selling the product directly to foreign customer or indirectly through an agent etc.  International franchising  Joint ventures  Licensing – business allowing another firm in the country being entered to produce its branded goods or patented products under license  Direct investment in subsidiaries – Setting up company-owned subsidiaries in foreign countries can achieve higher success rates than taking over emerging with locally based businesses International marketing Pan-global marketing Adopting a standardized product across the globe as if the whole world were a single market – selling the same goods in the same way everywhere  Common identity for product can be established – aids consumer recognition  Cost reduction can be substantial – economies of scale as same product is produced for worldwide market  Recognizes that differences between consumers in different countries are reducing  Despite growing similarity between tastes, it might be necessary to develop different products to suit cultural or religious variations  Legal restrictions can vary substantially between countries

125

IB Business & Management HL  Brand names don’t always translate well into other languages  Setting same price throughout fails to take into account different income levels Global localization Adapting the marketing mix, including differentiated products, to meet national and regional tastes and cultures  Local needs, tastes and cultures are reflected in marketing mix  higher sales and profit  No attempt to impose foreign brands/products/advertisements on local markets  Products more likely to meet local national legal requirements  Less local opposition to multinational business activity  Scope for economies of scale reduced  International brand can lose power and identity if local products become more popular than international ones  Additional costs of adapting products, adverts, store layouts etc.

126

IB Business & Management HL Unit 4.8 – E-commerce E-commerce The buying and selling of goods and services on the Internet  Selling of goods and services directly to the customer via Internet (Businessto-Consumer – B2C)  Selling/buying goods and services to/from other businesses (Business-tobusiness – B2B)  Advertising by using company’s own website or placing pop-ups on others  Sales leads established by visitors to a site leaving details so company can email/call them to make a sale  Collecting market research data by encouraging website visitors to answer questions  Relatively inexpensive compared to ratio of cost and number of potential customers  Companies can reach worldwide audience  Consumers interact with websites and leave important info  Convenient for consumers to use  Accurate records kept on the number of clicks or visitors etc.  Computer ownership/usage increasing  Selling via Internet has lower fixed costs  Some countries have low-speed Internet connection/no computers  Consumers cannot touch etc. the product – limit willingness to buy certain things  Product returns may increase, as consumers don’t like product once delivered  Cost and reliability of postal services might reduce cost advantage  Website must be kept up to date and user friendly – can be expensive  Worries about Internet security – usage of information – may reduce future growth potential Impact of e-commerce on the marketing mix Product  Consumer can be communicated with individually and products can meet all of their requirements  Businesses selling online have a greater market potential, thus can afford to stock high levels of a wide range of clothes Price  Price-comparison is much easier  Competitive pricing is more likely to be used Promotion  Banners, pop-ups, texts etc.  Promotional opportunities have expanded and costs can be saved Place  Changing the buying-shopping experience

127

IB Business & Management HL Unit 5 – Operations management 5.1 – Production methods Job production Producing a one-off item specially designed for the customer  Highly skilled workforce required  Able to undertake specialist projects or jobs, often with high value added  High levels of worker motivation  High unit production costs  Time consuming  Wide range of tools and equipment needed Batch production Producing a limited number of identical products – each time the batch passes through one stage of production before passing on to the next stage  Labor and machines must be flexible to switch to making batches of other designs  Some economies of scale  Faster production with lower unit costs than job production  Some flexibility in design of product in each batch  High levels of stock at each production stage  Unit costs likely to be higher than with flow production Flow/Line production Producing items in a continually moving process Mass production Producing large quantities of a standardized product  Specialized, often expensive, capital equipment needed – can be efficient  High steady demand for standardized products  Low unit costs due to constant working of machines  High labor productivity and economies of scale  JIT stock management is easier to apply here  Inflexible – often difficult and time consuming to switch from one type of a product to another  Expensive to set up flow-line machinery and each section needs to be synchronized Mass customization The use of flexible computer-aided production systems to produce items to meet individual customers’ requirements at mass production cost levels  Many common components  Flexible and multi-skilled workers  Flexible equipment – CAM to allow for variations  Combines low unit cost with flexibility to meet customers’ requirements  Expensive product redesign may be needed to allow key components to be switched for variety  Expensive flexible capital equipment needed

128

IB Business & Management HL Cell production Splitting flow production into self-contained groups that are responsible for whole work units  Form of flow production where production is split into several self-contained, mini-production units – cells  Each cell produced complete unit of work  Each cell has team leader and multi-skilled workers  Performance measured against pre-set targets – output levels, quality, lead times  Cells are responsible for quality of their own complete units of work  Significant improvements in worker commitment and motivation – teamwork  Job rotation within cell  Increased productivity  Output levels might decrease  Conflicts within or between cells could arise  Capital intensive – machinery needs to be bought for each individual cell Changing production methods Job  Batch  Finance o Cost of equipment to handle large numbers in each batch o Additional working capital needed to finance high stock levels and work in progress  Human resources o Staff demotivation – less emphasis on individual’s craft skills  Marketing o Can no longer promote product as being customized to each customer o May have to promote benefits of lower prices and consistent quality Job/Batch  Flow  Finance o Cost of capital equipment o Production delays during change-over period may impact cash flow  Human resources o Low motivation and boredom  Marketing o Mass production needs mass marketing – more market research vital o Accurate estimates of future demand to ensure output = demand o Promotion and pricing decisions geared to mass marketing approach Batch/flow  Cell  Finance o Expensive CAM (Computer Aided Management) methods needed to allow cells to switch  Human resources o Recruitment of flexible, adaptable staff

129

IB Business & Management HL o Staff training required  Marketing o Productivity and quality improvements allowing competitive pricing Choosing appropriate production methods Size of the market  If it’s very small – job production  Market for similar/identical products is large and consistent – flow production o If mass production is used, mass marketing methods need to be done  Even mass markets will have market niches allowing for smaller manufacturers to survive by making one-off orders or batches  If market demands large quantity but at different times of the year – batch production Amount of capital available  Purpose-built flow production line is difficult and expensive to set up  Small firms can’t afford this type of investment and thus use job/batch Availability of other resources  Large-scale flow production needs supply of relatively unskilled workers and large, flat land area  Job production needs skilled crafts people  If resources aren’t available, production needs to be adapted to suit available resources Market demand for products adapted to customer requirements  Cost advantages of high volumes combined with ability to make slightly different products for different markets – mass customization  Technology is giving firms flexibility to produce variety of models from one basic design and production process Final evaluation  Traditional differences between methods are less obvious  Many complex products can be adapted to meet different requirements o Flexibility offered by technology to large firms put small firms at risk However there’s always a demand from increasingly wealthy customers for original and specialist products, from small firms with non-mass production methods

130

IB Business & Management HL 5.2 – Costs and revenues       

Business costs are key factor in profit equation Cost data are important to departments Keeping cost records allows comparisons with past times Past cost data can help set budgets Cost variances can be calculated Comparing cost data can help manager make decisions about resource use Calculating cost of different options helps choose most cost-effective one

Direct costs Costs that can be clearly identified with each unit of production and can be allocated to a cost centre (e.g.: Labor and materials) Indirect/Overhead costs Costs that cannot be indentified with a unit of production or allocated accurately to a cost centre  Production overheads  Selling and distribution overheads  Administration overheads  Finance overheads – loans/interest Fixed costs Costs that don’t vary with output in the short-run Variable costs Costs that vary with output Semi-variable costs Costs that have both a fixed cost and a variable cost element (e.g.: Electricity standing charge plus cost per unit used) Marginal costs Extra cost of producing one more unit of output Revenue Income received from sale of a product Total revenue Total income from sale of all units of product = quantity × price Contribution to fixed costs Contribution per unit Selling price of product less variable costs per unit Total contribution Total revenue form sale of a product lesss total variable cost of producing it

131

IB Business & Management HL Cost and profit centers Cost center A section of a business, such as a department, to which costs can be allocated or charged Profit center A section of a business to which both costs and revenues can be allocated  Sets reasonable and achievable targets to work towards  Targets can be used to compare with actual performance  Individual performances of divisions can be assessed and compared  Work can be monitored and decisions made about future  Workers may consider their part of business more important – damaging competition  Some costs – indirect costs – are impossible to allocate accurately  Reasons for good/bad performance of one profit centre may be due to external factors not under its control Contribution costing Contribution costing Costing method that only allocated direct costs to cost/profit centers not overhead costs Important to note:  Marginal cost is the cost of producing an extra unit, this extra cost will clearly be a variable cost  Contribution to fixed costs and profit is the revenue gained from selling a product less its variable direct cost. It’s not the same as profits which can only be calculated once overheads are deducted as well Multi-product firms – assessing viability of each product  Contribution costing shows managers which product is making greatest/least contribution to overheads and profit  If all costs were divided between products equally, manager could decide to stop producing a product that seemed to be making a loss, although it might be making a positive contribution Should a business accept a contract or a purchase offer at below full cost?  If the firm has spare capacity or is trying to enter a new market segment, marginal costing assists managers to decied ewhether to accept an order below full cost of product  For example: For a hotel it is between to earn contribution from additional guests, than to leave rooms empty  If contracts are accepted/customers gained by using prices below full unit cost, it can in circumstances increase total profits  Fixed overheads are paid anyway. If extra contribution can be earned, profit increases

132

IB Business & Management HL

 Existing customers may learn of lower prices and want the same  When high prices are key feature in establishing of exclusive brand, lower priced could destroy this image  Where there’s no excess capacity, sales in contribution cost may be losing sales based on full cost  Lower priced goods may be resold into the higher price market Exam tip: Remember, even though a positive contribution can be made by accepting an order, the real dangers are that other customers find out and want the same – qualitative factors are important too! Using contribution costing – a summary  Overhead costs are not allocated to cost centers – avoids inaccuracies  Decisions about product/department are made on the basis of contribution to overheads  Excess capacity is more likely to be used effectively  By ignoring overhead costs until final calculation of profit, contribution costing doesn’t consider that some products/departments incur higher fixed costs  Emphasizes contribution in decision-making – leads to managers choosing to maintain production of a good just because of positive contribution  Qualitative factors may be important too!!

133

IB Business & Management HL 5.3 – Break-even analysis Break-even point of production The level of output at which total costs = total revenue Graphical Method

    

ALWAYS plot your lines to the maximum capacity of output ONLY!!!!! ALWAYS add labels and give the chart a title Margin of safety is the difference between the break-even point and the expected level of activity (maximum level of output) Projected profit = margin of safety × contribution per unit Profit = sales revenue – total cost

Margin of safety The amount by which the sales level exceeds the break-even level of output The break-even formula

Break - even level of output =



Fixed cost Contribution per unit

Contribution per unit Selling price of a product less variable costs per unit Break-even analysis – further uses  A marketing decision – impact of price increase, raising sales revenue line  Operations management decision – new equipment, lowering variable costs

134

IB Business & Management HL 

Location decision – 2 locations with different fixed and variable costs

Target revenue and profit

Target profit level of output

=

 



Price =

=

Fixed costs + target profit Contribution per unit

Profit + Total cost Output

Break-even revenue The amount of revenue needed to cover both fixed and variable costs so that the business breaks even Fixed costs Break - even revenue = 1- (variable cost/price) Evaluation  Easy to construct and interpret  Useful guidelines to management on break-even points, safety margins and profit/loss levels  Comparison between options can be made  Equation produces precise break-even result  Break-even analysis can be used to assist managers in key decisions – location, equipment, investment  Assumption that costs and revenues are always represented by a straight line is unrealistic  Not all costs can be conveniently classified into fixed and variable costs  No alloance made for stock levels – assumed that all units produced are sold  Unlikely that fixed costs will remain unchanged at different output levels up to maximum capacity

135

IB Business & Management HL 5.3 – Quality assurance Quality product A good/service that meets customers’ expectations and is therefore ‘fir for purpose’ Quality standards The expectations of customers expressed in terms of the minimum acceptable production or service standards Why is quality important?  Lowers costs (less wastage, less advertising)  Motivated workforce  Increased market share  Easier to create customer loyalty  International competitiveness  Increased in sales revenue  Premium pricing  Longer life cycles Quality control Based on inspection of the product or a sample of products 1. Prevention – quality should be ‘designed into’ the product 2. Inspection 3. Correction and improvement – correcting product/process causing fault  It’s looking for problems – negative culture causing resentment amongst workers  Job of inspection can be tedious – demotivated  If checking only takes place at specific points, faulty products may pass through many stages before being identified – wastes time  Takes away worker’s responsibility for quality Quality assurance A system of agreeing and meeting quality standards at each stage of production to ensure consumer satisfaction  Puts much emphasis on prevention of poor quality by designing products for easy fault-free manufacture  Stresses need for workers to get it right the first time  Established quality standards and targets for each stage  Checks components, materials and services bought at point of arrival  Makes everyone responsible for quality – job enrichment  Self-checking and efforts to improve quality increases motivation  Can ‘trace back’ quality problems  Reduces need for expensive final inspection  Reduces total quality costs – reduced cost of wastage  Gain accreditation for quality awards – ISO 9000

136

IB Business & Management HL

ISO 9000 Internationally recognized certificate that acknowledges the existence of a quality procedure that meets certain conditions  Staff training & appraisal methods  Methods for checking on suppliers  Quality standards in all areas of business  Procedures for dealing with defective products  After-sales service  Costs of preparing for inspection and bureaucratic form filling to gain certificate Total quality management (TQM) An approach to quality that aims to involve all employees in the quality improvement process  Requires significant changes in the culture of an organization  Philosophy of quality making all workers at all levels accept that the quality of work they perform is important  Links to Herzberg principles of job enrichment  Almost eliminates the need for a separate quality-control department  Workers are empowered with responsibility of checking own work – motivation  Cuts costs of faulty/defective products – workers ‘get it right first time’  Reject costs should fall and demand for product rise over time  Must be explained and training given to staff Internal customers People within the organization depend upon the quality of work being done by others Lean production       

Delivering value from your customers perspective Eliminating waste Continuously improving your process 1) Pull – rather producing as much as possible, customer demand pulls production  you produce goods based on customer demand (reduces over production and wastage of goods) 2) One piece flow – focusing on one piece at a time (reduces waiting time, minimizes storage and minimizes work interruption) 3) Takt – how fast you need to manufacture a product to meet customer demands (allows balancing work content, achieve a continuous flow and respond flexibly to changes in demand) 4) Zero defects – The aim of achieving perfect products every time  Mistakes from previous steps must be improved before going on (continuous improvement, allows your company to stay ahead of other companies in the market place by ensuring total quality)

137

IB Business & Management HL

Kaizen Japanese term meaning continuous improvement  Keeps production up to the mark and look for one-off improvements in form of inventions/investments in machines to increase productivity  Improvements In product don’t just result form massive one-off investments in new technology, but series of small improvements Conditions for Kaizen 1. Management culture must be directed towards involving staff and giving their views and ideas importance 2. Team working 3. Empowerment – power to take decisions allows speedier introduction of new ideas 4. All staff should be involved Exam Tip: Link Kaizen to Herzberg’s principle on job enrichment  Some changes cannot be introduced gradually and need radical/expensive solution  Resistance from senior managers might be present due to existing culture  In short term, there may be tangible costs such as staff training  Most important advances tend to be made early in Kaizen – later changes less significant Benchmarking Comparing the performance – including quality – of a business with performance standards throughout the industry Stages 1. Identify aspects of business to be benchmarked 2. Measure performance in these areas 3. Identify the firms in industry that are considered to be the best 4. Use comparative data form best firms to establish weaknesses in business 5. Set standards for improvement 6. Change processes to achieve standards set 7. Re-measurement  Faster and cheaper way of solving problems – following someone that already has quality standards  Areas of greatest significance for customers are identifies – action directed to improving these  Process can assist firm to increase international competitiveness  Comparisons between firms in different industries allows crossover of ideas  Workforce is involved in comparison – motivation  Process depends on obtaining relevant and up-to-date information from competitors  Merely copying ideas and practices may discourage initiative and own ideas  Cost of comparison exercise may not be recovered by improvements of benchmarking 138

IB Business & Management HL  Time consuming management process

139

IB Business & Management HL 5.5 – Location Optimal location A business location that gives the best combination of quantitative and qualitative factors Quantitative factors Measurable in financial terms and have direct impact on either the costs of a site or the revenue from it and its profitability  of non-optical location decisions  Problem High fixed site  High break-even level of production costs  Low profits – or even losses  If operating at low-capacity utilization – high unit fixed costs High variable  Low contribution per unit cost  Low profits  High unit variable costs – reduce competitiveness Low  Problems with recruiting unemployment  Staff turnover likely to be problematic rate  Pay levels may have to be raised to attract staff High  Low average consumer disposable incomes – low demand for unemployment income elastic products rate Poor transport  Increased transport costs of raw materials and finished goods infrastructure  Relatively inaccessible to customers  Difficult to operate with JIT Quantitative factors  Site and other capital costs such as building or shop-fitting costs  Labor costs  Transport costs  Sales revenue potential  Government grants Techniques to assist in location decisions  Profit estimates  Investment appraisal  Break-even analysis Qualitative factors Non-measurable factors that may influence business decisions  Safety  Room for further expansion  Managers’ preferences  Labor supply  Ethical considerations – rightful to relocate and cause redundancies?

140

IB Business & Management HL  

Environmental concerns Infrastructure

Other locational issues  Pull of the market  Planning restrictions by local authorities  External economies of scale – industry clusters  Multi-site locations  Greater convenience for customers  Lower transport costs  Production-based companies reduce risk of supply disruption if there are technical problems in one factory  Opportunities for delegation of work to regional managers  Cost advantages of multi-sites in different countries  Co-ordination problems  Potential lack of control  Different cultural standards  If sites are too close, danger of ‘cannibalism’ where one store takes sales away from another one owned by same business Globalization and international location decisions Offshoring The relocation of a business process done in one country to the same or another company in another country Multinational A business with operations or production bases in more than one country Reasons for location decisions and impact on functional departments 1. To reduce costs  Potential for higher profits benefits finance department  Relocation to low-wage economies 2. To access global markets a. Huge potential for marketing department to exploit b. If certain market has reached saturation you can expand to another 3. To avoid protectionist trade barriers Trade barriers – taxes/tariffs or other limitations on the free international movement of goods and services  To avoid tariff barriers on imported goods, it’s necessary to set up operations in country/trading bloc concerned 4. Other reasons a. Substantial government financial support for relocating b. Good educational standards c. Highly qualified staff d. Avoidance of problems resulting from exchange rate fluctuation Limitations of international location and impact on functional departments 1. Language and other communication barriers 141

IB Business & Management HL 2. Cultural differences 3. Level of service concerns – service might worsen 4. Supply-chain concerns – loss of control over quality and reliability of delivery for operations management department 5. Ethical considerations – can you cause mass redundancy for relocation? 5.6 – Innovation Research and development The scientific research and technological development of new products and processes Invention The formulation or discovery of new ideas for products or processes Innovation The practical application of new inventions into marketable products Product innovation New, marketable products such as the Apple iPad Process innovation New methods of manufacturing or service provision that offers important benefits Benefits of innovation and R&D   High-tech jobs  High added-value products  Prestige for the country  Attraction of investment  Competitive advantage over competitors  Customer loyalty  High, premium prices  Publicity  Lower costs Limitations of R&D   Doesn’t always lead to innovation  Expensive and has opportunity cost  Inventions don’t always lead to successful innovative products  Competing R&D spending might lead to even more successful products  Ethical issues sometimes outweigh potential commercial benefits Intellectual property Creations of the mind such as inventions, literary and artistic works and symbols, names, images and designs used in business Intellectual property rights Legal property rights over the possession and use of intellectual property Patent Legal right to be a sole producer and seller of an invention for a certain period of time

142

IB Business & Management HL

Copyright Legal right to protect and be the sole beneficiary from artistic and literary works Trademark A distinctive name, symbol, motto or design that identifies a business or its products – can be legally registered and cannot be copied  Sets business apart form competitors  Can be sold/licensed to provide a revenue stream  Key part of the branding process  Can be given a financial value on a business balance sheet  There are problems protecting intellectual property Factors influencing level of R&D and innovation  Nature of the industry – rapidly changing industries need much R&D and innovation  R&D and innovation spending plans of competitors  Business expectations – business managers might be optimistic about future state of economy  Risk profile or culture of the business  Government policy towards grants etc.  Finance is needed for effective R&D

143

IB Business & Management HL 5.7 – Production planning Stock (Inventory) Materials and goods required to allow for the production of and supply of products to customers Stocks of manufacturing businesses 1. Raw materials 2. Work in progress 3. Finished goods Stock-holding costs 1. Opportunity cost 2. Storage costs 3. Risk of wastage and obsolescence Cost of not holding enough stocks 1. Lost sales 2. Idle production resources – running out of components will leave expensive machines and labor idle 3. Special orders could be expensive – urgent orders etc. 4. Small order quanitities – can’t benefit from bulk buying economies of scale Optimum order size  Gains economies of scale  Allows for continuous production  Stock-holding will be higher as larger orders need to be stocked  Opportunity costs higher due to more capital tied up  Danger of stock becoming obsolete/out-of-date increases Economic order quantity (EOQ) The optimum or least-cost quantity to re-order taking into account delivery costs and stock-holding costs Exam tip: Remember & apply the costs of stock holding and costs of being out of stocks Controlling stock levels – graphical approach 1. Buffer stocks – the minimum stocks that should be held to ensure that production could still take place should a delay in delivery occur or production rates increase a. The more uncertainty, the higher the buffer stock b. The greater the cost of shutting down/restarting, the greater the cost savings from holding high buffer stocks 2. Maximum stock level – limited by space and financial costs of holding stocks a. Buffer Stock + EOQ of each component 3. Re-order quantity – the number of units ordered each time 4. Lead time - the normal time taken between ordering new stocks and their delivery a. The longer this period, the higher the re-order stock level 5. Re-order stock level – the level of stocks that will trigger a new order to be sent to the supplier

144

IB Business & Management HL Just in case (JIC) Holding high stock levels ‘just in case’ there is a production problem or an unexpected upsurge in demand To meet unexpected situations such as:  Failure of supplying firm to deliver on time  Production problems halting output  Increased consumer demand  Stocks of raw materials can allow firm to meet increases in demand by increasing production rate quickly  Raw-material supply hold-ups won’t lead to production stopping  Economies of scale from bulk buying  Stocks of finished goods can be displayed to customers – increasing buying  Stocks of finished goods used to meet sudden, unpredicted demand increases  Firms can stockpile completed goods to meet anticipated increases in demand  High opportunity costs of working capital tied up in stock  High storage costs  Risk of goods being damaged/outdated  ‘Getting it right first time’ matters less as supplies are kept in stock to replace  Space used to store stock could be used more productively Just in time (JIT) A stock control method that aims to avoid holding stocks by requiring supplies to arrive just as they are needed in production and completed products are produced in order Important conditions for JIT to be successful 1. Relationships with suppliers have to be excellent 2. Production staff must be multi-skilled and prepared to change jobs at short notice 3. Equipment and machinery must be flexible 4. Accurate demand forecasts will make JIT much more successful 5. Latest IT equipment will make JIT more successful 6. Excellent employee-employer relationships are essential 7. Quality must be everyone’s priority – no spare stocks to fall back on  Capital invested in stock and opportunity cost of stock holding is reduced  Cost of storage and stock holding reduced  Space released from holding of stocks used more wisely  Less chance of stock becoming outdated/obsolescent; reduced risk of damage  Greater flexibility allows quicker response to changes in consumer demand  Multi-skilled and adaptable staff may gain from improved motivation  Failure to receive supplies etc. leads to expensive production delays  Delivery costs increase as many small deliveries are needed  Administration costs may rise  Reduction in bulk discounts from suppliers as orders are small  Reputation of business depends a lot on outside factors like reliability of supplier

145

IB Business & Management HL

Suitability of JIT:  Not suitable if costs resulting from production being halted if supplies don’t arrive is much greater than costs of holding buffer stocks  Small firms may not be able to purchase expensive IT systems and thus JIT can’t be justified by potential cost savings  Global inflation makes it cheaper to stock large quantities of stock now, than to buy smaller quantities in future. Rising oil prices make frequent small deliveries more expensive Capacity utilization The proportion of maximum output capacity currently being achieved Current output level  100  Rate of capacity utilization Maximum output level



 At high right, unit fixed costs will be relatively low – costs spread over many units  Good cost advantages  Employees will have sense of job security  At low rate, unit fixed costs will rise  Staff may feel under pressure due to workload – operations management can’t afford any mistakes  Regular customers might be lost as those wishing to increase orders might be turned down  Machinery working at full capacity – no time for maintenance/preventative repairs, causing more unreliability in future Excess/Spare capacity Exists when the current levels of demand are less than the full capacity output of a business Exam Tip: Consider length of time that spare capacity might exist & cause of problem Full capacity When a business produces at maximum output Capacity shortage When demand for a business’s products exceeds production capacity Option 1: Use subcontractors or outsourcing  No major capital investment  Quick to arrange  Greater flexibility – when demand falls, contract can be ended  Less control over quality  Increased administration/transport costs  Uncertainty over delivery times and reliability of delivery  Unit costs may be higher due to supplier’s profit margin Option 2: Capital investment into expansion of production facilities  Long-term increase in capacity  Firm control quality and delivery

146

IB Business & Management HL  New facilities can use newest equipment  Economies of scale  Capital cost may be high  Problems with raising capital  Increases total capacity, but problems if demand falls  Takes time to build and equip Outsourcing / Subcontracting Using another business to undertake a part of the production process rather than doing it within the business using the firm’s own employees. (if it’s done overseas – offshoring)  Reduction and control of operating costs – outsourced companies have economies of scale  Increased flexibility  Improved company focus – company can focus on core activities  Access to quality service or resources that are not available internally  Free up internal resources for use in other areas  Loss of jobs within business – loss of job security/motivation and bad publicity  Quality issues  Customer resistance  Ethical concerns  Security Exam Tip: The more important the overall aims/reputation of a business, the less likely it is to outsource Make-or-buy decisions  Is it cheaper to make the product or buy it? Exam tip: Remember: will the supplier increase prices once firm has closed down its own production capability? Will the quality be as good? Is the supplier reliable? Outsourcing – an evaluation  Firms seek ways of improving competitiveness and more opportunity arise due to globalization  MUST undertake a cost-benefit analysis  Once a whole department is closed/run down, it’s expensive to re-open it  Decide what is a truly core activity that must be kept within direct control of the business

147

IB Business & Management HL 5.8 – Project management

Critical path analysis Planning technique that identifies all tasks in a project, puts them in the correct sequence and allows for the identification of the critical path Network diagram The diagram used in critical path analysis that shows the logical sequence of activities and the logical dependencies between them – critical path can be identified Critical path The sequence of activities that must be completed on time for the whole project to be completed by the agreed date Earliest start time (EST):  Earliest time each activity can begin, taking into account all preceding activities Latest finishing time (LFT):  Latest time an activity can finish without delaying the whole project  LFTs work from right to left easiest  The lowest number at each node is what is required for the LFT Critical path  Those nodes where EST and LFT are equal Total float  Time an activity can be delayed without delaying the whole project duration

148

IB Business & Management HL  Total float = LFT – duration – EST Free float  Length of time an activity can be delayed without delaying the start of the following activities  EST (next activity) – duration – EST (this activity) Dummy activities  Represented by a dotted line  Doesn’t consume time or resources  If A and B start the project, C follows A and D follows A and B  A and B will be connected by a dotted line

 Calculating total project duration allows business to give accurate delivery dates  Calculating EST allows operations manager to order special equipment or materials needed for task at correct time  Calculating LFT allows operations manager to see if project is up to schedule by comparing actual completion times against LFT on diagram  Critical path helps to identify which other activities need to be speeded up if one other activity has been delayed – reduces risk of expensive damage claims etc.  Additional resources for speeding up critical activity can come from non-critical ones – more efficient  Sequential and logical structure is compatible for many computer programs  Putting all activities in order to construct network, forces managers to plan whole project carefully  Network analysis gives design and engineering departments a positive advantage by showing them tasks than can be done simultaneously when developing a new product  Cannot gurantee the success of a project by itself  Only as good as the management  CPA for a completely new project involves a lot of guesswork – no previous experience  Although much is calculated by a computer, skilled labor hours are still needed – time and related expenses must be justified by subsequent cost and efficiency savings of applying the technique

149