AQA A Level Business Year 2 Companion Edition 1

AQA A LEVEL BUSINESS
YEAR 2
COURSE COMPANION
Edition 1
Essential Topic-by-Topic Study Notes

for the AQA A Level Business Year 2
Specification Content (3.7 – 3.10)
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Topic: Corporate Objectives
3.7.1 Mission, corporate objectives and strategy
What You Need to Know

The links between mission, corporate objectives
and strategy
Internal and external influences on corporate objectives and decisions
Influences on corporate objectives should include the pressures for short termism,
business ownership, the external and internal environment.
The distinction between strategy and tactics
What are Objectives?

Objectives are statements of specific outcomes that are to be achieved
Business objectives are:

• The specific intended outcomes of business strategy
• Targets which the business adopts in order to achieve its aims
What are Corporate Objectives?

Corporate objectives are those that relate to the business as a whole
Corporate objective are driven and influenced by the vision, mission and aims of a
business:
The main purposes of corporate objectives include to:

• Provide strategic focus
• Measure performance of the firm as a whole
• Inform decision-making (which involves strategic choice!)
• Set the scene for more detailed functional objectives
The Benefits of SMART Objectives

It is often said that objectives are more likely to be taken seriously and perhaps even
achieved if they comply with the requirements of the SMART acronym. SMART
stands for:
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S Specific Objective should state exactly what is to be achieved

M Measurable Objective should be capable of measurement – so that it is possible to
determine whether (or how far) it has been achieved
A Achievable Objective should be realistic given the circumstances in which it is

set and the resources available to the business
R Relevant Objectives should be relevant to the people responsible for achieving
them
T Time Bound Objectives should be set with a realistic time-frame in mind
The Hierarchy of Objectives in Business

Corporate objectives are positioned towards the top of a hierarchy of business
objectives, with the most important at the top, feeding down into more detailed
tactical and operational objectives. The hierarchy can be illustrated like this:
Key Areas for Corporate Objectives and How These Are Supported by
Functional Objectives
The most common aspects of a business that are impacted by corporate objectives
include:
Area Examples
Market Market share, customer satisfaction, product range
Innovation New products, better processes, using technology
Productivity Optimum use of resources, focus on core activities
Physical & financial Factories, business locations, finance, supplies
resources
Profitability Level of profit, rates of return on investment
Management Management structure; promotion & development
Employees Organisational structure; employee relations
Public responsibility Compliance with laws; social and ethical behaviour
Lower down the objectives hierarchy, the role of functional objectives is to set targets
for each key business function to help ensure that the corporate objectives are
achieved.
Examples of how functional objectives might work to support corporate objectives

would include:
Corporate Objective Example Functional Objective

Increase sales Successfully launch five new products in the next two
years (marketing)
Reduce costs Increase factory productivity by 10% (operations)
Increase cash flow Reduce the average time taken by customers to pay
invoices from 75 to 60 days (finance)
Improve customer Achieve a 95% level of high customer service (people)
satisfaction
Internal and External Influences on Corporate Objectives

Corporate objectives are influenced by a variety of factors that are within the control
of management (internal) as well as factors that a business can do nothing about –
except respond to them if significant (external).
The key internal and external influences can be summarised as follows:
Internal influences:
Internal Influence Comment
Business Ownership Who are the business owners and what do they want to
achieve?
Attitude to Profit Is the business run to earn profits or it is not-for profit?
Ethical Stance Do ethics play a role in a business’ decision-making?
Organisational Culture How is the business structured? How are objectives set and
decisions taken?
Leadership How strong is the influence of leadership in the business in
terms of objectives and how decisions are made?
Strategic position & What options & choices does the business realistically have
resources based on its existing market position & resources?
Stakeholder influence How influential are internal stakeholders?
External influences:
Internal Influence Comment
Short-termism External investor pressure to focus on and achieve short-term

objectives at the expense of long-term strategy?
Economic Perspective on key economic indicators such as economic growth,
environment consumer spending & interest rates?
Political / legal Impact of uncertainty about changes in the political & legal
environment environment?
Competitors Do competitor actions & strategies shape what a business thinks it
can achieve?
Social & How rapid is the pace of social & technological change in a
Technological business’ markets? Does this make objective-setting & decision-
change making easier or harder?
What is Short-termism?
Short-termism is where a business prioritises short-term rather than long-term
performance.
There are various reasons why the management of a business might be more
concerned more with how the business performs in the short, rather than the long-
term. These might include:
• Stock market (investor) focus on latest financial performance (e.g.

shareholder pressure to see a rising share price)
• Bonuses and other financial incentives for management that are largely
based on short-term performance
• Frequent changes in leadership & strategy (e.g. through takeover)
A short-termist approach is likely to involve management focusing on the following

performance measures:
• Share price and market capitalisation

• Revenue growth
• Gross & operating profit
• Unit costs & productivity
• Return on capital employed
If you were looking for possible symptoms of short-termist management you might
identify this from features such as:
• Low investment in R&D (particularly compared with competitors who

make take a more long-term approach)
• High dividend payments rather than reinvesting profits
• Overuse of takeovers rather than internal growth
A common criticism of short-termism is that it does not focus a business on what it

needs to do in order to build a sustainable competitive advantage. For example, some
of the following performance measures might be considered to be more appropriate
for a business taking a long-term rather than short-term perspective:
• Market share
• Quality (including reputation)
• Innovation
• Brand awareness and strength
• Employee skills & experience
• Social responsibility & sustainability
What is the Difference between Strategy and Tactics?

The key differences between strategy and tactics can be summarised as follows:
Strategy Tactics
How the business intends to achieve its Support achievement of specific targets
objectives Usually routine and short-term
Usually long-term Often delegated to junior management
Made by senior management
Some examples of decisions that are either strategic or tactical might include:
Strategic Decision Tactical Decision

External growth via takeover Relocate staff from takeover HQ
Enter international market Choose locations in new market
Adopt cost minimisation strategy Identify specific cost savings
Rebrand the business Launch rebranding campaign
Close a major business unit Determine detailed closure plan
Key Terms
Corporate objectives Business objectives that relate to the performance of the

business as a whole, which for the focus for business strategy
decisions
Short-termism Where the management of a business is predominantly
focused on the short-term performance of the business,
potentially to the detriment of long-term performance
Topic: SWOT Analysis

The value of SWOT analysis
Introduction to SWOT Analysis

SWOT analysis is a method for analysing a business, its resources, and its
environment.
SWOT is commonly used as part of strategic planning and looks at:

• Internal strengths
• Internal weaknesses
• Opportunities in the external environment
• Threats in the external environment
SWOT analysis can help management in a business discover:

• What the business does better than the competition
• What competitors do better than the business
• Whether the business is making the most of the opportunities available
• How a business should respond to changes in its external environment
The result of the analysis is a matrix of positive and negative factors for management
to address:
The key point to remember about SWOT is that:
Strengths and weaknesses

• Are internal to the business – they are within the control of the business
• Relate to the present situation
Opportunities and threats

• Are external to the business
• Relate to changes in the environment which will impact the business
Strengths
Strengths are:
• Things a business is good at
• A characteristic giving a business an important capability
• Sources of clear advantage over rivals
• Distinctive competencies and resources that will help the business achieve its
objectives
Importantly, when it comes to determining strategy:

• Strengths help to build up competitive advantage and serve as a cornerstone of
strategy
• Strengths should be protected and built upon
Here are some examples of possible business strengths:
Examples of Potential Business Strengths

High market share Technological leadership
Achieving economies of scale Brand reputation
High quality Protected IP
Leadership & management skills Distribution network
Financial resources Employee skills
Research and development capabilities High productivity
Flexibility of production
Weaknesses
Weaknesses are:
• A source of competitive disadvantage
• Things the business lacks or does poorly
• Factors that place a business at a disadvantage
• Issues that may hinder or constrain the business in achieving its objectives
Management should seek ways to reduce or eliminate weaknesses before they are
exploited further by the competition. Importantly, weakness should be seen as areas
for improvement.
Here are some examples of possible business weaknesses:
Examples of Potential Business Weaknesses

Low market share Cash flow problems
Inefficient plant Undifferentiated products
Outdated technology Inadequate distribution
Poor quality Low productivity
Lack of innovation Skills shortages
A weak brand name De-motivated staff
High costs Products at the decline stage of product
life cycle
Opportunities
An opportunity is any feature of the external environment which creates positive
potential for the business to achieve its objectives.
Possible sources of business opportunities in most industries and markets include:
Potential Business Opportunities

Technological innovation Higher economic growth
New demand Trade liberalisation
Market growth Diversification opportunities
Demographic change Deregulation of the market or other
Social or lifestyle change legislative change
Government spending programmes
Threats
Threats are any external development that may hinder or prevent the business from
achieving its objectives.
Possible sources of business threats include:
Potential Business Threats

New market entrants Economic downturn
Change in customer tastes or needs Rise of low cost production abroad
Demographic change Higher input prices
Consolidation among buyers New substitute products
New regulations Competitive price pressure
The Value of Using SWOT analysis

There is no point producing a SWOT analysis unless it is actioned! SWOT analysis
should be more than a list - it is an analytical technique to support strategic
decisions
Strategy should be devised around strengths and opportunities and the key words are
match and convert:
Weakness Possible Response

Outdated technology Acquire competitor with leading technology
Skills gap Invest in training & more effective recruitment
Overdependence on a single product Diversify the product portfolio by entering new
markets
Poor quality Invest in quality assurance
High fixed costs Examine potential for outsourcing or offshoring
A key challenge for any business is to convert weaknesses into strengths. Don’t forget
also that for every perceived threat, the same change presents an opportunity for other
businesses.
Evaluating SWOT Analysis

SWOT analysis is widely and effectively used in business management. The key
advantages and disadvantages of using it can be summarised as follows.
Advantages of SWOT Disadvantages of SWOT

Easy to understand Too often lacks focus or contains too many
elements
Logical structure Can quickly get out of date
Focuses on strategic issues Is it an independent assessment?
Encourages analysis of external environment
Key Terms
Strengths Features within the control of a business that are a source of

competitive advantage
Weaknesses Features within the control of a business that are a source of
competitive disadvantage
Opportunities Features of the external environment that create opportunities for
a business to leverage its strengths to benefit the business
Threats Features of the external environment that threaten the
performance and position of a business if not addressed
Topic: Mission Statements

Influences on the mission of a business
The links between mission, corporate objectives and strategy
What is a Mission Statement?

The mission of a business is the overriding purpose of the business and the reason
for its existence. The concept of mission supports the stated “vision” for the future of
the business.
Therefore, the business mission is not about:
• The goals or objectives of the business

• The core values that underpin the culture of the business
• How the business intends to compete or position itself in the market
The mission of a business is usually expressed in a “mission statement”
Where the Mission Statement Fits with Objectives and Strategy

The mission is a key part of the hierarchy of business objectives, as illustrated below:
What Makes for an Effective Mission Statement?

In order for a mission statement to be effective it needs to:
• Provide a clear sense of business purpose

• Excite, inspire, motivate & guide the intended audience
• Be easy to understand and remember
• Help differentiate the business from competitors
• Be designed for all relevant stakeholders - not just shareholders and managers
Topic: Mission Statements
Example Mission Statements
Here are some example mission statements for well-known businesses:
Business Mission Statement

Alibaba To make it easy to do business everywhere
Amazon To be Earth's most customer-centric company where people can find
and discover anything they want to buy online.
Coca-Cola To refresh the world in mind, body and spirit
To inspire moments of optimism and happiness through our brands
and actions
To create value and make a difference.
HP Our mission is to deliver seamless, secure, context-aware
experiences for a connected world
Ikea Our vision is to create a better everyday life for the many people
Microsoft Our mission is to enable people and businesses throughout the world
to realize their full potential
Nike To bring inspiration and innovation to every athlete in the world
Oxfam To create lasting solutions to poverty, hunger, and social injustice
Starbucks To inspire and nurture the human spirit – one person, one cup and
one neighborhood at a time
Uber Transportation as reliable as running water, everywhere for everyone
Criticisms of Mission Statements

Not every mission statement is as relevant or focused as the examples above.
Common criticisms of mission statements include:
• They are not always supported by actions of the business (i.e. there is a
disconnect between what the mission states and what a business actually does)
• Often too vague and general or merely statements of the blindingly obvious
• They are created largely for public relations purposes rather than acting as a
focus for business strategy
• Over time they are treated quite cynically by stakeholders, particularly
employees
Key Terms
Mission Statement A statement of the defining purpose of a business or

organisation
Topic: Liquidity (Current Ratio)
3.7.2 Financial Ratio Analysis

Financial ratio analysis to include: liquidity (current ratio)
What is Liquidity?
Liquidity is concerned with the ability of a business to be able to pay its way – to settle
liabilities such as the monthly payroll, amounts due to suppliers and taxes collected on
behalf of government and so on.
What is a Liquidity Ratio?

A liquidity ratio assesses whether a business has sufficient cash or equivalent current
assets to be able to pay its debts as they fall due.
Where Does the Data to Calculate Liquidity Ratios Come From?

All the financial information you need to calculate a liquidity ratio is contained within
the Statement of Financial Position (aka Balance Sheet):
Income statement Measures business performance over a given period of time, usually
one year. It compares the income of the business against the cost of
goods or services and expenses incurred in earning that revenue
Statement of A snapshot of the business' assets (what it owns or is owed) and its
Financial Position liabilities (what it owes) on a particular day
(Balance Sheet)
Cash flow This shows how the business has generated and disposed of cash and
statement liquid funds during the period under review
Calculating Liquidity Ratios

We calculate liquidity ratios by comparing the ratio of current assets and current
liabilities. Here’s a reminder of what the key parts of each of these two are:
On the top are current assets: which include cash, inventories and trade receivables (or
trade debtors –i.e. amounts owed by customers)
On the bottom are current liabilities, which include amounts owed to suppliers and any
bank overdraft balances (money owed to the bank)
The classic liquidity ratio is known as the current ratio. This is calculated very simply
by dividing current assets by current liabilities.
Topic: Liquidity (Current Ratio)
Let’s look at a simple example of this in action, using the following data:
Calculating the two totals we need for current assets and current liabilities gives us:
Now, simply divide current assets by current liabilities to get the current ratio:
Evaluating the Current Ratio

• A ratio of 1.5 - 2.5 would suggest acceptable liquidity & efficient management
of working capital
• Low ratio (e.g. well below 1) indicates possible liquidity problems
• High ratio: suggests too much working capital tied up in inventories or debtors?
However, don’t forget that:

• The industry or market matters – they have different requirements for holding
inventories, or approaches to trade debt and credit
• How does the current ratio compare with competitors?
• The trend is more important - a sudden deterioration in current ratio is a good
indicator of liquidity problems
Key Terms
Liquidity The ability of a business to settle amounts it owes
Topic: Efficiency Ratios

Financial ratio analysis to include: efficiency ratios: payables days, receivables days,
inventory turnover
What are Efficiency Ratios?

Financial efficiency ratios analyse how effectively a business is managing its assets
The three most commonly used efficiency ratios are:
Inventory Turnover Measures how often each year a business sells and replaces its
inventory
Payables Days Measures the The average length of time taken by a business
to pay amounts it owes
Receivables Days Measures the average length of time taken by customers to
pay amounts owed
Inventory Turnover
Remember that inventories (or “stocks”) are the raw materials, work-in-progress and
finished goods held by a business to enable production and meet customer demand.
The inventory turnover ratio is calculated using this simple formula:
Here are two worked examples of the calculation using real data from two very different
companies – Rolls Royce and Tesco:
£millions Rolls Royce plc Tesco plc

This Year Last Year This Year Last Year
Cost of Sales 10,459 10,533 51,579 59,128
Inventory 2,637 2,768 2,430 2,957
Inventory Turnover 4.0 times 3.8 times 21.2 times 20.0 times
As you can see from the data in table above, there is a significant difference between the
inventory turnover ratios for Rolls Royce (an engineering firm) and Tesco (a supermarket
chain).
Some sectors like engineering, construction and industrial distribution will typically have
low inventory turnover, whereas inventory turnover in retailing, fast-food & restaurants
and motor vehicle production is much higher. This needs to be borne in mind when
comparing the inventory turnover ratios of different businesses.
Therefore, when evaluating the results of inventory turnover calculations remember that:
Topic: Efficiency Ratios
• Inventory turnover varies from industry to industry
• Holding more inventory may improve customer service & allow the business to
meet demand
• Seasonal fluctuations in demand during the year may not be reflected in the
calculations
• Inventory turnover is not relevant to most service businesses
How can a business improve (i.e. increase) its inventory turnover? One or more of the
following might be an option:
• Sell-off or dispose of slow-moving or obsolete inventory

• Introduce lean production techniques to reduce amounts of inventory held
• Rationalise the product range made or sold
• Negotiate sale or return arrangements with suppliers – so inventory can be returned
if it does not sell
Payables & Receivables Days

These two ratios are concerned with how quickly payments are made (to creditors) and
received (from customers) and they use very similar formulae:
Note: both these ratios are expressed in terms of “days”. A worked example of both is
shown in the table below:
Trade receivables = £25,000 Trade payables = £75,000

Revenue = £150,000 Cost of sales = £500,000
Debtor days = 60.8 days Payables days = 54.7 days
Evaluating Receivables & Payables Days
Receivables Days Payables Days

Interpreting the results: Interpreting the results:
Shows average time customers take to pay In general, a higher figure is better for cash flow
Each industry will have a “norm” Ideally, payable days is higher than receivable
Look out for significant changes days
Be careful: a high figure may suggest liquidity
problems (stretching supplier goodwill)
Look out for: Look out for:
Comparisons (good or bad) v competitors Evidence from the current ratio or acid test ratio
Balance sheet window-dressing that business has problems paying creditors
Window-dressing: this is easiest figure to
manipulate
Topic: Profitability (Return on Capital Employed)

Financial ratio analysis to include: Return on capital employed (ROCE)
What is Return on Capital Employed?

ROCE is a measure of relative profitability.
ROCE tells us what returns (profits) the business has made on the resources available
to it. ROCE is particularly useful as a ratio as it helps:
• Evaluate the overall performance of the business

• Provide a target return for individual projects
• Benchmark performance with competitors
Calculating ROCE
To calculate ROCE, you need information about the amount of profit earned in a
particular period (usually a year), which you get from the Income Statement. To
calculate Capital Employed, you need information from the Statement of Financial
Position (Balance Sheet). ROCE is then calculated using the following formula:
A worked example of this formula is provided in the table below:
£’000 COMPANY X COMPANY Y

Non-Current Liabilities 500 700
Share Capital 1,000 1,000
Reserves 250 1,500
Total Equity 1,250 2,500
Operating Profit 400 600
ROCE Calculation: 400 / (1,250 + 500) 600 / (2,500 +700)
ROCE % 22.8% 18.7%
Evaluating ROCE
Key points to remember are:
• ROCE will vary between industries; ROCE is a particularly important measure in
capital-intensive industries with significant amounts of capital employed!
• ROCE is based on a snapshot of a business’ balance sheet
• Comparisons over time and with key competitors are most useful
Topic: Gearing

Financial ratio analysis - gearing
What is “Gearing”
“Gearing” measures the proportion of a business’ capital (finance) provided by debt
What is the Capital Structure of a Business?

The capital of a business represents the finance provided to it to enable it to operate
over the long-term. There are two parts to the capital structure: equity and debt
Equity Finance Debt Finance

Amounts invested by the owners of the Finance provided to the business by
business external parties:
Examples: Examples:
Share capital Bank loans
Retained profits Other long-term loans
What Factors Influence the Mix of Equity and Debt in a Financial Structure?
These factors can be summarised as follows:
Reasons for Higher Equity Reasons for Higher Debt

Where there is greater business risk (e.g. Where interest rates are very low = debt
a startup) is cheap to finance
Where more flexibility required (e.g. Where profits and cash flows are strong;
don’t have to pay dividends) so debt can be repaid easily
Measuring the Level of Debt in a Business Using the Gearing Ratio

The proportion of a business’ finance that is debt is measured by what is known as the
gearing ratio.
The key benefits to calculating the gearing ratio include:
• A useful measure of the financial health of a business

• Focuses on the level of debt in the financial structure of a business
• A high gearing ratio can mean higher risk of business failure (but not always)
Worked Example of How to Calculate & Analyses the Gearing Ratio

Let’s look at how to calculate & analyse the gearing ratio by considering the
following information about two businesses: Company A & Company B:
£million Business A Business B

Non-Current Liabilities (A) 200 500
Total Equity (B) 600 300
Equity + Non-Current Liabilities (A + B) 800 800
Topic: Gearing
The formula for calculating the gearing ratio is as follows
Applying this formula to the financial data for Business A & B, the gearing ratio can
be calculated as follows:
£million Business A Business B

Non-Current Liabilities (A) 200 500
Total Equity (B) 600 300
Equity + Non-Current Liabilities (A + B) 800 800
Gearing (A) / (A + B) 200 / 800 500 / 800
Gearing % 25% 62.5%
As you can see, Business B has much higher gearing (62.5%) than Business A (25%).
Is this a bad thing? As always, it depends!
• A gearing ratio of 50%+ is normally said to be high

• A gearing ratio of less than 20% is normally said to be low
• However, the level of acceptable gearing depends on the business & industry
The relative merits of high or low gearing can be summarised as follows:
Benefits of High Gearing Benefits of Low Gearing

Less capital required to be invested by the Less risk of defaulting on debts
shareholders Shareholders rather than debt providers
Debt can be a relatively cheap source of “call the shots”
finance compared with dividends Business has the capacity to add debt if
Easy to pay interest if profits and cash required
flows are strong
Key Terms
Gearing The proportion of a business’ capital structure that is in the

form of debt
Equity The proportion and amount of the capital structure that is
provided by shareholders or left as retained profits
Topic: Role, Value and Limitations of Financial Ratios

The value of financial ratios when assessing
performance
What is Ratio Analysis?

Ratio analysis involves the comparison of financial data to gain insights into
business performance
Ratio Analysis Helps Answer Questions Such As

Why is one business more profitable than another?
What returns are being earned in investment in a business?
Is a business able stay solvent?
How effectively is a business using its assets?
The Importance of Comparison and Trends

It is important to remember that calculating just one ratio is rarely enough if you are
to gain useful insights into the financial performance of a business. Effective ratio
analysis means you:
• Need to compare with competitors

• Need to analyse over time (trends)
Where Information for Ratio Analysis Comes From?

The financial accounts of a business are the source of the information you need for
ratio analysis:
Income Statement Statement of Financial Position

(Profit & Loss Account) (Balance Sheet)
Revenues Current assets
Cost of Sales Current liabilities
Gross Profit Inventories
Operating Profit Trade receivables & payables
Net Profit (Profit for the Year) Long-term liabilities
Capital & reserves
Ratios perform different purposes and can be grouped into three main types:
Topic: Role, Value and Limitations of Financial Ratios
The key users of these ratio types include:
Limitations of Ratios
Whilst ratio analysis is widely used, it is important to understand some of the key
limitations of ratios and also what financial ratios don’t measure!
Key limitations include:
• One data set is not enough – ratio data over a period of time is much better
• How reliable is the financial data? (see below)
• Ratios are based on the past – they are not a predictor of the future
• Comparability – be careful with comparing ratios, for example, between
different industries
Which might the financial data used in ratios not be wholly reliable?
• Financial information involves making subjective judgements

• Different businesses have different accounting policies
• Potential for manipulation of accounting information (e.g. window-dressing)
Remember that financial ratios are concerned with financial data. So they don’t tell
you directly about how well a business is performing in areas such as:
• Competitive advantages: e.g. brand strength

• Quality
• Ethical & CSR reputation
• Human resource management
Topic: Balanced Scorecard
3.7.3 Analysing the Overall Performance of a Business

Methods of assessing overall business performance to include: Kaplan and Norton’s
Balanced Scorecard model
What is the Balanced Scorecard?

The balanced scorecard provides a relevant range of financial and non-financial
information that supports effective business management.
Background to the balanced scorecard
• It is important to recognise that no single measure can give a broad picture of

the health or performance of a business
• So instead of a single measure, why not a use a composite scorecard involving
a number of different measures. That is the basis for a “balanced scorecard” or
• Kaplan and Norton devised a framework based on four perspectives –
financial, customer, internal and learning and growth.
• Kaplan & Norton argued that the business should then select critical
performance measures for each of these perspectives.
Kaplan & Norton themselves defined the purpose of the Balanced Scorecard as:
“To align business activities to the vision and strategy of the business, improve
internal and external communications, and monitor business performance against
strategic goals.”
Overview of the Balanced Scorecard

Key points to remember are:
• Scorecard is a system of corporate appraisal which looks at financial and non-

financial elements from a variety of perspectives.
• An approach to the provision of information to management to assist strategic
policy formation and achievement.
• It provides the user with a set of information which addresses all relevant
areas of performance in an objective and unbiased fashion.
• A set of measures that gives top managers a fast but comprehensive view of
the business.
The Four Perspectives of the Balanced Scorecard
Topic: Balanced Scorecard
Some examples of how these perspectives might be used to measure and assess key
performance indicators might be:
Benefits and Drawbacks of the Balanced Scorecard

The overall usefulness of using a balanced scorecard to measure business
performance can be summarised as:
Benefits Drawbacks
Broader view of business performance Danger of too many KPIs
Links performance measurement to long- Need to have balance between the four
term (mission & vision) perspectives – not easy
Involves everyone in the business (not just Senior management may still be too
financial stakeholders) concerned with financial performance
Highly flexible – KPIs chosen by the Needs to be updated regularly to be useful
business
Key Terms
Balanced scorecard A range of financial and non-financial performance measures

that provide key insights from the perspective of customers,
internal processes, organisational capacity and finance.
Key Performance A performance metric that can be used to assess and evaluate
Indicators (KPIs) the performance of a business or organisation
Topic: Non-Financial Performance Data

How to analyse data other than financial statements to assess the strengths and
weaknesses of a business
Data other than financial statements should include operations, human resource and
marketing data
Why Non-Financial Data is Important – the Limitations of Financial Data in

Assessing Business Performance
Though widely-used, there are limitations with relying on analysis of financial data in
assessing business performance. These limitations include:
• Financial ratios tend to look backwards – at historical financial performance

• Financial ratios focus on measures that are possibly most important to
shareholders than business management or other stakeholders
• Financial data is not solely the best way of understanding how a business is
performing in terms of key competitive performance
• Financial data tends to be more short-term in focus, whereas the value of a
business is often built over the longer-term
Key Areas of Non-Financial Performance Data

Some of the most important and widely-used non-financial measures of business
performance are shown in the table below. You will be familiar with many of these
from your studies of the main functional areas of business in addition to finance,
namely, operations, human resource management and marketing
Operations HRM Marketing

Efficiency (unit costs) Labour turnover Market share
Labour productivity Labour productivity Sales per employee
Capacity utilisation Unit labour costs Sales growth (volume)
Break-even output Absenteeism rate Customer retention rate
Quality (reject rate) Revenue per employee Brand reputation &
Quality (lead time) Staff retention rate awareness
Job satisfaction
In addition to the above non-financial performance measures, a business might also

useful track metrics concerned with:
• Environmental performance
• Compliance regulation
• Health & safety record
• Social media reach and engagement
How Financial and Non-Financial Measures Are Connected

A key skill for business managers (and for A Level Business students) is to
understand the relationship between financial and non-financial measures.
It is often possible to explain and interpret changes in financial measures by reference

to related non-financial data.
Topic: Non-Financial Performance Data
For example:
Financial Measure Related Non-Financial Measures

E.g. an improving operating profit margin Potentially linked to:
compared with key competitors might Higher market share
indicate one or more of these non- Economies of scale (lower unit costs)
financial measures Improved product quality
Increasing customer retention & loyalty
Lower labour turnover & higher labour
productivity
Topic: Elkington Triple Bottom Line

The value of different measures of assessing business performance: to include
Elkington’s Triple Bottom Line (Profit, People, Planet)
What is the “Triple Bottom Line”?

The Triple Bottom Line is a concept that encourages the assessment of overall
business performance based on three important areas: Profit, People and Planet
Limitations with Traditional Measures of Business Performance

The Triple Bottom Line approach (Profit, People and Planet) arose out of frustration
with traditional, financially-focused measures of business performance, which have
tended to emphasise profit as the key metric
• Businesses are usually assumed to be profit-maximisers

• Profit is the traditional measure of business success
• Profit is closely linked with business value (e.g. share price and market
capitalisation)
• Profit is often the basis for financial incentives (e.g. senior management
bonuses)
Is there More to Business Success than Profit?

In his model, John Elkington argues for a more balanced approach to measuring
performance over time:
So Profit, People and Planet aims to measure the financial, social and environmental
performance of a business over a period of time.
Profit Familiar to managers

Identified from income statement (profit and loss account)
Audited = reliable figure
Planet Measures the impact of business activity on the environment
More tangible – e.g. emissions, use of sustainable inputs
People Measures extent to which business is socially responsible
Harder to calculate & report reliably & consistently
Topic: Elkington Triple Bottom Line
Benefits of Measuring the Triple Bottom Line
The potential benefits of measuring a broader scope of business performance based on
Profit, Planet & People include:
• Encourages businesses to think beyond narrow measure of performance

(profit)
• Encourages CSR reporting
• Supports measurement of environmental impact & extent of sustainability
Criticisms of The Triple Bottom Line

Amongst the criticisms that have been made of Elkington’s model are:
• Not very useful as an overall measure of business performance

• Hard to reliably and consistently measure People & Planet bottom-lines
• No legal requirement to report it – so take-up has been poor
Key Terms
Corporate social Where businesses address social and environmental

responsibility considerations as part of their normal business activities.
Sustainable business Business activity that does not degrade the long-term
resources of the planet
Topic: Core Competencies

The importance of core competences
What is a Core Competence?

A core competence is something unique that a business has, or can do, strategically
well. The concept of core competencies was first developed by Hamel & Prahalad
who argued that:
“The key to competing in the future is building, deploying, protecting and

defending core competencies…”
You can see, therefore, that core competencies link closely with the idea of business
strengths, which you have studied as part of SWOT analysis.
Core competencies are:
• The collective learning within the business

• The ability of a business to integrate skills and technologies
• The ability of a business to deliver superior products and services
• Ways a business is differentiated to be competitive
Some examples of ways that well-known businesses have developed and sustained
core competencies are highlighted below:
Business Core Competencies

Ikea Innovative design capabilities
Unique organisational culture
Apple Integrated ecosystem of software & devices
Design built around the user
Dominos Pizza Integration of multi-channel systems
A profitable and proven franchise model
Starbucks Localised customer experience
Differentiated global brand
Topic: Core Competencies
What Counts as a Core Competence?
According to Hamel & Prahalad, a core competence need to satisfy three criteria:
• It provides benefits for consumers

• It is not easily copied by competitors
• It can be leveraged widely to many products & markets?
Criticisms of the Idea of Core Competencies

Whilst Hamel & Prahalad’s work on core competencies is widely respected, their
theory has come in for some criticism. The main criticisms are:
• By encouraging business to focus on their core competencies, many larger

firms took this as a sign that they needed to outsource non-core business
activities. It is argued that over-zealous outsourcing has damaged business
competitiveness
• It is, of course, difficult to identify core competencies that are genuinely
unique to any one particular business
• It is possible for a business to become complacent about its core
competencies, believing them to be unique, only to find that a competitor has
acquired the same abilities!
Key Terms
Core competencies Things that are unique that a business has, or can do,
strategically well, which provide a source of competitive
advantage.
Topic: Political & Legal Change
3.7.5 Political & Legal Change

The impact of changes in the political and legal environment on strategic and
functional decision making
The political and legal environment should include a broad understanding of the
scope and effects of UK and EU law related to competition, the labour market and
environmental legislation
Important note for students:

The AQA A Level Specification was completed before the UK voted to leave the EU on
23 June 2016. Brexit will involve significant changes in the legislative and regulatory
environment for businesses.
Introduction to Legislation
Government legislation is one important part of the overall external environment.
You do not need to be an expert in the areas of legislation covered in this part of the
specification. What is needed is more of an overview of the key areas where legislation
impacts business activity. The key points for each are set out below.
Main roles of business legislation

Legislation as it relates to business is designed to:
• Regulate the rights and duties of people carrying out business in order to ensure
fairness
• Protect people dealing with business from harm caused by defective services
• Ensure the treatment of employees is fair and un-discriminatory
• Protect investors, creditors and consumers
• Regulate dealings between business and its suppliers
• Ensure a level playing field for competing business
Employee protection
The key areas impacting on business are those relating to individual employment
(particularly pay and discrimination) and industrial disputes.
Equal pay
The basic rule: men and women are entitled to equal pay for work of equal value
• “Pay” includes everything in the employment contract - bonuses and pension
contributions, as well as basic wages or salary
• Workers have the right to ask their employer for information to check equality –
using the equal pay questionnaire
• If they believe their pay is unequal, they can take the employer to an Employment
Tribunal
Minimum wage
• Employers are required by law to ensure they pay their workers at least the national
minimum wage (NMW)
• Makes no difference when a worker is paid (monthly, weekly, daily, hourly). The
NMW still applies
Discrimination
It is illegal for an employer to discriminate against an employee on the basis of:
• Sex, including pregnancy and maternity

• Marital / civil partnership status
• A person's disability
• Race
• Age
• Sexual orientation
• Religion/belief
• Trade union membership or non-membership
• Status as a fixed-term or part-time worker
Employment rights
Laws provide a variety of “rights” for employees, including:
• Reasonable notice before dismissal
• Right to redundancy
• Right to a written employment contract
• Right to request flexible working
• Right to be paid national minimum wage
• Right to take time off for parenting
Industrial relations
• Protection from unfair dismissal
• Employers must recognise union is >50% of staff are members
• Regulation of procedures for industrial action (e.g. ballots)
• Role / powers of Employment Tribunals
• EU – Works Councils requirements
Consumer Protection
Legislation provides a wide variety of protections to consumers when they transact with
businesses. In particular, businesses must ensure that
• Goods fit their description

– E.g. organic wine really must be organic
– Businesses need to take care with descriptions – avoid inaccurate claims
• Must be of satisfactory quality
– Test is of a “reasonable person”
– Must work and have no major blemishes
• Goods are fit for the purpose specified
– E.g. a watch should tell the time
– Businesses should take care when explaining what a product can be used for
Other ways in which consumers are protected by legislation:
• Businesses may not use unfair commercial practices – e.g. misleading advertising
• Customers have a right of return and full refund if goods /services do not comply
with law
• Services
– Must be done at a reasonable price and by the time stated
– Customer can request that unsatisfactory work be repaired or carried out again
at no cost
• Consumers have the right to a “cooling off period”
• Distance selling regulations provide further protection for consumers against online
businesses
Distance Selling Gives consumers protection when they buy goods or services by mail
Regulations order, phone or online
The Sale of Goods Requires goods to be as described, fit for their purpose and of
Act satisfactory quality. If they are not, the customer can reject them
Supply of Goods and Customers are entitled to work that's carried out with reasonable skill,
Services Act in a reasonable time, at a reasonable price
Trade Descriptions Required any descriptions of goods and services given to be accurate
Act and not misleading
Environmental Protection
Businesses must comply with a wide variety of environmental laws and regulations.
These are set at local, UK and European levels. The key areas of impact are:
- Emissions into the air

- Storage, disposal & recovery of business waste
- Storing and handling hazardous substances
- Packaging
- Discharges of wastewater
Competition Laws
The main aims of laws designed to regulate market competition include:
• Wider consumer choice in markets for goods and services

• Encouraging and protecting innovation
• Effective price competition between suppliers
• Investigating allegations of anti-competitive behaviour within markets which might
have a negative effect on consumers
Both UK and EC competition law prohibit agreements, arrangements and

concerted business practices which appreciably prevent, restrict or distort
competition (or have the intention of so doing)
Examples of prohibited agreements include:
• Agreements which directly or indirectly fix purchase or selling prices, or any other
trading condition (e.g. discounts or rebates, etc)
• Agreements which limit or control production, markets, technical development or
investment (e.g. setting quotas or levels of output)
• Agreements which share markets or sources of supply
Health & Safety Legislation
Health and safety is about preventing people from being harmed at work or becoming
ill, by taking the right precautions and providing a satisfactory working
environment.
An employer has important responsibilities for health & safety. It is not just about
protecting staff – health & safety applies to many people who come into contact with the
business; for example:
• Employees working at the business premises, from home, or at another site

• Visitors to the premises such as customers or subcontractors
• People at other premises where the business is working, such as a construction site
• Members of the public - even if they're outside the business premises
• Anyone affected by products and services the business designs, produces or supplies
There are stringent health & safety regulations specific to particular industries too: for
example:
• Food processing (hygiene)

• Hotels (guest safety, hygiene)
• Chemical production (dangerous processes, waste disposal)
• Air travel (passenger safety)
• Tour operators (holidaymaker safety)
Topic: Inflation
3.7.5 Analysing the External Environment – Economic Change

Economic factors to include: inflation
Inflation
Inflation is a sustained increase in the average price level of an economy.
The rate of inflation is measured by the annual percentage change in the level of
prices as measured by the consumer price index. A sustained fall in the general price
level is called deflation – in this situation, the rate of inflation becomes negative.
The consumer price index is the main measure of inflation for the UK
The government has set the Bank of England a target for inflation (using the CPI) of
2%. The aim of this target is to achieve a sustained period of low and stable inflation.
Low inflation is also known as price stability
The recent level of consumer price inflation in the UK is illustrated in the chart below:
Why is the Rate of Inflation in the UK So Low Recently?

The UK has experienced a very low level of inflation in recent years, particularly when
compared with the rates of inflation in the last 10-30 years. Key reasons why UK
inflation has been consistently low include:
• Falling global commodity prices including oil

• Slow wage growth in the labour market
• Falling food prices (globally + supermarket price wars)
• Sustained price deflation in technology products
• Slower real economic growth – falling towards 2%
• Still some spare capacity on the supply-side of the economy
Causes of Inflation
What causes prices to rise? There are two main causes of inflation:
Topic: Inflation
Too much Businesses respond to high demand by raising prices to increase their profit
demand margins
Excess demand in the economy or a market is associated with the boom
phase of the business cycle
Rising Main causes:
business costs External shocks (e.g. commodity price fluctuations)
A depreciation in the exchange rate
Faster growth in wages and salaries
What happens?
Firms raise prices to protect their profit margins – better able to do this
when market demand is price inelastic
“Wages often follow prices”
A rise in inflation can lead to rising inflationary expectations
The main costs and consequences of inflation:
• Money loses its value and people lose confidence in money as the value of
savings is reduced
• Inflation can get out of control - price increases lead to higher wage demands as
people try to maintain their living standards. This is known as a wage-price
spiral.
• Consumers and businesses on fixed incomes lose out because the their real
incomes falls - employees in poor bargaining positions lose out
• Inflation can favour borrowers at the expense of savers – because inflation erodes
the real value of existing debts
• Inflation can disrupt business planning and lead to lower capital investment
• Inflation is a possible cause of higher unemployment in the long term – because
of a lack of competitiveness
• Rising inflation is associated with higher interest rates - this reduces economic
growth and can lead to a recession
Inflation and price elasticity of demand
• Remember that price elasticity of demand refers to the responsiveness of demand

to changes in price
• When demand is elastic, a price rise leads to a more than proportionate fall off
in quantity demanded
• When demand is inelastic, a price rise leads to a less than proportionate fall off
in quantity demanded
• Businesses with products that have inelastic price elasticity of demand will be
less affected by a rise in inflation
• Some businesses will be able to absorb price increases by becoming more
efficient
• Price inflation will vary from industry to industry – be careful about making
generalisations
Key Terms
Inflation A sustained increase in the average price level of an economy
Topic: Exchange Rates

Economic factors to include: exchange rates
What is an Exchange Rate?

An exchange rate is the price of one currency expressed in terms of another
currency.
The forces of demand and supply in the currency markets determine the price
(exchange rate). Just like the commodity markets for oil and coffee, the price of a
currency will reflect the amount of the currency that consumers and businesses want
to buy (demand) and sell (supply).
The exchange rate determines how much of one currency has to be given up in order
to buy a specific amount of another currency.
For example, a £/$ exchange rate might be 1.50. That means, for every £1, you can
buy $1.50 US dollars
This is the price of one pound, expressed in dollars i.e. the £/$ exchange rate.
What happens when an exchange rate changes? Let’s look at a simple example.
Set out below are two exchange rates for two months:
£1 buys May September

US Dollars ($) $1.60 $1.45
Euros (€) €1.15 €1.05
In the table above, you can see that in May, £1 would buy $1.60, if you wanted to
convert some pounds into US dollars. Alternatively, £1 would buy €1.15 euro.
What happened to the exchange rate for the pound between May and September?
The value of £1 fell against both the US dollar and the Euro. For example, by
September, £1 would only buy you $1.45, a fall of $0.15 from May.
That means that the pound weakened against the dollar (and the euro).
Putting it another way, the value of the US dollar strengthened against the pound.
If you were holding dollars, you would need less of them to convert into £1.
Topic: Exchange Rates
Factors that determine effect of changing exchange rates on business
Low effect on business High effect on business

No export sales – turnover all in domestic Significant export sales, perhaps in many
(UK) market currencies
All business activities located in UK Overseas operations, earning profits in
foreign currency
Raw materials and other supplies bought Significant purchases from overseas
in UK suppliers
Demand predominantly from domestic Substantial demand from overseas visitors
(UK) customers to UK
Demand is price inelastic Demand is price elastic
Higher costs can be passed on to Higher costs usually have to be absorbed
customers to maintain margin via a lower margin
Exchange Rates and Price Elasticity of Demand

Price elasticity of demand is an important concept for any business where demand
may be affected by changing exchange rates
E.g. price elastic demand

• Stronger (higher) exchange rate will increase selling price for export customers
(e.g. they have to use more US$ for each £1)
• Likely to result in greater reduction in quantity demanded + overall reduction in
export sales
Key Terms
Exchange Rate The price of one currency expressed in terms of another

currency
Topic: Fiscal & Monetary Policy

Economic factors to include: taxation, fiscal & monetary policy
Government Spending & Taxation – Fiscal Policy
Fiscal policy involves the use of government spending, taxation and borrowing to
affect the level and growth of economic activity.
The government taxes in order to:
• Raise revenue – to finance government spending

• Managing aggregate demand – to help meet the government’s macroeconomic
objectives
• Changing the distribution of income and wealth
• Address market failure and environmental targets
There are two main kinds of taxation: direct and indirect.
Direct Taxation Indirect Taxation

Levied on income, wealth and profit Levied on spending by consumers on goods
and services
Main examples: Main examples:
• Income Tax – VAT
• National Insurance Contributions – Excise duties on fuel and alcohol, car tax,
• Corporation Tax betting tax etc
• Capital Gains Tax
Government Spending
In the UK government spending takes up around 40% of annual GDP. Three main
areas of spending are:
• Transfer Payments - welfare payments made to benefit recipients such as the

state pension and the Jobseeker’s Allowance
• Current Spending - spending on state-provided goods & services such as
education and health
• Capital Spending - infrastructural spending such as spending on new roads,
hospitals, motorways and prisons
Why is Government spending so significant?
• Provide welfare support for low income households / the unemployed

• Government spending is also a means of redistributing income within society e.g.
to reduce the scale of relative poverty
• Government spending can also be used as a tool to manage aggregate demand
(GDP) as part of macroeconomic policy
Monetary Policy - Interest Rates
Topic: Fiscal & Monetary Policy
An interest rate is the reward for saving and the cost of borrowing expressed as a
percentage of the money saved or borrowed. At any one time there are a variety of
different interest rates operating within the external environment; for example:
• Interest rates on savings in bank and other accounts

• Borrowing interest rates
• Mortgage interest rates (housing loans)
• Credit card interest rates and pay day loans
• Interest rates on government and corporate bonds
The Bank of England uses policy interest rates to help regulate the economy and meet
economic policy objectives.
The Bank of England Base Rate has been very low and stable for several years – at
0.5% since 2010.
What might happen if interest rates start to rise? Possible effects might be:
• Cost of servicing loans / debt is reduced – boosting spending power

• Consumer confidence should increase leading to more spending
• Effective disposable income rises – lower mortgage costs
• Business investment should be boosted e.g. prospect of rising demand
• Housing market effects – more demand and higher property prices
• Exchange rate and exports – cheaper currency will increase exports
Key Terms
Fiscal Policy The use of government spending, taxation and borrowing to

affect the level and growth of economic activity.
Monetary Policy The management of the supply of money in an economy
through interest rates and other measures to affect economic
activity
Topic: Open Trade v Protectionism

Economic factors to include: open trade and protectionism
What is Open Trade?

Free (open) trade is an economic policy of not discriminating against imports from and
exports to other countries.
Buyers and sellers from separate economies may trade without the domestic government
applying tariffs, quotas, subsidies or prohibitions on their goods and services.
The key benefits of open trade include:
• Countries can benefit from comparative advantage

• Businesses can better achieve economies of scale
• Encourages competition and economic efficiency
• Enables businesses to grow beyond their domestic borders
The World Trade Organization (WTO) is the only international organisation dealing with
the global rules of trade between nations. Its main function is to ensure that trade flows
as smoothly, predictably and freely as possible.
What is Protectionism?
Protectionism involves any attempt by a country to to impose restrictions on trade in
goods and services.
The main aim of protectionism is to cushion domestic businesses and industries from
overseas competition and prevent the outcome resulting solely from the interplay of free
market forces of supply and demand. The three main types of protectionism are
summarised below:
Import A tariff a tax or duty that raises the price of imported products and causes a
Quotas reduction in domestic demand and an expansion in domestic supply. For
example, until recently, Mexico imposed a 150% tariff on Brazilian chicken.
The United States has an 11% import tariff on imports of bicycles from the
UK!
Tariffs Quotas are volume limits on the level of imports allowed or a limit to the
value of imports permitted into a country in a given time period. For
example, until 2014, South Korea maintained strict quotas on imported rice. It
has now replaced a quota with import tariffs designed to protect South Korean
rice farmers. Quotas do not normally bring in any immediate tax revenue for
the government although if they cause domestic production and incomes to
expand, there will be a beneficial impact on taxes paid.
Domestic & A subsidy is a payment to encourage domestic production by lowering their
Export costs. Well known subsidies include Common Agricultural Policy in the EU,
Subsidies or cotton subsidies for US farmers and farm subsidies introduced by countries
such as Russia. In 2012, the US government imposed tariffs on Chinese
manufacturers of solar panel cells, judging that they benefited from unfair
export subsidies after a review that split the US solar industry.
Topic: Open Trade v Protectionism
Whilst protectionism might seem not to be in the best interests of business and society,
there are several reasons why protectionism is favoured and encouraged by some
economies (to a greater or lesser extent):
Infant Industry Help infant or fledgling industries establish themselves, including

Protection achieving economies of scale
Protection of Protect jobs, skills and capabilities in key (strategic) industries to a
Strategic Industries country
Protection Against Dumping is a form of predatory pricing which can seriously damage
Import Dumping domestic industries
The key arguments against protectionism (which are in effect also arguments in support of
open or free trade) include:
Higher prices for Particularly arising from import tariffs or import quotas that restrict
consumers market supply
Retaliation from Protectionist measures often result in retaliation - such as price wars
other countries
Extra costs for Protectionism that becomes widespread in global industries
exporters increases the costs facing domestic firms trying to export
Key Terms
Protectionism An economy policy that involves any attempt by a country to

to impose restrictions on trade in goods and services or to
favour domestic firms against international competition
Open trade An economic policy of not discriminating against imports
from and exports to other countries
Topic: GDP & Business Cycle

Economic factors to include: GDP
Business Cycle
The business cycle is all about the rate of change in the value of economic activity. The
most common measure of this activity is Gross Domestic Product (GDP).
• The level of demand in most markets is influenced by the rate of economic growth
• Economies vary in terms of their “normal” long-term growth rate. A mature
economy like the UK has a long-term growth rate of around 2-3%
• GDP growth will vary depending on the stage of the business cycle
The business cycle describes:
• The changes in GDP from one quarter to the next

• The traditional sequence of slump, recovery, boom and recession
• The regular pattern of “ups and downs” in the economy
The traditional sequence of the business cycle is usually something like this:
Topic: GDP & Business Cycle
The main stages in the business cycle diagram above can be summarised as follows:
Boom • High levels of consumer spending, business confidence, profits and

investment
• Prices and costs also tend to rise faster
• Unemployment tends to be low
Recession • Falling levels of consumer spending and confidence mean lower
profits for businesses – which start to cut back on investment
• Spare capacity increases + rising unemployment
Slump / • Very weak consumer spending and business investment
depression • Many business failures
• Rapidly rising unemployment
• Prices may start falling
Recovery • Things start to get better
• Consumers begin to increase spending
• Businesses feel a little more confident and start to invest again
• But it takes time for unemployment to stop growing
What Causes the Business Cycle?
• Changes in the level of business and consumer confidence

• Alternating periods of stocking (businesses increasing their stocks) and de-stocking
(reducing the value of stocks held)
• Changes in the value of consumer spending and business investment
• Changes in government policy which can induce a change in the economy
Key Terms
Gross Domestic Product The total measured value of economic activity in an economy,
(GDP) measured over a particular period.
Topic: Globalisation

Reasons for greater globalisation of business
The importance of globalisation for business
What is Globalisation?
The OECD defines globalisation as
“The geographic dispersion of industrial and service activities, for example research and
development, sourcing of inputs, production and distribution, and the cross-border
networking of companies, for example through joint ventures and the sharing of assets.”
Key points to remember about the overall process of globalisation:
• Globalisation is a process in which economies have become increasingly

integrated and inter-dependent
• Globalisation is dynamic rather than an end state
• Globalisation is not inevitable – it can reverse, indeed the growth of world trade
in goods and services slowed in recent years following the global financial crisis
Key Features of the Changing Global Economy
The world’s largest economies, as measured by their share of global GDP, are illustrated
in the chart below:
It is important to understand that the world economy has changed significantly in recent
decades and continues to change as emerging economies develop further. Since 1980 the
share of global economic output has shifted towards Asian-Pacific countries who now
dominate, as illustrated in the chart below:
The Key Features of Globalisation

The process of globalisation has had a dramatic effect on both the structure of the global
economy and also how business is done in international markets. The key features of
globalisation include:
• Trade to GDP ratios are increasing for most countries

• Expansion of Financial Capital Flows between countries
• Foreign Direct Investment and Cross Border M&A
• Rising number of global brands – including from emerging countries
• Deeper specialization of labour – components come from many nations
• Global supply chains & new trade and investment routes e.g. South-South trade
• Increasing levels of international labour migration and migration within countries
• Increasing connectivity of people and businesses through mobile and Wi-Fi
networks
What Factors Have Contributed to Globalisation?

Whilst there are many factors that contributed to the process of globalisation, certain
factors are widely considered to have played a major role over the long-term. These are
summarised below:
Containerization The costs of ocean shipping have come down, due to containerization,
bulk shipping, and other efficiencies. The lower unit cost of shipping
products around the global economy helps to bring prices in the country
of manufacture closer to those in export markets, and it makes markets
more contestable globally
Technological Rapid and sustained technological change has reduced the cost of
change transmitting and communicating information – sometimes known as “the
death of distance” – a key factor behind trade in knowledge products
using web technology.
Economies of Many economists believe that there has been an increase in the minimum
scale efficient scale (MES) associated with some industries. If the MES is
rising, a domestic market may be regarded as too small to satisfy the

selling needs of these industries. Many emerging countries have their
own transnational corporations
Differences in The desire of businesses to benefit from lower unit labour costs and other
tax systems favourable production factors abroad has encouraged countries to adjust
their tax systems to attract foreign direct investment (FDI). Many
countries have become engaged in tax competition between each other in
a bid to win lucrative foreign investment projects.
Shift from Old forms of non-tariff protection such as import licensing and foreign
protectionism exchange controls have gradually been dismantled. Borders have opened
towards open and average import tariff levels have fallen. However, in the last few
trade years, there has been a rise in non-tariff barriers such as import quotas as
countries have struggled to achieve real economic growth and as a
response to persistent trade and current account deficits
Growth of In their pursuit of revenue and profit growth, increasingly global
MNCs businesses and brands have invested significantly in expanding
internationally. This is particularly the case for businesses owning brands
that have proved they have the potential to be successfully globally,
particularly in faster-growing economies fuelled by growing numbers of
middle class consumers.
Who Benefits from Globalisation?

The key potential benefits for businesses and the economies in which they operate
include:
• Encourages producers and consumers to benefit from deeper division of labour and
economies of scale
• Competitive markets reduce monopoly profits and incentivise businesses to seek
cost-reducing innovations
• Enhanced growth has led to higher per capita incomes – and helped many of
poorest countries to achieve faster economic growth and reduce extreme poverty
measured as incomes
• Advantages from the freer movement of labour between countries
• Gains from the sharing of ideas / skills / technologies across national borders
• Competitive pressures of globalisation may prompt improved governance and
better labour protection
Drawbacks and Risks of Globalisation
Key points include:
• Inequality: Globalisation has been linked to rising inequalities in income and

wealth. Evidence for this is the growing rural–urban divide in countries such as
China, India and Brazil. This leads to political and social tensions and financial
instability that will constrain growth. Many of the world’s poorest people do not
have access to basic technologies and public goods. They are excluded from the
benefits.
• Inflation: Strong demand for food and energy has caused a steep rise in
commodity prices. Food price inflation has placed millions of the world’s poorest
people at great risk.
• Vulnerability to external economic shocks – national economies are more
connected and interdependent; this increases the risk of contagion i.e. an external
event somewhere else in the world coming back to affect you has risen / making a
country more vulnerable to macro-economic problems elsewhere
• Threats to the environment: Irreversible damage to ecosystems, land
degradation, deforestation, loss of bio-diversity and the fears of a permanent
shortage of water afflict millions of the world’s most vulnerable
• Race to the bottom – nations desperate to attract inward investment may be
tempted to lower corporate taxes, allow lax health and safety laws and limit basic
welfare safety nets with damaging social consequences
• Trade imbalances: Global trade has grown but so too have trade imbalances.
Some countries are running big trade surpluses and these imbalances are creating
tensions and pressures to introduce protectionist policies such as new forms of
import control. Many developing countries fall victim to export dumping by
producers in advanced nations (dumping is selling excess output at a price below
the unit cost of supply.)
Topic: Porter’s Five Forces Model
3.7.7 The Competitive Environment

An understanding of the five forces to include:
• entry threat (barriers to entry)
• buyer power
• supplier power
• rivalry
• substitute threat.
Students should consider how the five forces shape competitive strategy.
Introduction to Porter’s Five Forces Model

The Five Forces Model was devised by Professor Michael Porter. The model is a
framework for analysing the nature of competition within an industry.
Introduction & Background - the Nature of Industry Competition

Every market or industry is different. Take any selection of industries and you should be
able to find differences between them in terms of:
• Size (e.g. sales revenue, volumes, numbers of customers)

• Structure (e.g. the number of brands and competitors)
• Distribution channels (how the product gets from producer to final consumer)
• Customer needs and wants (the basis of marketing segmentation)
• Growth (the rate of growth and which businesses are growing faster or slower
than the market)
• Product life cycle (the stage of the life cycle for the industry as a whole and for
products and brands within it)
• Alternatives for the consumer (e.g. substitute products)
The result of the above differences is that industries vary in terms of how much profit
they make. To take two classic examples:
Why do airlines make so little profit (and such big losses)? There are several factors,
including:
• Very intensive competitor rivalry – mainly on price

• Low barriers to entry – lots of new airlines who want to set up
• Suppliers of aircraft & equipment are powerful – can charge high margins
• Customers have lots of substitute options – e.g. rail, car
• High fixed costs – airline losses rise significantly if revenues fall only slightly
since it costs roughly the same to fly half-empty planes as full ones
By contrast, why are profits so high in the soft drinks market? The answer is mainly that:
• Customers and suppliers have little power – Pepsi has many millions of individual
consumers, and thousands of retail distributors none of whom has much influence
over the business
• There is high brand awareness & loyalty = less consumer desire for substitutes
• High barriers to entry – how do you enter a market dominated by Coca-Cola and
Pepsi?
What we have illustrated above is some analysis that you would obtain by considering
Porter’s Five Forces Model.
The Five Forces
Porter identified five factors that act together to determine the nature of competition
within an industry. These are the:
• Threat of new entrants to a market

• Bargaining power of suppliers
• Bargaining power of customers ("buyers")
• Threat of substitute products
• Degree of competitive rivalry
He identified that high or low industry profits (e.g. soft drinks v airlines) are associated
with the following characteristics:
Low industry profits associated with: High industry profits associated with:
Strong suppliers Weak suppliers
Strong customers (buyers) Weak customers (buyers)
Low entry barriers High entry barriers
Many opportunities for substitutes Few opportunities for substitutes
Intense rivalry Little rivalry
Let's look at each one of the five forces in a little more detail to explain how they work.
Threat of New Entrants

If new entrants move into an industry they will gain market share & rivalry will intensify.
The position of existing firms is stronger if there are barriers to entering the market.
If barriers to entry are low then the threat of new entrants will be high, and vice versa
Barriers to entry are, therefore, very important in determining the threat of new entrants.
An industry can have one or more barriers. The following are common examples of
successful barriers:
What makes an industry easy or difficult to enter? The following table helps summarise
the issues you should consider:
Bargaining Power of Suppliers
If a firm's suppliers have bargaining power they will:

• Exercise that power
• Sell their products at a higher price
• Squeeze industry profits
If the supplier forces up the price paid for inputs, profits will be reduced. It follows that
the more powerful the customer (buyer), the lower the price that can be achieved by
buying from them.
Suppliers find themselves in a powerful position when:
• There are only a few large suppliers

• The resource they supply is scarce
• The cost of switching to an alternative supplier is high
• The product is easy to distinguish and loyal customers are reluctant to switch
• The supplier can threaten to integrate vertically
• The customer is small and unimportant
• There are no or few substitute resources available
Just how much power the supplier has is determined by factors such as:
Bargaining Power of Customers

Powerful customers are able to exert pressure to drive down prices, or increase the
required quality for the same price, and therefore reduce profits in an industry.
A great example in the UK currently is the dominant grocery supermarkets which exert
great power over supplier firms.
Several factors determine the bargaining power of customers, including:
Customers tend to enjoy strong bargaining power when:

• There are only a few of them
• The customer purchases a significant proportion of output of an industry
• They possess a credible backward integration threat – that is they threaten to buy
the producing firm or its rivals
• They can choose from a wide range of supply firms
• They find it easy and inexpensive to switch to alternative suppliers
Threat of Substitute Products

A substitute product can be regarded as something that meets the same need.
Substitute products are produced in a different industry –but crucially satisfy the same
customer need. If there are many credible substitutes to a firm's product, they will limit
the price that can be charged and will reduce industry profits.
The extent of the threat depends upon

• The extent to which the price and performance of the substitute can match the
industry's product
• The willingness of customers to switch
• Customer loyalty and switching costs
If there is a threat from a rival product the firm will have to improve the performance of
their products by reducing costs and therefore prices and by differentiation.
Overall Degree of Competitive Rivalry

If there is intense rivalry in an industry, it will encourage businesses to engage in:
• Price wars (competitive price reductions),

• Investment in innovation & new products
• Intensive promotion (sales promotion and higher spending on advertising)
All these activities are likely to increase costs and lower profits.
Several factors determine the degree of competitive rivalry; the main ones are:
Topic: Investment Appraisal – Payback Period
3.7.8 Analysing strategic options: investment appraisal

Investment appraisal should include the calculation and interpretation of payback
The Three Main Methods of Investment Appraisal

Payback period is one of three methods of investment appraisal that you need to be able
to calculate and interpret:
Payback period The time it takes for a project to repay its initial investment
Average rate of Looks at the total accounting return for a project to see if it
return meets the target return
Discounted cash flow Net present value (“NPV”) calculates the monetary value now
(NPV) of the project’s future cash flows
Payback period is unique in that it measures the return from investment in terms of a
time period (years and days).
To calculate payback period:
• Identify the net cash flows for each period (e.g. year)
• Then keep a running total of the cash flows
• Initial investment = is nearly always an outflow
• Look to see when the running total move from negative (outflow) to positive
(inflow)?
• When the total net cash flow becomes positive, that is the end of the payback
period
An example of this approach is shown in the table below:
Cash Flow Cumulative

Year Cash Flow Detail Payback?
£ Cash Flow
0 Investment (cash outflow) (500,000) (500,000) No
1 Net Cash Inflows 100,000 (400,000 No
2 Net Cash Inflows 150,000 (250,000) No
3 Net Cash Inflows 175,000 (75,000) No
4 Net Cash Inflows 150,000 75,000 Yes
Payback in Year 4 can be calculated as follows:
Topic: Investment Appraisal – Payback Period
Benefits and Drawbacks of Using Payback Period

These can be summarised as follows:
Benefits of Using Payback Drawbacks of Using Payback

Simple and easy to calculate + easy to Ignores cash flows after payback has been
understand the results reached
Focuses on cash flows Takes no account of the “time value of
Emphasises speed of return; good for money”
markets which change rapidly May encourage short-term thinking
Straightforward to compare competing Ignores qualitative aspects of a decision
projects Does not actually create a decision for the
investment
Topic: Investment Appraisal – Net Present Value (NPV)

Investment appraisal should include the calculation and interpretation of net present
value using discounted cash flows

Discounted cash flow is one of three methods of investment appraisal that you need to
be able to calculate and interpret:
Discounted cash flow takes account of the “time value of money” to reduce (or
“discount”) the importance of cash flows arising further in the future.
So, discounting is the method used to reduce the future value of cash flows to
reflect the risk that they may not happen.
Why might it be important to take account of the time value of money?
• It is surely better to receive cash now rather than in the future

• Future cash flows are worth less
• Using discount factors brings cash flows back to their “present value”
• The relevant discount factor is determined by the required rate of return
How to Calculate Present Values?

Each cash flow needs to be discounted before they can all be added up. This is done
very simply by multiplying the cash flow by the relevant discount factor (which you
will always be given):
For example:
To get to the Net Present Value (NPV) of an investment project, we simply add all the
present values together and consider whether the total is positive or negative.
An example of these calculations is provided in the table below:
Cash Net Discount Present

Year
Flows Flow Factor Value
0 Investment (100,000) 1 (100,000)
1 Project Profits 40,000 0.91 36,400
2 Project Profits 50,000 0.83 41,500
3 Project Profits 60,000 0.76 45,600
Total 50,000 23,500
In the above example, the total of the present values (the NPV) is £23,500 – i.e. it is
positive. This would normally suggest that the investment project should go ahead.
Benefits and Drawbacks of Using Discounted Cash Flow (NPV)
Benefits of Using NPV Drawbacks of Using NPV

Considers all future cash flows The most complicated method compared
Reflects the risks that future cash flows will with Payback & ARR
not be as expected Choosing the discount rate is hard,
Different levels of risk can be accounted for particularly for long projects
by adjusting the discount rate Result can be influenced / manipulated
Creates a straightforward decision - using the discount rate
positive NPV suggests project should go
ahead
Topic: Investment Appraisal – Average Rate of Return (ARR)

Investment appraisal should include the calculation and interpretation of average rate
of return

Average rate of return (“ARR”) is one of three methods of investment appraisal that
you need to be able to calculate and interpret:
Calculating the ARR

The key steps involved in calculating ARR are:
Step 1 Calculate the average annual profit from the investment project
Step 2 Divide the average annual profit by the initial investment (“outlay”)
Step 3 Compare with the target percentage return
A Worked Example
A fashion retailer is planning to open 5 new stores next year. The initial investment
will be £1,000,000.
The annual profits for these stores and the initial outlay (shop fitting etc.) is shown in
the table below.
The target rate of return is 20%
What is the ARR for the 5 new stores?
Year Annual Profit (£)

1 100,000
2 250,000
3 400,000
4 500,000
5 500,000
Working through the three steps, here’s how to calculate ARR for this example:
Topic: Investment Appraisal – Average Rate of Return (ARR)
Benefits and Drawbacks of Using ARR

Benefits of Using ARR Drawbacks of Using ARR

Simple to understand and easy to calculate Ignores the timing of returns
Focuses on the overall profitability of an Focuses on profits rather than cash flows
investment project Does not adjust for the time-value of
Easy to compare ARR with other key target money
rates of return to help make a decision
Uses all the returns generated by a project
Topic: Investment Appraisal – Factors Influencing Investment Decisions

Factors influencing investment decisions: to include investment criteria, non financial
factors, risk and uncertainty
Key Factors Influencing Investment Decisions

The key factors can be categorised into:
Financial Factors Non-Financial Factors

Investment criteria Corporate objectives
Total returns (cash & profit) and sensitivity Organisational culture & attitude to risk
Alternative investments (opportunity cost) Management confidence in the
Financial position (e.g. liquidity, gearing) investment appraisal data
of the business Business image and reputation
Investment Criteria
Investment criteria are particularly important in determining whether or not to make an
investment:
• Criteria = the measures by which an investment will be judged

• A target percentage rate of return is most common in business
• This target return can be compared with the ARR, or used as basis for the discount
rate in NPV calculations
• Often larger businesses require investments to satisfy more than one criteria (e.g.
positive NPV and above target ARR
The Role of Corporate Objectives

As you have seen from your study of corporate objectives, these are the key strategic
targets that the business wants to achieve. As such, they are bound to play a very
influential role in investment decisions:
• Major investments need to be consistent with corporate aims and objectives

• For example, a objective of significant profit improvement through cost reduction
would be consistent with approving investments in greater automation or
efficiency
Investment Decisions and Organisational Culture

Organisational (or corporate) culture is another important influence:
• All investment decisions involve an element of risk-taking

• The culture of a business is likely to significantly influence attitude to risk-taking
• The ways in which management are rewarded or accountable for investment
decisions will also be important
Uncertainty
• By their nature all business investment decisions involve some uncertainty
Topic: Investment Appraisal – Factors Influencing Investment Decisions
• Changes in the external environment can have a particularly significant impact on
investment
• Contingency planning and sensitivity analysis can help businesses address the
problems created by uncertainty
Topic: Investment Appraisal – Sensitivity Analysis

The value of sensitivity analysis
What is Sensitivity Analysis?

Sensitivity analysis is a technique which allows the analysis of changes in assumptions
used in business forecasts.
Where Can Sensitivity Analysis be Used in Business?

Sensitivity analysis is a key technique wherever a forecast is produced by management.
The table below provides some examples of the most common use of forecasts in
business and ways in which the key assumptions can be tested with sensitivity analysis:
Business Forecast Examples of Assumptions Made

Cash-flow forecast Timing of cash inflows and outflows
Amount of cash inflows and outflows
Receivables & payables days
Budgeted profit Sales volumes and unit selling prices
Gross profit margins & overheads
Investment appraisal Timing and amount of project cash flows
Period over which project will run
Amount of initial investment
Breakeven analysis Average selling prices and variable costs
Fixed costs by category and total
Sensitivity analysis of assumptions used in business forecasts helps answer questions

such as:
• How reliable are the assumptions made?

• What happens if assumptions turn out to be significantly different in reality?
• Which assumptions are most significant to the forecast?
How Does Sensitivity Analysis Work?
• Allows key assumptions to be changed to analyse effect

• Helps judge the degree of risk (e.g. in an investment project)
• Recognises that there is no such thing as an accurate forecast
• Most importantly – sensitivity analysis considers one variable or assumption at
a time
A Worked Example of Sensitivity Analysis

To illustrate the process, let’s look at a simple example.
Managers at Business A are forecasting the profit they hope to achieve next year based
on the following assumptions.
Variable Assumption
Selling Price (SP) per Unit £100
Variable Cost (VC) per Unit £30
Fixed Costs for year £500,000

Forecast Sales (Units) 10,000
Using this information above, we can work out what the forecast profit is for the
business:
Variable Assumption Profit

Selling Price (SP) per Unit £100 Revenue: £1,000,000
Variable Cost (VC) per Unit £30 Variable costs: £300,000
Fixed Costs for year £500,000 Fixed costs: £500,000

Forecast Sales (Units) 10,000 Profit: £200,000
So, the forecast profit is £200,000 based on these assumptions. But, what happens to
forecast profit if the assumptions prove overly-optimistic? Let’s take a look to see what
happens to the profit forecast if each assumption is, say, 10% worse than expected:
Variable Assumption (Expected) Assumption (10% Worse)

Selling Price (SP) per Unit £100 £90
Variable Cost (VC) per Unit £30 £33
Fixed Costs for year £500,000 £550,000
Forecast Sales (Units) 10,000 9,000
Recalculating the forecast profit assuming that only one variable is worse than expected
at a time, gives the following results:
Variable Assumption = (10% Worse) Forecast Profit

Selling Price (SP) per Unit £90 £100,000
Variable Cost (VC) per Unit £33 £170,000
Fixed Costs for year £550,000 £150,000
Forecast Sales (Units) 9,000 £130,000
How does the forecast profit compare now with the original forecast of £200,000?
Well, not surprisingly, the forecast profit is worse (lower) in each case, However, the
sensitivity analysis shows that the forecast is most sensitive to the selling price
assumption. Where the selling price is £90 (not £100) the forecast profit falls by 50% to
£100,000.
So the key results from the sensitivity analysis are:

• Forecast profit (£200,000) is most sensitive to a fall in assumed selling price per
unit
• A 10% lower selling price results in a 50% fall in forecast profit (other
assumptions remaining constant)
• The next most significant assumption is sales volume, where a 10% shortfall
would result in a 35% reduction in forecast profit
Evaluating the Role of Sensitivity Analysis

The main benefits and potential drawbacks of using sensitivity analysis include:
BENEFITS DRAWBACKS
Identifies the most significant assumptions Only tests one assumption at a time
(which therefore require closer attention) (many assumptions may be linked)
Helps assess risk and prepare for a less-than- Only as good as the data on which
favourable scenario forecasts are based
Helps make the process of business A somewhat complicated concept – not
forecasting more robust understood by all managers
Key Terms
Sensitivity analysis A technique which allows the analysis of changes in

assumptions used in forecasts
Topic: Ansoff’s Matrix
3.8.1 Strategic direction

Strategic direction to include the Ansoff matrix and value of:
market penetration
market development
new product development
diversification
What is the Ansoff Matrix?

The Ansoff is a famous marketing planning model that helps a business determine its
product and market strategy.
The matrix identifies four different approaches to product and market strategy based
around whether a business chooses to focus on existing / new products and existing /
new markets.
Each of the four sections of the matrix can be summarised as follows:
Market Penetration
This is a growth strategy where a business aims to sell existing products into
existing markets
Key points:
• Aim: to increase market share
• By selling more existing products to the same target customers
• Get existing customers to buy more
• Widen the range of existing products
Evaluating market penetration:

• Business focuses on markets and products it knows well
• Can exploit insights on what customers want (and competitors)
• Unlikely to need significant new market research
• But will the strategy allow the business to achieve its growth objectives?
Product Development
Topic: Ansoff’s Matrix
3.8.1 Strategic direction
This is a growth strategy where a business aims to introduce new products into
existing markets
Key points:
• This strategy is driven by investment in new product development
• Usually requires consistent, long-term investment in research & development
• Technological innovation provides significant opportunities for product
development strategies
• Brand extensions are also examples of product development
Evaluating product development:

• This is a strategy that often plays to the strengths of an established business
• Strong emphasis on effective market research (insights into customer needs)
and successful innovation
• A great way of exploiting the existing customer base who may respond
positively to new products
Market Development
This growth strategy involves a business seeking to sell its existing products into
new markets.
Key points:
There are various ways of approaching a strategy of market development – such as
• New geographical markets; e.g. exporting to emerging markets
• New distribution channels (e.g. using e-commerce and mail order)
• Different pricing policies to attract new customers in different segments
Evaluating market development:

• A logical strategy where existing markets are saturated or in decline
• Often riskier than product development – particularly expansion into
international markets
• Existing products may not suite new markets: depends on customer needs
Diversification
A growth strategy where a business markets new products in new markets.
Key points:
Possible approaches to diversification:
• Innovation & R&D: develop new solutions
• Acquire an existing business in the market
• Extend an existing brand into the new market
Evaluating product development:

• Inherently risky strategy
• No direct experience of the product or market
• Few economies of scale (initially)
• However, if successful, overall risk of the business is spread
Topic: Porter’s Generic Strategies
3.8.2 Strategic positioning: choosing how to compete

Strategic positioning to include: Porter’s low cost, differentiation and focus strategies
What Porter Wrote About Strategic Positioning

Porter suggested two overall business strategies that could be followed in order to gain
competitive advantage:
Porter argued that differentiation and low cost are effective strategies for firms to gain
competitive advantage.
Remember that a competitive advantage is:
An advantage over competitors gained by offering consumers greater value, either

by means of lower prices or by providing greater benefits and service that justifies
higher prices
Strategic Positioning with a Low-Cost Strategy

With this strategy, the objective is to become the lowest-cost operator in a market or
industry.
This typically involves production or operations on a large scale which enables the
business to exploit economies of scale (which therefore reduces unit costs).
Why is cost leadership potential such a effective strategic positioning? The answer lies in
the marketing advantage of being able to offer lowest prices:
• If selling prices are broadly similar, the lowest-cost operator will enjoy the
highest profits
• Lowest-cost operator can also offer the lowest prices (gain market share)
What are suitable markets for a low-cost strategy? They tend to be markets with:
• A standard product
• Little product differentiation
• Where branding is relatively unimportant (though many successful low-cost
operators build brands that emphasise and are associated with low-cost
positioning!)
The key features of businesses that successfully position themselves using a low-cost
strategy typically include:
• High levels of productivity & efficiency

• High capacity utilisation
• Large scale = economies of scale
• Use bargaining power to negotiate (or demand) lowest prices from suppliers
• Lean production methods and low-cost culture
• Access to the widest and most important distribution channels
Some examples of such businesses are shown below:
Strategic Positioning through Differentiation

With a differentiation strategy, businesses aim to offer a product that is distinctively
different from the competition, and where the customer values (i.e. is prepared to pay
for) that differentiation.
There are various ways in which a business can attempt to differentiate its product or
service:
• Superior product quality (features, benefits, durability, reliability)

• Branding (strong customer recognition & desire; brand loyalty)
• Wide distribution across all major channels (i.e. the product or brand is an
essential item to be stocked by retailers)
• Sustained promotion - often dominated by advertising, sponsorship etc.
Some examples of businesses who position themselves through differentiation are shown
below:
Hybrid Strategies – Positioning as Both Low-Cost and Differentiation

Is it possible to adopt a hybrid positioning strategy and attempt to be both low-cost and
differentiated? Some businesses believe this is possible. Ikea is a good example of how it
might be possible:
Low Cost of Ikea Differentiation at Ikea

Achieves its low prices via cost leadership: Unique / unusual design
Furniture is flat packed to reduce storage space Localisation of product range
Large out of town retail units spread fixed costs Targeting (mainly) the young, global
Products are made in China and Malaysia middle class
reducing unit costs
Low margins/ high volume allows economies of
scale
Key Terms
Low-cost positioning Where a business is able to operate at the lowest unit cost in
the market, enabling it to charge lower prices than the
competition or earn higher profit margins
Differentiation Where a business is able to distinguish its product or service
positioning in the minds of consumers as offering better value – perhaps
through quality, branding or other attributes that consumers
value.
Topic: Bowman’s Strategic Clock

How to compete in terms of benefits and price. Strategic positioning to include:
• Bowman’s strategic clock.
Introduction to Bowman’s Strategic Clock

Bowman’s Strategic Clock is a model that explores the options for strategic positioning
– i.e. how a product should be positioned to give it the most competitive position in the
market.
The purpose of the clock is to illustrate that a business will have a variety of strategic
options of how to position a product based on two dimensions – price and perceived value.
Exploring the Strategic Positioning Options on Bowman’s Clock

The Strategic Clock looks like this:
Low Price and Low Value Added (Position 1)

Not a very competitive position for a business. The product is not differentiated and the
customer perceives very little value, despite a low price. This is a bargain basement
strategy. The only way to remain competitive is to be as “cheap as chips” and hope that
no-one else is able to undercut you.
Low Price (Position 2)

Businesses positioning themselves here look to be the low-cost leaders in a market. A
strategy of cost minimisation is required for this to be successful, often associated with
economies of scale. Profit margins on each product are low, but the high volume of output
can still generate high overall profits. Competition amongst businesses with a low price
position is usually intense – often involving price wars.
Topic: Bowman’s Strategic Clock
Hybrid (Position 3)
As the name implies, a hybrid position involves some element of low price (relative to the
competition), but also some product differentiation. The aim is to persuade consumers that
there is good added value through the combination of a reasonable price and acceptable
product differentiation. This can be a very effective positioning strategy, particularly if the
added value involved is offered consistently.
Differentiation (Position 4)
The aim of a differentiation strategy is to offer customers the highest level of perceived
added value. Branding plays a key role in this strategy, as does product quality. A high
quality product with strong brand awareness and loyalty is perhaps best-placed to achieve
the relatively prices and added-value that a differentiation strategy requires.
Focused Differentiation (Position 5)

This strategy aims to position a product at the highest price levels, where customers buy
the product because of the high perceived value. This the positioning strategy adopted by
luxury brands, who aim to achieve premium prices by highly targeted segmentation,
promotion and distribution. Done successfully, this strategy can lead to very high profit
margins, but only the very best products and brands can sustain the strategy in the long-
term.
Risky High Margins (Position 6)

This is a high risk positioning strategy that you might argue is doomed to failure –
eventually. With this strategy, the business sets high prices without offering anything extra
in terms of perceived value. If customers continue to buy at these high prices, the profits
can be high. But, eventually customers will find a better-positioned product that offers
more perceived value for the same or lower price. Other than in the short-term, this is an
uncompetitive strategy. Being able to sell for a price premium without justification is
tough in any normal competitive market.
Monopoly Pricing (Position 7)

Where there is a monopoly in a market, there is only one business offering the product.
The monopolist doesn’t need to be too concerned about what value the customer perceives
in the product – the only choice they have is to buy or not. There are no alternatives. In
theory the monopolist can set whatever price they wish. Fortunately, in most countries,
monopolies are tightly regulated to prevent them from setting prices as they wish.
Loss of Market Share (Position 8)

This position is a recipe for disaster in any competitive market. Setting a middle-range or
standard price for a product with low perceived value is unlikely to win over many
consumers who will have much better options (e.g. higher value for the same price from
other competitors).
Overview
Looking at the Strategy Clock in overview, you should be able to see that three of the
positions (6, 7 and 8) are uncompetitive. These are the ones where price is greater than
perceived value. Provided that the market is operating competitively, there will always be
competitors that offer a higher perceived value for the same price, or the same perceived
value for a lower price.
Topic: Economies of Scale and Scope
3.9.1 Assessing a Change in Scale

Issues with managing growth should include:
economies of scale (including technical, purchasing and managerial)
economies of scope
diseconomies of scale
What are Economies of Scale?

Economies of scale arise when unit costs fall as output increases
Remember that we can calculate unit costs (or cost per unit) using this important formula:
This calculation (and the effect of economies of scale on unit costs) can be illustrated by
this simple example. Here, we assume that:
• Fixed costs are £10,000, and

• Variable costs are £100 per unit
Fixed Total Variable Total

Output Cost per Unit
Costs Costs Costs
Units £ £ £ £
50 10,000 5,000 15,000 300
100 10,000 10,000 20,000 200
150 10,000 15,000 25,000 166
200 10,000 20,000 30,000 150
250 10,000 25,000 35,000 140
As output rises from 50 units to 250 units per period, the cost per unit falls from £300 per
unit to £140 per unit. This is because the fixed costs of £10,000 per period are being
spread over a larger number of units produced.
The effect of economies of scale on unit costs can also be illustrated diagrammatically as
follows:
How Economies of Scale Can Provide a Competitive Advantage

In your studies of strategic positioning you look at the two key methods of strategic
positioning for competitive advantage – low cost and differentiation.
Achieving economies of scale is a key aim for businesses that wish to position
themselves as low-cost operators. One useful exercise is to compare the unit costs of
different businesses in a market to see which is able to operate most efficiently.
A simple example of this kind of comparison is provided in the table below:
Output Total Costs Unit Costs

Business
Units £ £
A 10,000 50,000 5
B 20,000 80,000 4
C 5,000 30,000 6
D 25,000 75,000 3
E 15,000 75,000 5
Categories of Economies of Scale

Economies of scale can be distinguished between:
Internal Economics of Scale: arise from the increased output of the business itself
External Economies of Scale: occur within an industry: i.e. all competitors benefit
The main types of internal economies of scale are summarised in the following table:
Economy How It Works Example
The major grocery supermarket chains are able to obtain

Buying in greater
much lower prices from key suppliers than smaller
quantities usually
Purchasing independent retailers – due to the volume of demand they
results in a lower
provide to those suppliers. This gives the largest
price (bulk-buying).
supermarkets a significant cost advantage
As firms grow, they are often able to invest heavily in

automation in order to further improve their efficiency and
Use of specialist
productivity. Capital-intensive and automated production
equipment or
Technical can provide firms with a significant unit cost advantage
processes to boost
over smaller firms as well as creating a tough barrier to
productivity.
market entry. The car industry is, perhaps, the best
example of this.
Specialist managers Smaller firms are often unable to afford managers with
can be employed to specialist expertise (e.g. in finance, HR, marketing). As a
Managerial
help reduce unit costs firm grows it is better able to bring in specialist managerial
and boost efficiency expertise which should enable it to be more efficiently run.
External Economies of Scale

These arise from the way an industry operates as a whole – i.e. all competitors benefit
They are often associated with particular geographic areas – for example the
concentration of creative & media businesses in London. Examples of why this works
include:
• Having many specialist suppliers close by

• Access to research and development facilities
• Pool of skilled labour to choose from
Economies of Scope
Economies of scope occur where it is cheaper to produce a range of products rather than
specialize in a very limited number.
Diseconomies of Scale
There is no guarantee that unit costs will fall as the scale of a business’ operation rises.
There may be reasons why inefficiencies arise as a business gets larger. For example:
• Control – problems in monitoring productivity and work quality, increasing

wastage of resources
• Co-operation - workers in large firms may develop a sense of alienation and loss
of morale
• Negative effects of internal politics, information over-load, unrealistic
expectations among managers and cultural clashes between senior people with
inflated ego
Topic: Experience Curve

Goes here
What is the Experience Curve?

The concept behind the Experience Curve is that the more experience a business has
in producing a particular product, the lower its costs.
The Experience Curve concept was devised by the Boston Consulting Group.
From BCG's research into a major manufacturer of semiconductors, they found that
the unit cost of manufacturing fell by about 25% for each doubling of the volume
that it produced.
BCG concluded: the more experience a firm has in producing a particular product, the
lower are its costs
The logic behind the Experience Curve is this:
• As businesses grow, they gain experience...

• That experience may provide an advantage over the competition...
• The “experience effect” of lower unit costs is likely to be particularly strong
for large, successful businesses (market leaders)
The Experience Curve can be illustrated diagrammatically as follows:
Implications of the Experience Curve for Strategy

If the Experience Curve concept is valid, then it has some significant implications for
growth strategy:
• Business with the most experience should have a significant cost advantage
• Business with the highest market share likely to have the most / best
experience
• Therefore:
Topic: Experience Curve
• Experience is a key barrier to entry

• Firms should try to maximise market share
• External growth (e.g. takeovers) might be the best way to do this if a business
can acquire firms with strong experience
Criticisms of the Experience Curve Model
• Market leaders often become complacent – perhaps because of their

“experience”
• Experience may cause resistance to change and innovation
• Might this cancel out cost benefits of experience?
• The Experience Curve concept is a relatively old theory that is less relevant in
a competitive environment that changes so rapidly
Key Terms
Experience Curve A mode that predicts that the more experience a business has
in producing a particular product, the lower are its costs
Topic: Greiner’s Model of Growth

Issues with managing growth should include Greiner’s model of growth.
Introduction to Greiner’s Growth Model

Greiner's Growth Model attempts to predict the six phases and five crises that
businesses may experience as they grow.
The phases of the Greiner Growth Model are illustrated below:
What are the Five Crises of Growth Predicted by Greiner’s Model?

The five predicted crises of growth according to the model are:
Growth Phase: Direction - Crisis of Leadership

• Informal communication starts to fail
• Business now too big for leader to get involved in everything
Growth Phase: Delegation - Crisis of Autonomy

• Business now has functional management
• But founder / leader still struggling to let go (e.g. not delegating)
Growth Phase: Coordination - Crisis of Control

• More formal management structures are now in place
• But new layers of hierarchy needed to keep control
Growth Phase: Collaboration - Crisis of Red Tape

• A dangerous growth in organisational bureaucracy
• Slowing decision-making & and increased risk of missing important changes in
the external environment
Topic: Greiner’s Model of Growth
Growth Phase: Alliances - Crisis of Growth
• Growth slows as business runs out of ideas
• Alliances are sought (including new business owners)
• But are these the right alliances for the business?
Key Messages from Greiner's Growth Model

What can we learn about the challenges of growing a business if, for a moment, we
assume that Greiner's Growth Model is valid?
• Growth is hard and uncertain

• Growth poses many management and leadership challenges (crises)
• Leadership and organisational structure have to evolve to reflect the growth of a
business
• Businesses that don’t adjust as they grow will experience lower growth than
those that do
Evaluating Greiner’s Growth Model

Key criticisms that can be made of this model include:
• Like most models – it is simplistic

• Not every business will suffer crises as it grows – many adapt easily without
suffering any obvious panics or crises
• The model doesn’t really take account of the pace of growth, particularly in an
increasingly dynamic external environment
Topic: Methods of Growth

Types of growth to include organic and external.
Methods of growth to include mergers, takeovers, ventures, franchising.
Types of growth to include vertical (backward and forward), horizontal and
conglomerate integration
Methods of Business Growth

Most business want to grow and there are a variety of methods this can be achieved.
Let’s look at the key features of each approach.
Organic (Internal) Growth

Organic growth involves expansion from within a business, for example by expanding
the product range, or number of business units and locations.
Note: organic growth is also often called “internal growth”.
A good example of organic growth is the increase in number of Dominos UK pizza

outlets in the UK, as illustrated by the chart below:
The main benefits and drawbacks of organic growth can be summarised as follows:
Advantages Disadvantages
Less risk than external growth (e.g. Growth achieved may be dependent on the
takeovers) growth of the overall market
Can be financed through internal funds (e.g. Hard to build market share if business is
retained profits) already a leader
Builds on a business’ strengths (e.g. brands, Slow growth – shareholders may prefer
customers) more rapid growth
Allows the business to grow at a more Franchises (if used) can be hard to manage
sensible rate effectively
Franchising
Franchising arises when a franchisor grants a license (franchise) to another business
(franchisee) to allow it trade using the brand / business format.
Where appropriate, franchising is a classic growth strategy for a business (franchisor)

that wants to allow others to license the right to trade using its business format:
• A classic growth strategy for a proven business format

• Enables much quicker geographical growth for a relatively low investment
• Still have the option to open locations that are operated by the Franchisor
• Capital investment by franchisees is an important source of growth finance
For a business that wants to operate a franchise (the franchisee) the key benefits and
drawbacks are:
Benefits for the Franchisee Drawbacks for the Franchisee

Running your own business Not cheap! Initial fees + royalties &
Tried & tested brand commission
Advice, support, training Restrictions on actions, including selling
Easier to raise finance Franchisor owns the brand
Buying power of franchisor What happens if franchisor fails?
Lower risk method of market entry + lower
failure rate
External Growth - Joint Ventures

A joint venture (JV) is a separate business entity created by two or more parties,
involving shared ownership, returns and risks.
Joint ventures are different from takeovers and mergers in that the risks and returns of
the business formed as the joint venture are shared by the parties involved. Usually this
is a 50:50 share, although that doesn't have to be the case.
The parties involved in a joint venture are usually looking to benefit from
complementary strengths and resources brought to the venture, as well as sharing the
risks and rewards involved.
Joint ventures are often used as a method of one business entering international markets.
Indeed, in some cases, this is a requirement of firms entering certain industries in some
countries
The potential benefits and drawbacks of using joint ventures as a method of growth
include:
Benefits of a Joint Venture Drawbacks of a Joint Venture

JV partners benefit from each other's Risk of a clash of organisational cultures -
expertise and resources (e.g. market particularly in terms of management style
knowledge, customer base, distribution
channels, R&D expertise) The objectives of each JV partner may
change, leading to a conflict of objectives
Each JV partner might have the option to with the other
acquire in the future the JV business based
on agreed terms if it proves successful In practice, there turns out to be an imbalance
in levels of expertise, investment or assets
Reduces the risk of a growth strategy - brought into the venture by the different
particularly if it involves entering a new partners
market or diversification
What happens if the JV business fails? Can
the JV be closed or sold amicably?
External Growth – Takeovers

A takeover (or acquisition) involves one business acquiring control of another
business.
Takeovers are the most common method of external growth and are undertaken for a
wide variety of reasons: for example:
Reasons for Growing through Takeovers

Increase market share Overcome barriers to entry to target markets
Acquire new skills (e.g. research) Defend itself against a takeover threat
Access economies of scale Enter new segments of an existing market
Secure better distribution To eliminate competition
Acquire intangible assets (brands, patents, Spread risks by diversifying
trade marks)
Takeovers might be the most appropriate method of growth for some businesses, for
example when:
• Existing products are in the later stages of their life cycles

• Business lacks knowledge or resources to develop organically
• Speed of growth is a high priority
• Competitors enjoy significant advantages that are hard to overcome
However, takeovers are a high risk strategy and many end in failure. The many
drawbacks of using takeovers include:
• High cost involved

• Problems of valuation
• Upset customers and suppliers
• Problems of integration (change management)
• Resistance from employees
• Non-existent cost savings
• Incompatibility of management styles, structures and culture
• Questionable motives
Why Do Some Many Takeovers Fail?

Takeovers are a very popular method of growth – but so many fail to achieve their
objectives. Why is this? Here are the key reasons:
• Price paid for takeover was too high (over-estimate of synergies)

• Lack of decisive change management in the early stages
• The takeover was mishandled
• Cultural incompatibility between the two businesses
• Poor communication, particularly with management, employees and other
stakeholders of the acquired business
• Loss of key personnel & customers post acquisition
• Competitors take the opportunity to gain market share whilst the takeover target
is being integrated
Types and Direction of Integration

Growth strategies can also be categorised in terms of whether they involve a business
moving forwards or backwards in the supply chain, or whether the strategy simply
consolidates its position at the same stage of the supply chain.
Each of these directions of integration can be summarised as follows:
Direction Explanation
Acquiring a business further up in the supply chain – e.g.
Forward + vertical
manufacturer buys a distributor
Acquiring a business operating earlier in the supply chain – e.g.
Backward + vertical
a retailer buys a wholesaler
Acquiring a business at the same stage of the supply chain –
Horizontal
e.g. a manufacturer buys a competitor
Where the acquisition has no clear connection to the business
Conglomerate
buying it
Horizontal Integration
The potential benefits of growing through horizontal integration include:
• More likely to achieve economies of scale

• Cost synergies (savings) from the rationalisation of the business
• Potential to secure revenue synergies
• Wider range of products - (i.e. diversification)
• Reduces competition by removing key rivals – this increases market share and
long-run pricing power
• Buying a existing and well-known brand can be cheaper than organically
growing a brand – this can then make the entry barriers higher for potential rivals
Vertical Integration
The potential benefits of growing through vertical integration include:
• Enables a business to capture a greater share of the profit on each sale

• Secures important sources of supply or distribution
• Create a barrier to entry to potential new competitors
• Gain greater insights into customer needs and wants at each stage of the supply
chain
Key Terms
Organic growth Growth that comes from within the business, e.g. through the
launch of a new product or opening new locations
External growth Growth that comes from outside the business, e.g. through a
takeover or joint venture
Horizontal integration Acquiring a business at the same stage of the supply chain
Vertical integration Acquiring a business at either an earlier or later stage of the
supply chain
Joint venture A separate business entity created by two or more parties,
involving shared ownership, returns and risks
Topic: Synergy

Issues with growth should include: synergy
What is Meant by “Synergy”?

Synergy happens when the value of two businesses brought together is higher than the
sum of the value of the two individual businesses. in other words, when synergy
happens.
The concept of synergy is, therefore, particularly important when a business pursues
an external growth strategy through takeovers or mergers.
Cost and Revenue Synergies

These two types of synergies can be summarised as follows:
Cost Synergies Revenue Synergies

Reductions in costs as a direct result of the Increased revenues that are generated as a
combination of businesses direct result of the combination of
businesses
Examples: Examples:
Eliminate duplicated functions & services Cross-selling to customers of both
Better deals from suppliers businesses
Higher productivity & efficiency from Access to new distribution
shared assets Brand extensions
New geographic markets opened up
Topic: Retrenchment

The impact of retrenchment on the functional areas of the business
What is Retrenchment?
Retrenchment is a term used to describe when a business decides to significantly cut
or scale-back its activities.
Retrenchment might occur when one or more of the following happen to a business:
• Reduce output & capacity

• Job losses / redundancy programmes
• Product / market withdrawal
• Disposal of business unit
• Scaling back planned capital investment
What Are the Causes of Retrenchment?

Retrenchment arises from strategic change, which in turn happens because of:
• New leadership (usually a new CEO)

• Excessively-high costs and low profitability
• Low ROCE
• High gearing
• Loss of market share
• A failed takeover or merger
• Economic downturn
• Change of ownership
Implications of Retrenchment for Change Management
A decision to adopt a strategy of retrenchment by definition involves change for a

business. Can this change be implemented successfully? Much depends on the
circumstances, scale and scope of the retrenchment.
• Small-scale, incremental retrenchment has only limited impact

• Significant retrenchment is often associated with a fundamental reappraisal of
the business – and therefore with complex and costly change management
Some of the key implications of retrenchment for change management are

summarised in the table below:
Topic: Retrenchment
Retrenchment Action Possible Implications for Change

Changed organisation Changed management responsibilities
structures Greater workloads / higher stress (possibly)
New teams and colleagues
Different reporting structures
New leadership and/or Different leadership style
ownership Uncertainty (particularly amongst management)
New priorities, aims and objectives
A threat to the prevailing corporate culture
Previous projects often abandoned (e.g. investment)
A new / renewed sense of urgency
Fewer people Loss of morale and increased de-motivation
Bad news for some external stakeholders (e.g. local
community, local suppliers)
Key Terms
Retrenchment When a business decides to significantly cut or scale-back its

activities.
Topic: Overtrading

Issues with growth should include: overtrading
What is Overtrading?
Overtrading happens when a business expands too quickly without having the
financial resources to support such a quick expansion.
If suitable sources of finance are not obtained, overtrading can lead to business
failure.
Importantly, overtrading can occur even a business is profitable. It is an issue of

working capital and cash flow.
Overtrading is, therefore, essentially a problem of growth. It is particularly associated

with retail businesses who attempt to grow too fast
When is Overtrading Most Likely to Happen?

Overtrading is most likely to occur if:
• Growth is achieved by making significant capital investment in production or

operations capacity before revenues are generated
• Sales are made on credit and customers take too long to settle amounts owed
• Significant growth in inventories is required in order to trade from the
expanding capacity
• A long-term contract requires a business to incur substantial costs before
payments are made by customers under the contract
Classic Symptoms that a Business Might Be Overtrading

Whilst the following symptoms do not guarantee that a business is overtrading, one or
more of them might prove to be good indicators:
• High revenue growth but very low gross and operating profit margins
(compared with key competitors
• Persistent use of a bank overdraft facility
• Significant increases in the payables days and receivables days ratios
• Significant increase in the current ratio
• Very low inventory turnover ratio
• Low levels of capacity utilisation (alongside high levels of investment in
capacity)
How Can Businesses Manage the Risk of Overtrading?

The most effective steps to avoid overtrading are essentially those that would be taken
as part of a sensible cash flow and working capital management. For example:
• Reducing inventory levels

• Scaling back the pace of revenue growth until profit margins and cash reserves
have improved
• Leasing rather than buying capital equipment
Topic: Overtrading
• Obtaining better payment terms from suppliers
• Enforcing better payment terms with customers (e.g. through prompt-payment
discounts)
Key Terms
Overtrading When a business expands too quickly without having the

financial resources to support such a quick expansion.
Topic: Benchmarking
3.9.2 Assessing Innovation

The ways of becoming an innovative organisation: Benchmarking
What is Benchmarking?
The objective of benchmarking is to understand and evaluate the current position
of a business or organisation in relation to best practice and to identify areas and
means of performance improvement.
What is Involved in Benchmarking?

There are four key steps in benchmarking:
1. Understand in detail existing business processes

2. Analyse the business processes of others
3. Compare own business performance with others
4. Implement steps necessary to close performance gaps
What Are the Main Types of Benchmarking?

Type What is it?
Strategic benchmarking Examines the long-term strategies and general approaches

that have enabled high-performers to succeed
Performance or Competitive Businesses consider their position in relation to

Benchmarking performance characteristics of key products and services
Process Benchmarking Comparing against best practice organisations that

perform similar work or deliver similar services
Functional Benchmarking Comparing with partners drawn from different business

sectors to find ways of improving work processes
Internal Benchmarking Benchmarking businesses or operations from within the

same organisation, for example business units in different
countries
External Benchmarking Analysing outside organisations that are simply known to

be ”best in class”
Topic: Innovation

Types of innovation should include product and process innovation
Ways of protecting intellectual property include patents and copyrights
What is Innovation?
Innovation is about putting a new idea or approach into action.
Innovation is commonly described as 'the commercially successful exploitation of ideas'.
Successful innovation is mainly about creating or adding value. It does so either by:
• Improving existing goods, processes or services (process innovation), or by
• Developing goods, processes or services of value that have not existed previously
(product innovation)
However, both kinds of innovation require a business to:

• Challenge the status quo in a market
• Have a deep understanding of customer needs
• Develop imaginative and novel solutions to how those needs might be met
Innovation can come in many forms:

• Improving or replacing business processes to increase efficiency and
productivity, or to enable the business to extend the range or quality of existing
products and/or services
• Developing entirely new and improved products and services - often to meet
rapidly changing customer or consumer demands or needs
• Adding value to existing products, services or markets to differentiate the
business from its competitors and increase the perceived value to the customers
and markets
Whatever form it takes, innovation is a creative process. The ideas may come from:
• Inside the business – e.g. from employees, in-house designers, sales staff
• Outside the business, e.g. suppliers, customers, media reports, market research
insights or from contacts at local universities or other research organisations
Product and Process Innovation

A distinction can be made between:
Product Launching new or improved products (or services) on to the market

innovation Key advantages:
Higher prices and profitability
Added value
Opportunity to build early customer loyalty
Enhanced reputation as an innovative company
PR coverage
Increased market share
Process Finding better or more efficient ways of producing existing products, or
innovation delivering existing services
Topic: Innovation
Key advantages:
Reduced costs
Improved quality
More responsive customer service
Greater flexibility
Higher profits
Benefits of Successful Innovation

The benefits of innovation can be significant. They include:
Benefit Examples
Improved A lot of process innovation is about reducing unit costs. This
productivity & might be achieved by improving the production capacity and/or
reduced costs flexibility of the business – to enable it to exploit economies of
scale
Better quality By definition, better quality products and services are more likely
to meet customer needs. Assuming that they are effectively
marketed, that should result in higher sales and profits
Building a product A business with a single product or limited product range would
range almost certainly benefit from innovation. A broader product range
provides an opportunity for higher sales and profits and also
reduces the risk for shareholders
To handle legal and Innovation might enable the business to reduce it carbon
environmental issues emissions, produce less waste or perhaps comply with changing
product legislation. Changes in laws often force business to
innovate when they might not otherwise do so
More added value Effective innovation is a great way to establish a unique selling
proposition (“USP”) for a product – something which the
customer is prepared to pay more for and which helps a business
differentiate itself from competitors
Improved staff Not an obvious benefit, but often significant. Potential good
retention, motivation quality recruits are often drawn to a business with a reputation for
and easier innovation. Innovative businesses have a reputation for being
recruitment inspiring places in which to work.
Successful innovation comes from filtering those ideas, identifying those that the
business will focus on and applying resources to exploit them.
Using Kaizen Groups to Drive Innovation
• Linked with developing an innovative culture in business

• Another kind of quality assurance
• Based on concept / culture of continuous improvement
• Encourages employees to engage fully with finding ways to improve quality
processes
Topic: Innovation
Potential problems with and risks of innovation
A strategy of investing in R&D and innovation can bring significant rewards, but it is not
without risk. Amongst the potential pitfalls are:
Competition An innovation only confers a competitive advantage if competitors

are not able to replicate it in their own businesses. Whilst patents
provide some legal protection, the reality is that many innovative
products and processes are hard to protect. One danger is that one
research-driven, innovative company makes the initial investment
and takes all the risk – only to find it is competing with many me-too
competitors riding on the coat-tails of the innovation.
Uncertain Much research is speculative and there is no guarantee of future
commercial revenues and profits. The longer the development timescale the
returns greater the risk that research is overtaken by competitors too.
Availability of Like other business activities, R&D has to compete for scarce cash.
finance Given the risks involved, R&D demands a high required rate of
return. That means that for businesses that have limited cash
resources, the opportunity cost of investing in R&D can be very high.
Protecting the Intellectual Property (IP) of a Business

Many businesses invest heavily in developing intellectual property (IP) and it is
important to take whatever steps are appropriate to:
• Keep control of intellectual property

• Maintain “unique selling point”
• Maximise return on investment
• Reduce threat of competition
Two key ways of protecting IP are:
Patents Copyright
To be protected by a patent, the invention must Important protection for many industries
be: – e.g. media, design, publishing
New Protection is automatic for any original
An innovative step (i.e. not obvious to other work
people with knowledge of the subject) Lasts for 70 years after authors death
Capable of industrial application (i.e. it can be Can control how copyrighted work is
made and used!) exploited (e.g. license, royalties)
Not be excluded (certain inventions don't count Widely used as a way of protecting
- e.g. scientific theories, artistic creations) creative work of all kinds
Topic: Intrapreneurship

The ways of becoming an innovative organisation: to include intrapreneurship
Introduction to Intrapreneurship
Established businesses often wish their employees and management were more
“entrepreneurial”. In other words, they want people within an existing, established
business to display the characteristics and traits associated with entrepreneurs.
What is Intrapreneurship?
Intrapreneurship involves people within a business creating or discovering new business
opportunities, which leads to the creation of new parts of the business or even new
businesses.
An intrapreneur is someone within a business that takes risks in an effort to solve a given
problem. Two famous examples of products that were the result of intrapreneurial activity
are:
Gmail (Google) Employees at Google are allowed time for personal projects. Some
of Google’s best projects come out of their 20 percent time policy.
One of these was Gmail, launched on 1 April 2004.
PlayStation Ken Kutaragi, a relatively junior Sony Employee, spent hours
(Sony) tinkering with his daughters Nintendo to make it more powerful
and user friendly. What came from his work turned into one of the
world’s most recognisable brands - the Sony PlayStation
What is the Difference between Intrapreneurship and Entrepreneurship?

The key difference between these two similar concept relates to who owns the risks and
rewards of entrepreneurial activity, as summarised in this diagram:
Potential Business Benefits of Intrapreneurship

In addition to identifying and executing new business opportunities, intrapreneurs can
help drive innovation within businesses. In a similar role to that of entrepreneurs,
intrapreneurs seek to provide solutions to problems – for example low productivity,
excess waste, poor quality.
Topic: Intrapreneurship
What Can a Business Do to Encourage and Facilitate Intrapreneurship?
There are a series of actions a business can do to support and encourage intrapreneurship,
including the following:
• Actively look out for – and encourage - entrepreneurial activity

• Give employees ownership of projects
• Make risk-taking and failure acceptable
• Train employees in innovation
• Give employees time outside the confines of their job description
• Encourage networking & collaboration
• Reward entrepreneurial thinking and activity
So Why Are Big Businesses Often Accused of Lacking Entrepreneurial Spirit?

The reality is that we associated entrepreneurial activity with start-ups and other smaller
businesses where there is a compelling reason to be entrepreneurial – the need to ensure
business survival.
Larger businesses can sometimes struggle to engender an entrepreneurial for a variety of

reasons including:
• Complacency / arrogance
• Bureaucracy (stifling initiative)
• Reward systems do not provide an incentive to innovate
• Short-termism (discouraging long-term thinking or risk-taking)
Key Terms
Intrapreneurship Involves people within a business creating or discovering new

business opportunities, which leads to the creation of new
parts of the business or even new businesses
Topic: Bartlett Ghoshal Model
3.9.3 Assessing Internationalisation

Managing international business includes Bartlett and Ghoshal’s international,
multidomestic, transnational and global strategies.
Introduction to the Bartlett & Ghoshal Model

The Bartlett & Ghoshal Model indicates the strategic options for businesses wanting
to manage their international operations based on two pressures:
• Local responsiveness, and

• Global integration
The two "pressures" or forces on firms wanting to compete in international markets,

which determine the four grids in the box above are:
Force for local responsiveness

This considers questions such as:
• Do customers in each country expect the product to be adapted to meet local
requirements?
• Do local (domestic competitors) have an advantage based on their ability to be
more responsive?
Force for global integration

This considers questions such as:
• How important is standardisation of the product in order to operate efficiently
(e.g. economies of scale)?
• Is consistent global branding required in order to achieve international
success?
The key features of each box in the Bartlett & Ghoshal model are summarised in the
table below:
Topic: Bartlett Ghoshal Model
Strategy Pressure for Pressure for Key Features

Responsiveness Global
Integration
Global Low High Highly centralised
Focus on efficiency (economies of scale)
Little sharing of expertise locally
Standardised products
Transnational High High Complex to achieve
Aim is to maximise local responsiveness
but also gain benefits from global
integration
Wide sharing of expertise (technology,
staff etc.)
International Low Low Aims to achieve efficiency by focusing
on domestic activities
International operations are largely
managed centrally
Relatively little adaption of product to
local needs
Multi-domestic High Low Aims to maximise benefits of meeting
local market needs through extensive
customisation
Decision-making decentralised
Local businesses treated as separate
businesses
Strategies for each country
Topic: Internationalisation

Reasons for targeting, operating in and trading with international markets
Methods of entering international markets include:
Export, licensing, alliances, direct investment
Targeting overseas markets may include being a multinational.
Factors influencing the attractiveness of international markets
Why Do Businesses Increasingly Want to Target International Markets?

Whilst many businesses are content to target their domestic customers, the
opportunity to trade internationally is increasingly seen as attractive by businesses.
The key reasons why international markets are targeted include:
• Reducing dependence on domestic market

• Accessing faster-growing markets & demand
• Achieving economies of scale
• Better serving customers located overseas
• Building brand value, particularly global brands
Factors Influencing the Attractiveness of International Markets

Analysing and evaluating the attractiveness of an international market to a large
extent should involve similar considerations to those a business will consider before it
enters any market.
The key factors that influence the relative attractiveness of an international market
will include:
• Size and growth of target customer base

• Ease of entry to an international market
• Extent to which product will need to be adapted
• Existing competitive structure in the target market
• Economic conditions in the target economy
• Need for local expertise or partners
• Consistency with corporate objectives
• Other external environment factors (e.g. legal)
Methods of Entering International Markets

The four key methods of entering international markets, which are further
summarised below, are:
• Exporting direct to international customers

• Selling via international agents & distributors
• Opening an operation overseas
• Joint venture or takeover
Direct Exporting
This is the simplest method of trading with international markets. Customers located
overseas order directly from your business and you send the goods to them, or deliver
the service, directly. Most businesses enter international markets this way and, for
most, it is the only method they continue to use (particularly small businesses). The
main benefits and drawbacks are:
Benefits of Exporting Directly Drawbacks of Exporting Directly

Uses existing systems – e.g. e-commerce Potentially bureaucratic
Online promotion makes this cost-effective No direct physical contact with customer
Can choose which orders to accept Risk of non-payment
Direct customer relationship established Customer service processes may need to be
Entire profit margin remains with the extended (e.g. after-sales care in foreign
business languages)
Can choose basis of payment – e.g. terms,
currency, delivery options etc.
Selling Via International Agents / Distributors

For some international markets the challenge is to gain access to the best distribution
channels in order to reach target customers. This is often achieved by contracting with
agents and distributors based in key international markets or areas. The main benefits
and drawbacks are:
Benefits of Agents / Distributors Drawbacks of Agents / Distributors

Agent or distributor should have specialist Loss of profit margin
market knowledge and existing customers Unlikely to be an exclusive arrangement –
Fewer transactions to handle question mark over agent and distributor
Can be cost effective – commission or commitment & effort
distributor margin is a variable cost, not Harder to manage quality of customer
fixed service
Agent / distributor keeps the customer
relationship
Opening an Overseas Operation

This involves a much higher degree of risk and a longer-term investment
commitment. A typical approach is to initially open a “sales office” in the target
international market. Much more complex is building and opening product capacity or
wholly-owned sales outlets. The main benefits and drawbacks are:
Benefits of Overseas Operations Drawbacks of Overseas Operations

Local contact with customers & suppliers Significant cost & investment of
Quickly gain detailed insights into market management time
needs Need to understand and comply with local
Direct control over quality and customer legal and tax issues
service Higher risk
Avoids tariff barriers
Joint Ventures & Overseas Takeovers
These are by some distance the highest risk approach to international expansion. They
tend to be undertaken only by the largest businesses, who have the resources to take
such risks. In some countries (e.g. China) it is a requirement to joint-venture partner
with a local (domestic)business in order to trade. The main benefits and drawbacks
are:
Benefits of JV’s & Overseas Takeovers Drawbacks of JV’s & Overseas Takeovers
Speed & potentially transformational Higher risk, particularly if the wrong JV
Popular way of entering emerging markets partner or takeover target is selected
Reduced risk – shared with joint venture Significant cost & investment of management
partner time
Buying into existing expertise and market Need to understand and comply with local
presence legal and tax issues
JVs may be a requirement in some markets Costly to withdraw if the strategy goes wrong
Multinational Companies (MNCs)

A multinational company (MNC) is a business that has operations in more than one
country.
Note that a business does not become an MNC simply because it sells its goods and
services overseas. The key to being an MNC is that the business has business
operations in two or more countries.
The number of MNCs has grown rapidly in recent decades, alongside the rise of
globalisation. The key reasons for the emergence of MNCs include:
• Global brands seeking to drive revenue and profit growth in emerging

economies (in particularly seeking rising demand from increasingly affluent
consumers)
• The search for economies of scale, to reduce unit costs by concentrating
production in a few key international locations
• The perceived need to supplement relatively weak demand in existing,
developed economies
• The need to operate in many countries to avoid protectionism
• Increased takeover activity that has built businesses with widespread
international operations
Do MNC’s benefit the countries in which they operate? Supporters of MNCs point to
the following advantages:
• MNCs provide significant employment and training to the labour force in the
host country
• Transfer of skills and expertise, helping to develop the quality of the host
labour force
• MNCs add to the host country GDP through their spending, for example with
local suppliers and through capital investment
• Competition from MNCs acts as an incentive to domestic firms in the host
country to improve their competitiveness, perhaps by raising quality and/or
efficiency
• MNCs extend consumer and business choice in the host country
• Profitable MNCs are a source of significant tax revenues for the host economy
(for example on profits earned as well as payroll and sales-related taxes)
From the perspective of the economies in which MNCs operate, critics of MNCs
point to the following drawbacks:
• Domestic businesses may not be able to compete with MNCs and some will
fail
• MNCs may not feel that they need to meet the host country expectations for
acting ethically and/or in a socially-responsible way
• MNCs may be accused of imposing their culture on the host country, perhaps
at the expense of the richness of local culture.
• Profits earned by MNCs may be remitted back to the MNC's base country
rather than reinvested in the host economy.
• MNCs may make use of transfer pricing and other tax avoidance measures to
significant reduce the profits on which they pay tax to the government in the
host country
Key Terms
Multinational A business that has operations in more than one country
Topic: Offshoring & Reshoring

Reasons for producing more and sourcing more resources abroad: Decisions
regarding producing overseas include off-shoring and re-shoring
Introduction to Offshoring
Offshoring involves the relocation of business activities from the home country to a
different international location.
It is the changed international location of where the business activity is performed that is
key to understanding offshoring.
Offshoring has traditionally been associated with the relocation of manufacturing activities
from a domestic economy overseas (e.g. from the US to China, or UK to Poland). However,
offshoring is also increasingly common with business services (e.g. UK financial services
using call centres based in India).
The Difference between Offshoring and Outsourcing

Take care with the difference between two similar-sounding terms! They are not (quite) the
same thing!
• Offshoring is about WHERE the work is done

• Outsourcing is about WHO does the work
So, offshoring involves changing the international location of WHERE work is done for or
by a business.
Outsourcing involves changing WHO does work for a business - away from the business
itself to an external supplier. The table below illustrates some examples of the distinction
between offshoring and outsourcing:
Operations Decision Offshoring Outsourcing

A UK business sets up its own call-centre in India to serve UK
Yes No
customers
A toy manufacturer uses overseas suppliers to produce
Yes Yes
components which it imports to the UK
A UK bank hands over its payroll and recruitment services to
No Yes
a specialist supplier in the UK
A UK chocolate manufacture moves production from York to
Yes No
a factory it has built in Poland
Key Reasons for Offshoring

Why might a business decide to change the international location of where its business
activities are undertaken? Key reasons include:
• To access lower manufacturing costs (particularly in emerging markets which enjoy

the advantage of lower labour costs)
Topic: Offshoring & Reshoring
• To access potentially better skilled & higher quality supply
• To makes use of existing capacity overseas
• To take advantage of free trade areas and avoid protectionism
• To make it easier to supply target international markets (where it is important to be
located in, or near to, those markets)
Potential Drawbacks to Offshoring

Like all decisions about where to locate business operations, there are potential drawbacks to
offshoring, including:
• Longer lead times for supply & risks of poorer quality

• Implications for CSR (harder to control aspects of operating long distances away
from the home country)
• Additional management costs (time, travel)
• Impact of exchange rates (potentially significant)
• Communication: language & time zones
Reshoring
Reshoring is the reverse of offshoring. it involves a business returning production or
operations to the host country that had previously been moved to a different international
location.
Reasons for Reshoring

Whilst the extent of reshoring is nowhere near as significant as offshoring in recent decades,
there have been an increasing number of businesses who have decided to move production or
operations back to the home country.
Key reasons for reshoring include:
• Greater certainty around delivery times (including shorter delivery times)

• Minimising risk of supply chain disruptions
• Reducing the complexity of the supply chain
• Making it easier to collaborate with home-based suppliers
• Getting greater certainty about the quality of inputs and components
• Recognising that the cost advantage of producing or sourcing overseas is not as
significant as it used to be (particularly in China where unit labour costs have risen
significantly in recent years).
Key Terms
Offshoring The relocation of business activities from the home country to a

different international location
Outsourcing The transfer of business functions from being done within the
business to be provided by a supplier
Reshoring Involves a business returning production or operations to the host
country that had previously been moved to a different
international location.
Topic: Assessing Digital Technology
3.9.4 Assessing Greater Use of Digital Technology

The pressures to adopt digital technology
The value of digital technology (should include e-commerce)
The impact of digital technology on the functional areas of the business
What are the Key Pressures to Adopt Digital Technology?

Almost every business of any size or complexity is now under pressure to adopt and
invest in digital technology. Indeed, some businesses are built entirely on digital
technology and would not exist without it.
The key pressures, which clearly vary by industry, include:
• Serve existing customers better (and meeting their higher expectations)

• Reach new customers in new segments & locations
• Offer new ways of delivering products and services using digital technology
• Reduce costs by integrating digital technology into operations
• The need to respond to digital innovation by competitors
• Access, analyse and action data that provides key insights into customer needs and
What is E-Commerce?
E-commerce can be defined quite widely as:
Digitally enabled commercial transactions between and among organisations and

individuals
The Disruptive Impact of E-Commerce

Much has been written about the highly disruptive impact of e-commerce on the nature of
competition in many markets and industries.
E-commerce has challenged almost every aspect of how business is done, impacting areas
such as:
• Market size (revenues, quantity)

• Market structure
• Distribution channels
• Customer needs and wants
• Profitability
• Length of product life cycles
• Alternatives for the consumer
Linking the developments in e-commerce to a key theory – Porter’s Five Forces Model –
it is possible to highlight some ways in which e-commerce has significantly changed the
barriers to entry to markets and the nature of competitive rivalry. For example:
• Widespread availability of smartphones and the associated app “eco-system” has

created new ways of delivering existing products & services
• Global e-commerce platforms such as Amazon, ebay, Google, Alibaba etc. have
made it much easier for small businesses to access their target customer base
• E-commerce has made it much easier to expand into international markets
• Technological change has shortened product life cycles and enabled new market
entrants to challenge established market leaders
The Impact of Digital Technology on the Functional Areas of Business

The table below summarizes some examples of how digital technology has impacted the
four key functional areas of business:
Marketing
Impact on Marketing Examples
Marketing strategy of E-commerce enables mass customisation

differentiation increasingly Easier to target niche market segments online
effective
Product life cycles are shortened Rapid pace of technological change
More competition (lower barriers to entry)
Greater use of digital promotion Digital promotion now mainstream
Social media increasingly important
Brands and retailers increasingly Omnichannel retailing – where online and offline
using multiple distribution channels are closely integrated
channels
Greater use of dynamic pricing Based on customer preferences & responding to market
conditions; use of big data
Increased need for localisation Essential in order to expand into international markets
using ecommerce
Ability to sell a much wider No physical constraints on selling space
product range (the “long tail”) Niche & specialist products promoted more easily
Human Resource Management
Impact on HRM Examples

Need for employees to have a Digital literacy now a key employability skill
broader range of digital skills New types of workforce roles and jobs essential for any
firm using e-commerce
Coders, data analysts, digital marketers etc.
Workforce planning – to support Peak demand for e-commerce is Nov-Dec
highly seasonal demand Like physical retailers, major e-commerce employ
substantial numbers of temp staff
Concerns over the working Exposes of conditions in Amazon in US and UK
conditions of staff working in e- highlighted concerns about how staff are treated and
commerce warehouses managed
Operations
Impact on Operations Examples
The leading e-commerce operations are hugely complex

and are highly integrated with other business systems
Logistics behind large-scale e- Businesses operating multi-channel platforms have
commerce platforms are particularly demanding challenges
complex Supply chains are becoming much more complex due to
e-commerce, meaning that firms and their suppliers have
to work much closer together
The largest e-commerce firms and platforms benefit
Economies of scale are
from significant “network economies of scale” where the
becoming increasingly
extra customers, products, suppliers etc. added to the
important
platform add very little to operating costs
Platforms like Amazon and eBay are designed to
It is now relatively easy for
encourage as many people businesses as possible to sell
smaller firms to sell online
online.
Finance
Impact on Finance Examples
Significant investment required Many retail firms have stuck with legacy IT and logistics
to set-up e-commerce platforms systems that were developed long before the explosion
and to integrate them with other of e-commerce
systems Upgrading these systems requires substantial investment
As firms expand their e-commerce activities, greater
demand from international customers can usually be
E-commerce likely to involve
expected.
greater use of multi-currency
This increases the risks of foreign currency fluctuations
transactions
which will thereby affect the returns made from
international sales
Key Terms
E-commerce Digitally enabled commercial transactions between and

among organisations and individuals
Topic: Big Data and Data Mining

Digital technology should include big data and data mining
What is Big Data?

Big data is the process of collecting and analysing large data sets from traditional and
digital sources to identify trends and patterns that can be used in decision-making.
These large data sets are both structured (e.g. sales transactions from an online store)
and unstructured (e.g. posts) on social media.
The quantity of data generated is growing exponentially, including data generated by:
• Retail e-commerce databases
• User-interactions with websites and mobile apps
• Usage of logistics, transportation systems, financial and health care
• Social media data
• Location data (e.g. GPS-generated)
• Internet of Things (IoT) data generated
• New forms of scientific data (e.g. human genome analysis)
How Businesses are Using Big Data

Some important uses of big data include:
• Tracking and monitoring the performance, safety and reliability of operational

equipment (e.g. data generated by sensors)
• Generating marketing insights into the needs and wants of customers, based on
the transactions, feedback, comments (e.g. from e-commerce analytics, social
media posts). Big data is revolutionising traditional market research.
• Improved decision-making - for example analysing the real-time impact of
pricing changes or other elements of the marketing mix (the use of big data to
drive dynamic pricing is a great example of this).
• Better security of business systems: big data can be analysed to identify unusual
activity, for example on secure-access systems
• More efficient management of capacity: the increasing use of big data to inform
decision-making about capacity management (e.g, in transportation and logistics
systems) is a great example of how big data can help a business operate more
efficiently
What is Data Mining?

Data mining is the process of analysing data from different perspectives and
summarising it into useful information, including discovery of previously unknown
interesting patterns, unusual records or dependencies.
There are many potential business benefits from effective data mining, including:
• Identifying previously unseen relationships between business data sets

• Better predicting future trends & behaviours
• Extract commercial (e.g. performance insights) from big data sets
Topic: Big Data and Data Mining
• Generating actionable strategies built on data insights (e.g. positioning and
targeting for market segments)
Data Mining and Marketing

Data mining is a particularly powerful series of techniques to support marketing
competitiveness.
Examples of the use of data mining in marketing include:
• Sales forecasting: analysing when customers bought to predict when they will
buy again
• Database marketing: examining customer purchasing patterns and looking at
the demographics and psychographics of customers to build predictive profiles
• Market segmentation: a classic use of data mining, using data to break down a
market into meaningful segments like age, income, occupation or gender
• E-commerce basket analysis: using mined data to predict future customer
behavior by past performance, including purchases and preferences
Key Terms
Big Data The process of collecting and analysing large data sets from
traditional and digital sources to identify trends and patterns
that can be used in decision-making.
Data Mining The process of analysing data from different perspectives and
summarising it into useful information, including discovery of
previously unknown interesting patterns, unusual records or
dependencies
Topic: Enterprise Resource Planning (ERP)

Digital technology should include enterprise resource planning (ERP)
What is Enterprise Resource Planning?

ERP is a software system that a system that helps businesses integrate and manage
their often complex financial, supply chain, manufacturing, operations, reporting, and
human resource systems.
Although the introduction and management of ERP systems is both complex and
costly, there are some significant business benefits if ERP is implemented
successfully.
These benefits include:
• Financial management: better control over assets, cash flow, and accounting
• Supply chain and operations management: streamlined purchasing,

manufacturing, inventory, and sales order processing
• Customer relationship management: improved customer service, and

opportunities to cross-sell
• Project management: complex projects better managed and to lower cost
• Human resources management: may help attract and retain good employees
• Business intelligence: improved management reporting, analysis, and

business analytics
• International business: helps coordinate multi-location business management
Topic: Causes and Types of Change
3.10.1 Managing Change

Types of change include: internal change, external change, incremental change,
disruptive change.
What is Change Management?

Change management involves the process that ensures a business responds to the
environment in which it operates
Key Types of Change: Incremental, Step and Disruptive

Classifying change into different categories based on the degree and nature of change is a
good way of understanding the context for change management.
A classic way to distinguish change is to compare Step change with Incremental Change.
These two are summarised below.
Step Change Incremental Change

Significant & occurs rapidly Many small and frequent changes
Key features: Key features:

Dramatic or radical change in one fell Many small changes which take place as a
swoop business develops and responds to subtle
Often required when a business has suffered changes in the external environment
from strategic drift Usually involves little resistance
Often involves significant alteration in the Arises as strategy develops
business Often not noticed
Gets it over with quickly / decisively A culture of accepting and embracing
May require some coercion to overcome incremental change may develop
resistance
Disruptive Change
This is a form of step change that arises from changes in the external environment which
impact the market as a whole.
Disruptive change impacts the market as a whole, challenging the established “business
model” (i.e. how products and services are sold).
Rapid improvements in technology are the main driver of disruptive change since
technological innovation provides new ways of delivering goods and services as well as
reducing barriers to market entry.
Topic: Causes and Types of Change
Internal and External Causes of Change
A distinction can be made in terms of the causes of change between those that are
“internal” (i.e. within the control of the business) and those that are “external” (i.e.
outside of the control of the business but which still need to be addressed).
Internal Causes of Change External Causes of Change

Arise from factors within the control of the Arise from factors outside the control of the
business – i.e. the decisions taken by business – i.e. as a result of changes in the
business management external environment
Examples: Examples:
New leadership Significant competitor actions (e.g. new
Change in strategic direction & corporate products, takeovers)
objectives Political & legal changes (e.g. deregulation
Significant investment decisions or new taxes)
Changes to scope of business activities Significant changes in economic environment
(e.g. business unit closures) (e.g. post Brexit for UK firms)
Adjusting the organisational structure (e.g. Longer-term changes in society (e.g.
delayering) lifestyles, demographics)
Technological change (e.g. rapid growth or
mobile device usage and related market
disruption)
Key Terms
Change management The process that ensures a business responds to the

environment in which it operates
Step change Significant and often transformational change that is
significant to the business
Incremental change Small, frequent and relatively insignificant changes to the
business
Disruptive change Change that arises from changes in the external environment
which impact the market as a whole.
Topic: Change and Organisational Structures

Organisational structures to include: functional, product based, regional and matrix
structure
Introduction to Organisational Structure

The organisational structure shows how employees and management are organised in a
business.
The organisational structure is vitally important because it determines:
• Authority and responsibility – who is responsible for whom and who is in charge?
• Individual job roles and titles
• The people to whom others are accountable
• The formal routes through which communication flows in the business
The simplest way to show how a business is organised is to look at an organisation chart.
This shows the management hierarchy in a business. It works from the top to bottom and
also illustrates:
• Span of Control
• Line management
• Chain of command
An example organisation chart is shown below:
Hierarchy
The levels of hierarchy refer to the number of layers within an organisation.
Traditional organisations were tall with many layers of hierarchy and were often
authoritarian in nature.
The organisation chart above shows a business with four levels of hierarchy – from the
Managing Director at the top, to assistants and team members at the bottom.
Below is another organisation chart, which shows a taller hierarchy.
Span of Control
The span of control is the number of subordinates for whom a manager is directly
responsible. The two diagrams below illustrate two different spans of control:
A span of control of 7 would be considered to be quite wide. Contrast this with a span of
3 below, which would be considered “narrow”
Is there an ideal span of control? The answer is generally no – a suitable span of control
will depend on factors such as the:
• Experience and personality of the manager

• Nature of the business. If being a line manager requires a great deal of close
supervision, then a narrower span might be appropriate
• Skills and attitudes of the employees. Highly skilled, professional employees might
flourish in a business adopting wide spans of control
• Tradition and culture of the organisation. A business with a tradition of democratic
management and empowered workers may operate wider spans of control
Should spans of control be wide or narrow?
Narrow Span of Control Wide Span of Control

Allows for closer supervision of employees Gives subordinates the chance for more
independence
More layers in the hierarchy may be required More appropriate if labour costs are
significant – reduce number of managers
Helps more effective communication
Chain of Command
The chain of command describes the lines of authority within a business. In the simple
organisation chart below Sam is responsible for Eve, Chris and Brenda. Further down the
chain, Brenda is responsible for Sharon and Dawn.
What is the Most Effective Hierarchy?
Although it is a generalization, there are traditionally two categories of organisational
structure based around the number of layers in the hierarchy and span of control: tall and
flat
Tall structure
• Key features – many layers of hierarchy + narrow spans of control
• Allows tighter control (less delegation)
• More opportunities for promotion
• Takes longer for communication to pass through the layers
• More layers = more staff = higher costs
Flat structure
• Key features – few layers of hierarchy + wide spans of control
• Less direct control + more delegation
• Fewer opportunities for promotion, but staff given greater
responsibility
• Vertical communication is improved
• Fewer layers = less staff = lower costs
Changing the Organisational Structure

Organisational structures are dynamic – they change! Indeed, a business that doesn’t
regularly assess how effective its organisational structure may find itself becoming
uncompetitive.
• Why change the structure?

– Growth of the business means a more formal structure is appropriate
– Reduce costs and complexity (key)
– Employee motivation needs boosting
– Customer service and/or quality improvements
• Challenges of changing the structure

– Manager and employee resistance
– Disruption and de-motivation = potential problems with staff retention
– Costs (e.g. redundancies)
– Negative impact on customer service or quality
Delayering (from Tall to Flat)

Delayering involves removing layers of management from the hierarchy of the
organisation. The potential benefits and drawbacks of delayering an organisational
structure include:
Benefits of Delayering Drawbacks of Delayering

Lower management costs Wider spans of control – too wide?
Faster decision making Potential loss of management expertise
Shorter communication paths
Stimulating employee innovation
Matrix Structures
In a matrix structure, individuals work across teams and projects as well as within their
own department or function.
For example, a team established to develop a new product might include engineers and
design specialists as well as those with marketing, financial, personnel and production
skills.
These teams can be temporary or permanent depending on the tasks they are asked to
complete. Each team member can find himself/herself with two managers - their normal
functional manager as well as the team leader of the project.
An example of a matrix structure might look like this:
The benefits and drawbacks of a matrix structure are summarised below:
Advantages of a Matrix Structure Disadvantages of a Matrix Structure

Help to breaks down traditional department Members of project teams may have divided
barriers, improving communication loyalties as they report to two line managers
Individuals get to use their skills within a May not be a clear line of accountability for
variety of contexts project teams
Likely to result in greater motivation Difficult to co-ordinate
amongst the team members
Encourages sharing of good practice and Team members may neglect their functional
ideas across departments responsibilities
A good way of sharing resources across It takes time for matrix team members to get
departments used to working in this kind of structure
Authority and Organisational Design: Who Makes the Decisions?
Decision-making in an organisation is about authority.
A key question is whether authority should rest with senior management at the centre of a
business (centralised), or whether it should be delegated further down the hierarchy,
away from the centre (decentralised).
Centralised Decision-Making
Businesses with a centralised structure keep decision-making firmly at the top of the
hierarchy (amongst the most senior management). The main benefits and drawbacks of a
centralised approach include:
Advantages of Centralisation Disadvantages of Centralisation

Easier to implement common policies and More bureaucratic – often extra layers in the
practices for the whole business hierarchy
Prevents other parts of the business from Local or junior managers are likely to much
becoming too independent closer to customer needs
Easier to co-ordinate and control from the Lack of authority down the hierarchy may
centre – e.g. with budgets reduce manager motivation
Economies of scale and overhead savings Customer service does misses flexibility and
easier to achieve speed of local decision-making
Quicker decision-making (usually) – easier to
show strong leadership
Decentralised Decision-Making
In a decentralised organisational structure, decision-making is spread out to include more
junior managers in the hierarchy, as well as individual business units or trading locations.
The main benefits and drawbacks of a decentralised approach include:
Advantages of Decentralisation Disadvantages of Decentralisation

Decisions are made closer to the customer Decision-making is not necessarily “strategic”
Better able to respond to local circumstances Harder to ensure consistent practices and
policies at each location
Improved level of customer service May be some diseconomies of scale – e.g.
duplication of roles
Consistent with aiming for a flatter Who provides strong leadership when needed
hierarchy (e.g. in a crisis)?
Good way of training and developing junior Harder to achieve tight financial control – risk
management of cost-overruns
Should improve staff motivation
Using Organisational Design to Improve Motivation: Delegation & Empowerment

Two ways in which the way work is organised better to improve employee motivation are
delegation and job empowerment:
Delegation
Be careful not to confuse delayering with a similar-sounding term: delegation.
Delegation is the assignment to others of the authority for particular functions, tasks, and
decisions. The advantages and disadvantages of encouraging greater delegation include:
Advantages of Delegation Disadvantages of Delegation

Reduces management stress and workload Cannot / should not delegate responsibility
Allows senior management to focus on key Depends on quality / experience of
tasks subordinates
Subordinates are empowered and motivated Harder in a smaller firm
Better decisions or use of resources May increase workload and stress of
(potentially) subordinates
Good method of on-the-job training
Job Empowerment
Job (or employee) empowerment is about giving employees the power to do their job.
The concept is closely linked to motivation and customer service. Put simply, employees
need to feel that their actions count. Empowerment is a catch-all term that covers:
• Giving authority to make decisions to front-line staff (e.g. hotel receptionist, call
centre assistant)
• Encouraging employee feedback
• Showing more trust in employees
Key Terms
Hierarchy The structure and number of layers of management and supervision in

an organisation
Span of control The number of employees who are directly supervised by a manager
Delegation Where responsibility for carrying out a task or role is passed onto
someone else in the business.
Empowerment Delegating power to employees so that they can make their own
decisions
Delayering The process of removing one or more layers from the organisational
structure
Centralisation An organisational structure where authority rests with senior
management at the centre of the business
Decentralisation An organisational structure where authority is delegated further down
the hierarchy, away from the centre
Topic: Flexible Organisations

Flexible organisations include:
• restructuring
• delayering
• flexible employment contracts
• organic structures v mechanistic
What is a Flexible Organisation?

A flexible organisation is one that is able to adapt and respond relatively quickly to
changes in its external environment in order to gain advantage and sustain its
competitive position.
Whilst it is not easy to achieve or sustain, there are some significant potential benefits to
a business having a flexible organisation. These include:
• More likely to be efficient & productive (impact on unit costs)

• More likely to respond to and meet changing customer needs and wants
• Improved decision-making (better informed and quicker)
• The organisation can concentrate on its core competencies rather than trying to
undertake every business activity
• A more attractive place to work for the best people
• Essentially – more likely to identify and respond to the need for change – before
it is too late to change
Restructuring
Businesses of any size or complexity often find it necessary to restructure the way they
operate.
Restructuring usually involves changing the organisational structure, both in terms of the
type of structure and layers. This might also mean how business units (e.g. divisions) are
organised. Restructuring also involves decisions about:
• Activities are undertaken directly by a business

• Where activities are undertaken (e.g. a decision to offshore)
• Activities that are outsourced to external suppliers
Restructuring through Delayering

The traditional way to achieve a flatter organisational structure is through delayering.
Delayering involves removing one or more levels of hierarchy from the

organisational structure.
Frequently, the layers removed are those containing middle managers. For example,
many high-street banks no longer have a manager in each of their branches, preferring to
appoint a manager to oversee a number of branches. Some schools adopt this policy too –
with a director of studies looking after several schools in a local area.
Delayering does not necessarily involve cutting jobs and overheads. But it does
usually mean increasing the average span of control of senior managers within the
business. This can, in effect, chop the number of layers without removing a single name
from the payroll, as the people affected are moved elsewhere in the business.
However, it is fair to say that, increasingly delayering is seen as a way of reducing
operating costs, particularly as a response to the economic downturn.
Delayering can offer a number of advantages to business:
• It offers opportunities for better delegation, empowerment and motivation as the

number of managers is reduced and more authority passed down the hierarchy
• It can improve communication within the business as messages have to pass
through fewer levels of hierarchy
• It can remove departmental rivalry if department heads are removed and the
workforce is organised more in teams
• It can reduce costs as fewer (expensive) managers are required
• It can encourage innovation
• It brings managers into closer contact with the business’ customers – which
should (in theory) result in better customer service
But disadvantages exist too, making a decision to delayer less clear cut:
• Not all organisations are suited to flatter organisational structures - mass

production industries with low-skilled employees may not adapt easily
• Delayering can have a negative impact on motivation due to job losses, especially
if it is really just an excuse for redundancies
• A period of disruption may occur as people take on new responsibilities and fulfil
new roles
• Those managers remaining will have a wider span of control which, if it is too
wide, can damage communication within the business. There is also a danger of
increasing the workload of the remaining managers beyond that which is
reasonable.
• Delayering may create skills shortages within the business – a danger is that
delayering means that the business loses managers and staff with valuable
experience
Any programme of delayering needs to be carefully thought-through. Get it wrong, and

the damage to a business can be significant.
Flexible Employment Contracts (“Flexible Working)

Flexible working involves arrangements where there are a variety of options offered to
employees in terms of working time, working location and the pattern of working.
Amongst the most popular flexible working practices included in employment contracts
are:
Part-time working Term-time working Working from home

Flexitime Career breaks Job sharing
Annual hours contracts Mobile working Shift swapping
Of the options listed above, by far the most popular in the UK currently is part-time
working.
There are good business reasons why businesses are increasingly likely to offer
employees one or more flexible working options. For example:
• Most importantly, savings on costs. A business can make substantial savings on

overheads if it does not have to provide office and other accommodation for so
many employees or if staff can work from home rather than commute into work
every day
• As a way of helping with recruitment and staff retention. There is lots of evidence
that flexible working results in better job satisfaction and higher staff morale
• To reflect the changing profile of the UK workforce. There are more women in
the labour market and an ageing population – as a result, it is increasingly
common for staff to have caring responsibilities outside work
• To take advantage of developments in technology – it is now simple and cost-
effective for employees to be able to access their employers online and other
networked systems, and to communicate digitally with colleagues
• An increasing need for businesses to be able to deliver services to customers on a
24/7 basis. Flexible working makes it easier for businesses to offer extended
opening hours, for example
• To meet employment legislation – increasingly the law allows certain groups of
employees the legal right to request flexible working
Whilst there any many advantages to flexible working, it is not always simple or
appropriate to introduce it.
Amongst the concerns that employers often raise about flexible working are:
• Additional administrative work and “red-tape” involved in setting up and running
flexible working
• The potential loss of customers if key employees reduce their working hours
• Lower employee productivity
• Inability to substitute for certain skills if certain employees are absent (a common
concern of smaller businesses_
• Managers finding it difficult to manage or administer the flexibility
A study by the Joseph Rowntree Foundation found that flexible working practices were
most likely to be found in the following situations:
• In large organisations and businesses

• In public sector organisations
• Where the business does not operate in a highly competitive industry
• Where there are recognised unions
• Where there is a well established HR function
• Where there is high employee involvement in decision-making
• In workforces with larger proportions of women
• Where there is a highly educated workforce who has a large amount of discretion
in organising work (e.g. professions, creative industries)
Organic vs Mechanistic Organisational Structures

A flexible organisation is more likely to have adopted what is often referred to as an
"organic" structure, as compared with a "mechanistic" structure.
The differences between these two can be summarised as follows:
Organic Structures Mechanistic Structures

Characterised by: Characterised by:
Informality More formality & bureaucratic
Flexible and fluid (easy to change) Associated with centralised decision-making
Favours informal (e.g.) verbal & supervision
communication Reliance on formal communication methods
Associated with decentralised decision- Favours standardised policies and procedures
making & employee empowerment Little perceived need to change
Find change easier to handle Greater resistance to change when
implemented
Key Terms
Delayering Involves removing one or more levels of hierarchy from the

organisational structure.
Flexible working Arrangements where there are a variety of options offered to
employees in terms of working time, working location and the
pattern of working.
Topic: Kotter & Schlesinger Change Model

Barriers to change: Kotter and Schlesinger’s four reasons for resistance to change.
How to overcome barriers to change: Kotter and Schlesinger's six ways of
overcoming resistance to change
Introduction
Kotter and Schlesinger developed theories to explain two key areas of change:
(1) Why is change resisted

(2) What can be done to overcome resistance to change
Let’s look at each area.
Kotter and Schlesinger’s Four Reasons for Resistance to Change

Kotter & Schlesinger suggest that there are four main reasons why change is resisted:
The key points to remember for each of the four reasons above are:
Self-interest
• Self-interest is a powerful motivator

• Arises from a perceived threat to job security, status and financial position
• Understandable - why would you want to lose something you believe to be
valuable?
• Individuals often place their own interests ahead of those of their organisation,
particularly if they don't feel a strong loyalty to it
Misinformation & Misunderstanding
• People don’t understand why change is needed, perhaps because they are
misinformed about the real strategic position of the business
• Perception may be widespread that there is no compelling reason for change
• Perhaps even an element of people fooling themselves that things are better than
they really are
Different Assessment of the Situation
• Here there is disagreement about the need for change or what that change needs to
be
• Some people may simply disagree with the change proposed, or they may feel
they have a better solution
• This is different from “self-interest” – the resistance here is based on disagreement
about what is best for the business
Low Tolerance and Inertia
• Many people suffer from inertia or reluctance to change, preferring things to stay
“the way they are”
• Many people need security, predictability & stability in their work
• If there is low tolerance of change (perhaps arising from past experience) then
resistance to change may grow
Kotter and Schlesinger's Six Ways of Overcoming Resistance to Change

How can senior management overcome the inevitable resistance to change when change
is required? In their work, six approaches suggested by Kotter & Schlesinger.
Here are the key points for each of the six approaches:
Education & Communication
• The starting point for successful change is to communicate effectively the reasons
why change is needed!
• Honest communication about the issues and the proposed action helps people see
the logic of change
• Effective education helps address misconceptions about the change, including
misinformation or inaccuracies
• Education and communication are unlikely to achieve very short-term effects.
They need to be delivered consistently and over a long-period for maximum
impact
Participation & Involvement
• Involvement in a change programme can be an effective way of bringing “on-

board” people who would otherwise resist
• Participation often leads to commitment, not just compliance
• A common issue in any change programme is just how much involvement should
be permitted. Delays and obstacles need to be avoided.
Facilitation & Support
• Kotter & Schlesinger identified what they called “adjustment problems” during
change programmes
• Most people (though not all) will need support to help them cope with change
• Key elements of facilitation and support might include additional training,
counselling and mentoring as well as simply listening to the concerns of people
affected
• If fear and anxiety is at the heart of resistance to change, then facilitation and
support become particularly important
Co-option & Manipulation
• Co-option involves bringing specific individuals into roles that are part of change
management (perhaps managers who are likely to be otherwise resistant to
change)
• Manipulation involves the selective use of information to encourage people to
behave in a particular way
• Whilst the use of manipulation might be seen as unethical, it might be the only
option if other methods of overcoming resistance to change prove ineffective
Negotiation & Bargaining
• The idea here is to give people who resist an incentive to change – or leave
• The negotiation and bargaining might involve offering better financial rewards for
those who accept the requirements of the change programme
• Alternatively, enhanced rewards for leaving might also be offered
• This approach is commonly used when a business needs to restructure the
organisation (e.g. by delayering)
Explicit & Implicit Coercion
• This approach is very much the “last resort” if other methods of overcoming
resistance to change fail
• Explicit coercion involves people been told exactly what the implications of
resisting change will be
• Implicit coercion involves suggesting the likely negative consequences for the
business of failing to change, without making explicit threats
• The big issue with using coercion is that it almost inevitably damages trust
between people in a business and can lead to damaged morale (in the short-term)
Topic: Lewin’s Force Field Analysis

Managing change should include: Lewin’s force field analysis.
Introduction to Lewin’s Force Field Analysis

Lewin’s Force Field Analysis model provides an overview of the balance between
forces driving change in a business and the forces resisting change.
Lewin argued that successful businesses tend to be constantly adapting to their

environment and changing, rather than being inflexible. However, he recognised that
businesses found it difficult to change, in particular as a result of the forces resisting
change being strong than those driving change.
Key Features of the Force Field Analysis Model

The key points to remember are:
• There are forces driving change and forces restraining it

• Where there is an equilibrium between the two sets of forces there will be no
change
• In order for change to occur the driving force must exceed the restraining force
This is represented diagrammatically below:
The idea with the model is to assign values to the key driving forces and restraining
forces.
If the total value of driving forces is greater than the total value of the restraining forces,
then change can be achieved. Conversely if the restraining forces are stronger (higher in
value) than the driving forces, change is hard to implement.
The key action for management trying to implement change, therefore, is to take action to
reduce the power of the restraining forces – i.e. try to overcome resistance.
The models of Kotter & Schlesinger suggest different ways in which this can be done:
Topic: Lewin’s Force Field Analysis
Examples of forces driving change include:
Internal Forces Driving Change External Forces Driving Change

Need for higher profits Customer demand
Poor efficiency Competition
Lack of innovation Legislation & taxes
Need to change culture Political environment
Change of leadership Ethics & social values
Technological change
An example of the Force Field Analysis approach – as applied to the Royal Mail – is
illustrated below:
Topic: Changing Organisational Culture
3.10.2 Managing Organisational Culture

The influences on organisational culture
The reasons for and problems of changing organisational culture
What is Organisational Culture?

Although most of us understand in our own minds what is meant by organisational
culture, it is hard to define precisely. We know (and can often sense) a "culture" exists
when we visit a business as a customer or work there, but how can this be explained?
Charles Handy described organisational (or corporate) culture as:
"The way we do things around here"
Culture consists of factors such as:

• The shared values of a business
• The beliefs and norms that affect every aspect of work life
• The behaviours typical of day-to-day behaviour
• The strength of a culture determines how difficult or easy it is to know how to
behave in the business
The culture of a business is reflected in many ways – including:
• How employees are recruited – the cultural factors that make one applicant more
suitable than another
• The way that visitors and guests are looked after
• How the working space is organised
• The degree of delegation & individual responsibility
• How long new employees stay in a business
• How contracts are negotiated and agreed
• The personality and style of the sales force
• The responsiveness of communication
• The methods used for communication
• How staff call each other (e.g. first name)
• The nature and style of marketing materials
• The speed with which decisions are taken
• The number of layers in the management hierarchy
Strong v Weak Culture

When you visit a range of businesses you soon get a sense of the strength of the
business culture. If a culture can be measured as then how might this show itself?
Signs of a strong organisational culture include:

• Staff understand and respond to culture
• Little need for policies and procedures
• Consistent behaviour
• Culture is embedded
Evidence that points to a weak organisational culture include:

• Little alignment with business values
• Inconsistent behaviour
• A need for extensive bureaucracy & procedures
Note: strong culture is particularly hard to change!
Key Influences on Organisational Culture

Organisational culture is complex and is built on a variety of influences, some of which
will be much more important than others in certain organisations. Key influences
include:
• Influence of the founder (“shadow of the leader”)

• Size & development stage of the business (e.g. start-up, multisite, multinational)
• Leadership & management style
• Organisational structure, policies & practices
• Employee & management reward structures (e.g. pay, bonuses, individual v
team rewards)
• Market /industries in which it operates
• Working environment & nature of tasks (e.g. physical, office, remote working,
flexible working)
• External environment (e.g. legal, economic)
• Attitude of organisation to risk-taking & innovation
What Are the Signs that Organisational Culture Might Need Changing?
Attempts to change organisational culture are often associated with other
transformational (“step”) change projects in organisations.
Accordingly, the signs that culture may need to change are often the same symptoms of
the need for broader organisational change, including:
• Declining profits and sales

• Inadequate returns on investment
• Low quality or standards of customer service
• Loss of market share
• Failure to innovate
The above list are largely strategic business issues. Other culture-related symptoms
might point to a more deep-seated problem with culture that needs to be addressed, such
as:
• Internal fighting; management criticism ("us & them mentality")

• High levels of voluntary staff turnover & hard to retain top talent
• Greater absenteeism
• Processes become more bureaucratic
• Innovation is no longer valued
• Evidence of declining customer service
• Leadership show double standards or decision-making becomes inconsistent
• Communication becomes more closed and restricted
Changing Organisational Culture is Hard
Almost by definition, if an existing organisational culture is strong (i.e. deeply
embedded) then it is going to be hard to change, particularly in the short-term.
Professor Ed Schein, an expert on organisational culture, argues that senior management

should never start with the intention of changing a culture. Instead they should start with
the issues that the organisation faces and assess whether the existing culture gets in the
way of resolving those issues.
Schein argues that management should always think first of the organisational culture as
a source of strength even if some elements are dis-functional. If major changes are
needed, try to build on existing cultural strengths.
Topic: Handy’s Model of Culture

Organisational culture models should include: Handy’s task culture, role culture,
power culture and person culture
Introduction to Handy’s Model of Organisational Culture

Charles Handy, a leading authority on organisational culture, defined four different
kinds of culture:
• Power culture
• Role culture
• Task culture
• Person culture
Let's summarise what each of those kinds of organisational culture mean, according to
Handy:
Power Culture
In an organisation with a power culture, power is held by just a few individuals whose
influence spreads throughout the organisation.
There are few rules and regulations in a power culture. What those with power decide
is what happens. Employees are generally judged by what they achieve rather than
how they do things or how they act. A consequence of this can be quick decision-
making, even if those decisions aren't in the best long-term interests of the
organisation.
A power culture is usually a strong culture, though it can swiftly turn toxic. The
collapse of Enron, Lehman Brothers and RBS is often attributed to a strong power
culture.
Role Culture
Organisations with a role culture are based on rules. They are highly controlled, with
everyone in the organisation knowing what their roles and responsibilities are. Power
in a role culture is determined by a person's position (role) in the organisational
structure.
Role cultures are built on detailed organisational structures which are typically tall
(not flat) with a long chain of command. A consequence is that decision-making in
Topic: Handy’s Model of Culture
role cultures can often be painfully-slow and the organisation is less likely to take
risks. In short, organisations with role cultures tend to be very bureaucratic.
Task Culture
Task culture forms when teams in an organisation are formed to address specific
problems or progress projects. The task is the important thing, so power within the
team will often shift depending on the mix of the team members and the status of the
problem or project.
Whether the task culture proves effective will largely be determined by the team
dynamic. With the right mix of skills, personalities and leadership, working in teams
can be incredibly productive and creative.
Person Culture
In organisations with person cultures, individuals very much see themselves as unique
and superior to the organisation.
The organisation simply exists in order for people to work. An organisation with a
person culture is really just a collection of individuals who happen to be working for
the same organisation. Perhaps some Premier League football teams have a person
culture!
Topic: Hofstede National Cultures

Cultural models should include: Hofstede’s national cultures
Introduction to Hofstede's National Cultures

Social psychologist Geert Hofstede has conducted extensive research into the different
categories of culture that help distinguish the ways business is conducted between
different nations.
Hofstede carried out research amongst over 100,000 employees working around the world
for IBM. He attempted to categorise cultures of different nationalities working at IBM.
Hofstede has extended the categories to six based on his latest research, which are
summarised below:
Let’s briefly outline the main points about these categories of cultural difference:
Individualism v Collectivism
• Some societies value the performance of individuals
• For others, it is more important to value the performance of the team
• Has important implications for financial rewards at work (e.g. individual bonuses v
profit-sharing for bigger groups)
Power Distance
• This considers the extent to which inequality is tolerated and whether there is a
strong sense of position and status
• A high PD score would indicate a national culture that accepts and encourages
bureaucracy and a high respect for authority and rank
• A lower PD score would suggest a national culture that encourages flatter
organisational structures & a greater emphasis on personal responsibility and
autonomy
Long-term orientation
• This category is concerned with the different emphases national cultures have on
the time horizons for business planning, objectives & performance
Topic: Hofstede National Cultures
• Some countries place greater emphasis on short-term performance (so-called short-
termism), with financial and other rewards biased towards a period of just a few
months or years.
• Other countries take a much longer-term perspective, which is likely to encourage
more long-term thinking.
• The key implication of this category is the impact on investment decisions and risk-
taking
Masculinity v Femininity
• This somewhat unfortunately-named category considers the differences in decision-
making style
• Hofstede linked what he called a “masculine” approach to a hard-edged, fact-based
and aggressive style decision-making
• By contrast, “feminine” decision-making involved a much greater degree of
consultation and intuitive analysis
Uncertainty Avoidance
• This category essentially considers the different attitudes to risk-taking between
countries
• Hofstede looked at the level of anxiety people feel when in uncertain or unknown
situations
• Low levels of uncertainty avoidance indicate a willingness to accept more risk,
work outside the rules and embrace change. This might indicate a more
entrepreneurial national culture
• Higher levels of uncertainty avoidance would suggest more support for rules, data,
clarity of roles and responsibilities etc. These cultures might be less entrepreneurial
as a consequence
Indulgence v Restraint
• Indulgence stands for a society that allows relatively free gratification of basic and
natural human drives related to enjoying life and having fun
• Restraint stands for a society that suppresses gratification of needs and regulates it
by means of strict social norms
Some Selected Hofstede National Culture Indicators
Power Individualism v Masculinity Uncertainty Long-term Indulgence v

Distance Collectivism v Femininity Avoidance Orientation Restraint
Australia 38 90 61 51 21 71
China 80 20 66 30 87 24
UK 35 89 66 35 51 69
India 77 48 56 40 51 26
South Korea 60 18 39 85 100 29
Singapore 74 20 48 8 72 46
U.S.A. 40 91 62 46 26 68
Topic: Network Analysis
3.10.3 Managing Strategic Implementation

The value of network analysis in strategic implementation
Network analysis to include:
• understanding and interpreting network diagrams
• amendment of network diagrams
• identifying the critical path and total float
Introduction
Network, or as it is otherwise known - critical path analysis (“CPA”) - is a widely-
used project management tool that uses network analysis to help project managers
handle complex and time-sensitive operations.
Many larger businesses get involved in projects that are complex and involve
significant investment and risk. As the complexity and risk increases it becomes even
more necessary to identify the relationships between the activities involved and to
work out the most efficient way of completing the project.
Building the Network Analysis Model

The essential technique for using CPA is to construct a model of the project that
includes the following:
• A list of all activities required to complete the project

• The time (duration) that each activity will take to completion
• The dependencies between the activities
Using this information, CPA calculates:

• The longest path of planned activities to the end of the project
• The earliest and latest that each activity can start and finish without making
the project longer
This process determines which activities are "critical" (i.e., on the longest path) and
which have "total float" (i.e. can be delayed without making the project longer).
In project management, a critical path is:

The sequence of project activities which add up to the longest overall duration
The critical path determines the shortest time possible to complete the project.
Any delay of an activity on the critical path directly impacts the planned project
completion date (i.e. there is no float on the critical path).
Illustrating CPA
Here is worked example to illustrate how the critical path for a project is determined.
Conventions in drawing the network
The main components of a network analysis are summarised below:
Component Description
Node A circle that represents a point in time where an activity is started or finished.
The node (circle) is split into three sections:
The left half of the circle is the unique node (activity)
number – the network diagram draws these in order
The top right section shows the earliest start time
(EST) that an activity can commence based on the
completion of the previous activity
The bottom right section shows the latest finish time
(LFT) by which the previous activity must be
completed
Activities An activity is something that takes time. An activity is shown on the network as
a line, linking the nodes (circles). A description of the activity, or a letter
representing the activity, is usually shown above the relevant line
Duration The length of time it takes to complete an activity – shown as a number of the
relevant units (e.g. hours, days) under the activity line
Example Network Diagram

Consider the following series of activities in a business planning to launch a new
product:
Duration
Task Activity Order
(months)
A Conduct customer research Starting activity 2
B Design product concept Begin when A complete 4
C Design and test product prototype Begin when B complete 2
D Develop and test production tooling Begin when C complete 3
E Notify suppliers of requirements Begin when C complete 1
F Commence production Begin when D complete 3
G Conduct launch promotion Begin when F complete 1
Laid out in the correct sequence of activities, the network diagram would look like
this before we calculate the EST and LFT for each activity:
The next step is to calculate the EST for each activity.
For example:
The EST for task B is 2 months – the time taken to conduct market research (task A)
To calculate the EST for task C, we add the 2 months for task A to the 4 months for
designing the product concept (task B) = 6 months
The remaining ESTs can then be added to the network diagram:
The LFTs show the latest time an activity must be completed by to avoid a delay to
the project. LFTs are calculated by looking right to left on the network diagram. So:
Evaluating Network Analysis / CPA

The main advantages and disadvantages of a business using CPA can be summarised
as follows:
Advantages Disadvantages
Most importantly – helps reduce the risk Reliability of CPA largely based on accurate
and costs of complex projects estimates and assumptions made
Encourages careful assessment of the CPA does not guarantee the success of a
requirements of each activity in a project project – that still needs to be managed
properly
Help spot which activities have some slack Resources may not actually be as flexible as
(“float”) and could therefore transfer some management hope when they come to
resources = better allocation of resources address the network float
A decision-making tool and a planning tool Too many activities may the network
– all in one! diagram too complicated. Activities might
themselves have to be broken down into
mini-projects
Provides managers with a useful overview
of a complex project
Links well with other aspects of business
planning, including cash flow forecasting
and budgeting
Key Terms
Network analysis A management planning tool to help manage complex and

time-critical projects
Topic: Contingency Planning
3.10.4 Problems with Strategy and Why Strategies Fail

The value of contingency planning
Introduction to Contingency Planning

Contingency planning involves:
• Preparing for predictable and quantifiable problems
• Preparing for unexpected and unwelcome events
The aim of contingency planning is to minimise the impact of a significant foreseeable

event and to plan for how the business will resume normal operations after the event.
Contingency Planning and Risk Management

Contingency planning is one of the three approaches a business can take to manage risk.
These are:
Risk management Identifying and dealing with the risks threatening a business
Contingency planning Planning for unforeseen events
Crisis management Handling potentially dangerous events for a business
What do we mean by “risk” in business? Risk can be:
• The possibility of loss or business damage

• A threat that may prevent or hinder the ability to achieve business objectives
• The chance that a hoped-for outcome will not occur (e.g. customers do not respond
well to a new product launch)
Risk is ever-present in business and there are a variety of possible responses to it:
• Ignore it (wait and see)

• Share/deflect the risk (e.g. take-out insurance)
• Make contingency plans - prepare for it
• Embrace risk as an opportunity- particularly if it also affects other competitors
Some examples of how action can be taken to reduce risk include:
Area Risk Management Action

Marketing Avoid over-reliance on customers or products
Develop multiple distribution channels
Test marketing for new products
Operations Hold spare capacity
Rigorous quality assurance & control procedures & culture
Finance Insurance against bad debts
Investment appraisal techniques
People Key man insurance – protect against loss of key staff
Rigorous recruitment & selection procedures
Topic: Contingency Planning
What is Involved in Contingency Planning
The process of contingency planning involves:
• Identifying what and how things can and might go wrong

• Understanding the potential effects if things go wrong
• Devising plans to cope with the threats
• Putting in place strategies to deal with the risks before they happen
Almost by definition, contingency planning should focus on the most important risks; those
that have the potential for significant business disruption or damage. Risks vary in terms of
their significance to the business
Contingency planning is not required for every eventuality. However, risks of strategic
significance cannot be ignored
Key Terms
Contingency planning The process of preparing for predictable and quantifiable

problems and preparing for unexpected and unwelcome events
Topic: Corporate Governance

The effect of the divorce between ownership and control to include corporate
governance.
What is Corporate Governance?

Corporate governance is the system by which companies are directed and controlled.
The Role of the Board of Directors

It is the Board of directors of each company that is legally responsible for the
governance of the company.
The shareholders’ role in corporate governance is to:

• appoint the directors (and the auditors where required) and
• to satisfy themselves that an appropriate governance structure is in place.
The responsibilities of the Board of directors include:
• Setting the company’s objectives and aims

• Determining the strategy to achieve those aims and objectives
• Providing the leadership to put them into effect
• Supervising the management of the business
• Reporting to shareholders on their stewardship of the business
Divorce between Ownership and Control

The so-called "divorce between ownership and control" happens when the owners of
a business do not control the day-to-day decisions made in the business. For
example, the majority of shareholders in public companies are not involved in any
way with operational decision-making by the companies in which they have invested.
The owners of a company normally elect a Board of Directors to control the

business's resources for them. Often in smaller firms, there is no difference between
the Directors and the Shareholders - they are the same person or people.
However, when the share ownership of the business becomes more widespread (for
example when shares are sold to external investors) the original owners of the
business sacrifice some of their control.
Other shareholders can exercise their voting rights, and providers of loans often have
some control (security) over the assets of the business.
This may lead to conflict between them as different shareholders can have varying
objectives. This is known as the principal agent problem.
The Principal Agent Problem

How do the shareholders of a business know that managers charged with running the
business are acting in their best interests by building shareholder value?
The principal agent problem revolves around how best to get your employees to act in
your interests rather than their own?
Shareholders tend to want strong returns in the form of dividend payments and a
rising share price. However, managers may have objectives such as power, bonuses,
prestige and status.
The problem is the many shareholders have no day-to-day control over managers.
For example, pension fund managers cannot dictate what CEOs and CFOs of
businesses decide to do and senior executives may have little knowledge of what their
managers are doing. Many investors are 'passive'. The biggest investors in UK-listed
companies tend to be large institutional shareholders such as pension funds and
insurance companies.
What is in the best interest of the management is not necessarily the same as what is
in the best interests of the shareholders.
Dealing with the Divorce between Ownership & Control

Strategies to deal with the potential conflict between shareholders and managers
include:
• Ensuring that financial rewards and incentives offered to managers are aligned
with shareholder holder interests - e.g. based on the share price, dividends,
profits achieved
• Implementing suitable corporate governance procedures to ensure
shareholders are protected as far as possible (e.g. through non-executive
directors, management remuneration committees)
• Company legislation ensuring that Directors are accountable for their actions
to shareholders.
The Growth of Activist Shareholders

Activist shareholders look to put pressure on existing management or force through
changes to management boards.
Some insist on businesses using profits to buy-back shares to increase returns to

existing shareholders.
An activist shareholder uses an equity stake to put pressure on existing management.
The goals of activist shareholders can range from financial (e.g. increase of
shareholder value through changes in dividend decisions, plans for cost cutting or
investment projects etc.) to non-financial (e.g. dis-investment from particular
countries with a poor human rights record, or pressuring a business to speed up the
adoption of environmentally friendly policies and build a better reputation for ethical
behaviour, etc.)
Rules for Corporate Governance in Public Companies

The need for effective corporate governance is particularly important in quoted (or
public) companies. This is because of the "divorce between ownership and
control", described above whereby most shareholders have no involvement in the
day-to-day management of the company.
The essential elements of "best practice" corporate governance for such companies
are:
• The CEO and Chairman of companies should be separated
• Boards should have at least three non-executive directors, two of whom
should have no financial or personal ties to executives
• Each board should have an audit committee composed of non-executive
directors
Key Terms
Corporate governance The system by which companies are directed and controlled
Activist shareholders An activist shareholder uses an equity stake to put pressure on
existing management
Board of Directors The people who are appointed by shareholders and who are
legally responsible for the governance of a company.
Topic: Planned and Emergent Strategy

Planned v emergent strategy
What is Planned Strategy?

Much of your studies of business management and strategy focus on the models, tools
and theories of classic planned business strategy.
Planned strategy is based around a formal process of setting corporate objectives and
developing a coherent business strategy designed to achieve those objectives with the
resources available.
Planned strategy is, therefore, the formal business planning process that is outlined in all
the business textbooks.
What is Emergent Strategy?

If only business strategy was as easy as writing a business plan and then implementing it
in order to achieve the strategic objectives. If all strategy could be carefully planned,
then surely all businesses would succeed.
Of course, strategic success is not easy. It is messy. Often the most successful strategies
emerge from a series of management decisions in response to a changing environment
rather than by slavishly following the original planned strategy.
That is the concept behind "emergent strategy", a term initially used by Professor
Henry Mintzberg to describe:
"a pattern of action that develops over time in an organization in the absence of a
specific mission and goals, or despite a mission and goals."
Mintzberg argued that "strategy emerges over time as intentions collide with and
accommodate a changing reality."
Planned v Emergent Strategy - Compared
Planned Strategy Emergent Strategy

The intended strategy The strategy that actually happens
Influenced by specific corporate objectives Strategy responds to events as they arise (e.g.
Based around a formal strategy planning changes in external environment)
process Often involves strategic and tactical changes
Supported by traditional planning tools and Not restricted by formal planning tools and
methods (e.g. SWOT Analysis, PESTLE methods
framework, Porter’s Five Forces)
Described in formal business plan
Topic: Strategic Drift

Reasons for strategic drift
What is Strategic Drift?

Strategic drift happens when the strategy of a business is no longer relevant to the
external environment facing it.
Illustrating Strategic Drift

The process of strategic drift is illustrated (and explained further below) in this diagram:
Why Does Strategic Drift Happen?

Strategic drift usually arises from a combination of factors, including one or more of
the following:
• Business failing to adapt to a changing external environment (for example

social or technological change)
• A discovery that what worked before (in terms of competitiveness) doesn’t work
anymore
• Complacency sets in – often built on previous success which management
assume will continue
• Senior management deny there is a problem, even when faced with the evidence
The Four Phases of Strategic Drift

Referring to the diagram above, the four phases of strategic drift can be described as
follows:
Phase 1 - Incremental Change

In this phase there is little significant change in the external environment. A series of
small, incremental changes to strategy enable the business to remain in touch with the
external environment.
Topic: Strategic Drift
Phase 2 - Strategic Drift
Now things are starting to drift apart. The rate of change in the external environment is
accelerating and small, incremental changes in strategy are not enough on their own to
remain in touch. The business will be losing its competitive advantage.
Phase 3 - Flux
This phase is characterised by management indecision. There is now a significant gap
between what the market expects and what a business is delivering. Management may
have recognised this gap and begun to alter strategy, however there is no decisive
improvement. There may be disagreement between the senior management team about
how to address what is now significant strategic drift.
Phase 4 - Transformational Change or Death

The moment of truth. Either management recognise the need for a transformational
change in strategic direction, or the business fails. It often takes new, external leadership
for this recognition to be made and the relevant strategic change programme
implemented. For some businesses, this phase comes too late.
Examples of Businesses that Suffered from Strategic Drift
Kodak Failed to respond to rapid development & take-up of digital

photography – despite having created such technology!
Nokia Lost dominant global market leadership in mobile phones by failing
to respond to smartphone technology
MySpace At one stage, the world’s leading social media platform; failed to
respond to changing social trends & lost leadership to Facebook
Blackberry Arrogance and complacency were features of their lack of response to
the launch of the iPhone which sound started to destroy a previously
dominant market share
Tesco Complacent leadership failed to respond to the rapid emergence of
low-cost discount retailers such as Aldi and Lidl.
Key Terms
Strategic drift When the strategy of a business is no longer relevant to the

external environment facing it.
External environment The political, economic, social, technological, ethical and
legal environmental factors which impact a business but
which are outside of its control
Topic: Strategic Planning

The value of strategic planning
The Strategic Planning Process

In simple terms, the classic strategic planning process can be illustrated as follows:
Strategic direction is set through the following elements of strategic planning:
Vision Non-specific directional and motivational guidance for the entire

business
What will the business be like in five years time
Mission statement A business’s reason for being
It is concerned with the scope of the business and what
distinguishes it from similar businesses
Objectives Ideally SMART objectives
Goals Specific statements of anticipated results
The Different Plans in Business

The strategic plan is just one of the traditional series of plans in business management:
Strategic plan Sets out the overall direction for the business in broad scope
Business plan The actions that a business will take to to achieve corporate
objectives
Operational plans Details how each objective is to be achieved
Specifies what senior management expects from specific
departments or functions
The role and scope of these plans can be further summarised as follows:
Topic: Strategic Planning
Strategic Business Operational

Level Business wide Business unit Functional area
Focus Direction and strategy Direction and strategy Resources and action for
for whole business for the business unit functional area
Nature Broad and general More detail on goals Specific to the function
and tasks
Time Long term 1-2 years Up to one year
horizon 3+ years
Benefits of Strategic Planning

If the strategic planning process is managed properly, then a variety of business benefits
can arise, including:
• Clarify direction of the business

• Ensure efficient use of business resources (allocated to strategic priorities)
• Provide a way of measuring progress (corporate objectives)
• Support effective decision-making (a focus for senior management)
• Co-ordinate activities
• Allocate responsibility
• Motivate & guide people
How Does a Business Evaluate Its Strategic Performance?

In order for a business to be able to evaluate its strategic performance, it needs:
• A strategic plan with measurable objectives

• Data to measure performance against those objectives
The regular performance-measurement and monitoring processes that are commonly

used to evaluate performance then include:
• Business Planning
• Budgeting & Variance Analysis
• Regular Performance Reviews
• Monitoring of External Environment
• Financial & Other Ratio Analysis
• Benchmarking
The use of a Balanced Scorecard, monitoring Key Performance Indicators, is another

crucial part of evaluation, particularly for more complex and larger businesses.
Key Terms
Strategic plan A document used to communicate with the business the goals
and objectives, the actions needed to achieve those goals and all
of the other critical elements developed during the planning
exercise

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AQA A LEVEL BUSINESS

Essential Topic-by-Topic Study Notes

What You Need to Know

What are Objectives?

Business objectives are:

What are Corporate Objectives?

The main purposes of corporate objectives include to:

The Benefits of SMART Objectives

S Specific Objective should state exactly what is to be achieved

A Achievable Objective should be realistic given the circumstances in which it is

The Hierarchy of Objectives in Business

Examples of how functional objectives might work to support corporate objectives

Corporate Objective Example Functional Objective

Internal and External Influences on Corporate Objectives

Short-termism External investor pressure to focus on and achieve short-term

• Stock market (investor) focus on latest financial performance (e.g.

A short-termist approach is likely to involve management focusing on the following

• Share price and market capitalisation

• Low investment in R&D (particularly compared with competitors who

A common criticism of short-termism is that it does not focus a business on what it

What is the Difference between Strategy and Tactics?

Strategic Decision Tactical Decision

Corporate objectives Business objectives that relate to the performance of the

What You Need to Know

Introduction to SWOT Analysis

SWOT is commonly used as part of strategic planning and looks at:

SWOT analysis can help management in a business discover:

The key point to remember about SWOT is that:

Strengths and weaknesses

Opportunities and threats

Importantly, when it comes to determining strategy:

Here are some examples of possible business strengths:

Examples of Potential Business Strengths

Here are some examples of possible business weaknesses:

Examples of Potential Business Weaknesses

Possible sources of business opportunities in most industries and markets include:

Potential Business Opportunities

Possible sources of business threats include:

Potential Business Threats

The Value of Using SWOT analysis

Weakness Possible Response

Evaluating SWOT Analysis

Advantages of SWOT Disadvantages of SWOT

Strengths Features within the control of a business that are a source of

What You Need to Know

What is a Mission Statement?

Therefore, the business mission is not about:

• The goals or objectives of the business

The mission of a business is usually expressed in a “mission statement”

Where the Mission Statement Fits with Objectives and Strategy

What Makes for an Effective Mission Statement?

• Provide a clear sense of business purpose

Business Mission Statement

Criticisms of Mission Statements

Mission Statement A statement of the defining purpose of a business or

What You Need to Know

What is a Liquidity Ratio?