Business Unit 3 Notes

1|Pa g e – U N I T 3 – Prepa red B y - Sa ma ntha C o o ra y
Chapter 1
Corporate objectives
Corporate Aim
It is a general statement which shows the direction in which the company intends to go.
It identifies in general terms what it wants to achieve in the long run.
It can also be defined as the long-term visions or goals of a business.
E.g.: “The No: 1 coffee retailer in the planet”, “The world’s premium airline”.
Aims and Mission Statement
Mission Statement is the statement of business’s core aims and purposes.
E.g., “To bring inspiration and innovation to every athlete in the world” – Nike Sports.
“Organise worlds information and make it universally available” –Google
“To refresh the world in Mind body and Spirit” – Coca cola
Mission Statement is usually short in length and passionate in nature. It is designed to inspire
and inform the key stakeholders of the business.
Mission statement is usually set out in published form – not a secret.
A good mission statement should have the following: -
• Purpose - why the business exists.
• Values- it includes the values the business upholds such as, integrity, sustainability,
innovation and quality.
• Standards and behaviour- it reminds employees the standards they have to keep up.
Example: A teacher in school – the professionalism is the standard.
• Strategy; the mission statement should indicate how the objectives are achieved. It is the
competitive position of the business
Advantages and Disadvantages of Mission Statement
Advantages Disadvantages
Tells the stakeholders what the business is all It is a general statement and just wishful
about. thinking
Provides a sense of purpose and focus to It doesn’t provide SMART objectives for use
managers and workers within the business
The process of creating a mission statement Some organizations prepare M.S. without
can help to bring managers together much reflections therefore less impact on
stakeholders
It may need to be revised frequently if the

nature of the business changes frequently.
Corporate Objectives
They are the goals or targets that concern the business as a whole. They reflect the aims of the
management but are more specific. They are SMART and may relate to the short or long term.
SMART Objectives
SMART is an acronym which stands for:
• S – Specific: objectives should define clearly what the business plans to do and include
reference to sales, cost and profit. E.g., instead of saying that the business should
improve it is more specific to say that business should increase its sales revenue.
• M – Measurable: it means objectives should be expressed in terms of quantitative

measures. E.g., increasing sales revenue by 10%.
• A – Achievable (agreeable): This has got 2 meanings. The first meaning is the objectives
cannot be too difficult or too simple. The second meaning is everyone should agree on
the objective.
• R – Realistic (relevant): it means objectives should be relevant to the people who try to
achieve the objective. It also means the resources should be sufficient to achieve the
objective.
• T – Time specific: it means that there should be clear deadlines for the achievements of
the objectives. E.g.: increasing profits by 10% within 2 years.
Common Corporate Objectives

There are some common objectives most of the businesses pursue.
• Survival – to avoid losses rather than making profits. This can be an objective of start-up
businesses and all other businesses during a recession. (Survival can be a tactic during a high
competition)
• Profit satisficing – to earn sufficient profits to satisfy the owner. This is mostly followed by
small businesses such as sole traders and partnerships.
• Profit maximization – it means to earn possible higher profits within the given period of time.
It can be achieved by increasing revenue, decreasing cost or doing both. This objective might
conflict with many other stakeholder objectives such as employee welfare, customer
satisfaction, and environmental protection.
• Increase in market share – it means capturing the highest potion of the market and become
a market leader so that business can have power over the market, suppliers and customers.
Sometimes the objectives of increasing market share may have a conflict with profit
maximization objective if the market share is achieved at the expense of price.
• Sales maximization – this is a short-term objective; it means maximizing the number of units
sold in the market by means of advertising and sales promotion. This objective is used when
there is high competition in the market.
• Growth - this means expansion of the business in terms of market share or sales revenue.
This can be internal growth or external growth. This can be done through penetration
(getting a bigger share in the market), market development (getting into new markets),
product development (developing new products) and diversification (getting into different
industries).
• Increasing shareholder value – this objective is relevant only for plc where the necessary
actions are taken in order to maximize the value of shares quoted in the stock market. This
can be done through increasing dividends or better performance of the business.
• Diversification – this means moving into either new geographical or product markets. It can
be an objective of matured business so that they can reduce the risk of concentrating on one
product or one market.
• Improving market image – this involves gaining particular image or reputation in order to
support products and increase consumer confidence. This is mainly achieved through
marketing and advertising.
• Ethical objectives (not for profit objectives/Corporate Social Responsibility CSR) – these are
the objectives that involve supporting wider community, charitable activities, protection of
the environment, employment welfare, developing local community, etc.
Factors Affecting Corporate Objectives

There are many factors which may have an influence on the corporate objectives. They can be
divided into internal and external influences.
➢ Internal Influences
These are the Internal influences which affect businesses internally.
• Attitudes of owner or director – owners or directors may have a different view of risk
taking from that comes the objectives such as profit maximization or survival.
• Corporate culture – the prevailing attitude and behaviour of a company are likely to
dictate what happens in a number of areas including risk taking, relationship with
customers, employee welfare and ethical stance (position) of the business.
• Age of the business – the objectives of a start-up business is in contrast to that of mature
businesses. For instance, start-up businesses might pursue survival, profit satisficing but
mature businesses will be more on growth and market share.
• Business’s legal structure – shareholders of plc are often more interested in shareholder
value rather than company growth.
➢ External Influences
• Actions of competitors – a dramatic increase in the degree of competition in the market

can change the company to concentrate on survival or maintaining market share rather
than increasing it.
• Economic factors – the economic conditions such as recessions or slow growth may
encourage firms to expand overseas particularly if the exchange rate is favourable.
• Legislations – certain government legislations may force a business to change their

objectives. E.g., ban of a product, restriction of exports.
• Social attitudes – increasing public concerns regarding the treatment of suppliers have
led to many companies adapting to more mutually favourable partnerships rather than
focusing on maximizing profits by cutting down the supply cost. Moreover, customers are
well aware regarding ethical businesses and their environmental impact and therefore
businesses have to accommodate social objectives to survive.
Divisional, departmental and individual objectives
Divisional objectives set by the mangers in order to make sure that
• Coordination between divisions – otherwise there will be disagreements and confusions

• Consistency with corporate objectives
• To provide adequate resources to achieve objectives
Further they would be broken down to departmental and individual objectives

Chapter 2
Corporate Strategies
Corporate strategy means the ways in which corporate objectives are achieved.
Developing a Corporate Strategy
Developing a corporate strategy involves the following steps:
Identification of mission and aims
Analysis of current situation

(Situational analysis)
(Techniques used = SWOT, PESTLE, Boston
Matrix, Porter’s five forces)
Planning and developing strategies to achieve objectives

(Porter’s generic strategies, Ansoff Matrix)
Strategic choice
(Decision Tree Analysis, Investment Appraisals,
Ratio analysis, contribution analysis)
Implementing the strategy

(Contingency Planning, Critical Path Analysis)
Monitoring and evaluation

Strategy and tactics

Strategy is a long-term plan of action for the whole organization, designed to achieve a particular
goal. Tactic is a short-term policy or decision aimed at resolving a particular problem or meeting
a specific part of the overall strategy.
Tactic is a short-term policy or decision aimed at resolving a particular problem or meeting a
specific part of the overall strategy
Strategic decisions, e.g., to develop new Tactical decisions, e.g., to sell a product in
markets abroad different sizedpackaging
Long term decision short- to medium-term
difficult to reverse once made – departments reversible, but there may still be costs
will have committed resources to it involved
taken by directors and/or senior managers taken by less senior managers and
subordinates with delegated authority
cross-functional – will involve all major impact of tactical decisions is often only on
departments of the business one department
Boston Matrix (Portfolio Analysis)

Portfolio analysis (sometimes called as Boston Matrix) is a strategic technique which relates to
each and every product in the portfolio in relation to market share and market growth.
Possible Strategies based on Boston Matrix
• Cash Cow – The strategy used for cash cow is harvesting. It means profits generated from
cash cows can be utilized in order to invest in other products such as problem children
and stars.
• Star – The strategy used is holding strategy. This means holding the product’s current
market position by maintaining sales and market share through effective marketing. This
is a challenge because rapidly growing markets attract new competitor’s therefore
constant update and vigorous marketing is essential.
• Problem Child/ question Marks – The strategy followed here is building strategy. This
could be relevant for stars as well. This involves increasing market share through better
marketing, wider distribution, attractive product designs, getting into new markets, etc.
The funds necessary could be gained from cash cows.
• Dog – The strategy followed here is divesting which means discontinuation of products
whose market share is declining in a declining market because they are a waste of
resources for the business. The funds invested on dog products could be reinvested in
other profitable products. This is applicable for problem children as well.
Advantages and Disadvantages of Portfolio Analysis
It analyzes the most important marketing It cannot forecast what might happen with
aspect of a product. Namely: market share and each product in the future.
growth.
It encourages managers to take strategic Boston Matrix identifies the position of a

decisions regarding various products in the product but it has got a limited analysis as to
portfolio such as harvesting, divesting and why a product is in that position.
investing, etc.
It helps managers to prepare themselves Market is dynamic therefore market growth

beforehand to develop new products and market share are subject to change. It will
replacing dog or problem children. lead to change of market position of each
product.
It is a snapshot of the current position of the It assumes that high market share is always
product portfolio. profitable but that isn’t the case always (high
market share doesn’t always mean profits).
Porter’s Generic Strategies
Porter suggested 4 generic business strategies that could be adopted in order to gain
competitive advantage.
Generic strategies suggest that all markets operate in the same way. Hence named as generic
A competitive advantage is an advantage over competitors gained by offering consumers greater

value. It is either by means of lower prices or by providing greater benefits and service that
justifies higher prices.
The 4 strategies suggested by Porter are summarized in the figure below.
The differentiations and cost leadership strategies seek competitive advantage in a broad range
of market or industry segment. By contrast the differentiation focus and cost focus strategies are
adopting in a narrow market or industry.
Cost Leadership
It means becoming the lowest cost producer in the industry. This is a traditional method where
businesses try to achieve cost advantage through economies of scale. The idea behind this
strategy is selling as much as products with lower profit margin and achieve great profits. This is
very common with large scale businesses offering standard products with little differentiation.
To be the lowest cost producer a firm should maintain:
• High levels of productivity

• High levels of capacity utilization
• Better supply contracts with suppliers
• Lean production methods such as JIT
• Effective use of technology in the production process
10 | P a g e – U N I T 3 – P r e p a r e d B y - S a m a n t h a C o o r a y
E.g.: Wal-Mart.
Cost Focus
Here a business seeks lower cost advantage in just one or a small number of market segments.
The product will be a basic product similar to the high priced and featured market leader. The
product is acceptable to sufficient consumers in a particular market segment.
E.g.: Pepsi, video gaming market.
Differentiation Leadership (Differentiation) – whole industry.

With differentiation leadership business targets much larger markets aims to achieve
competitive advantage through differentiation across the entire industry. E.g.: Apple iPhones.
According to this strategy one or more criteria are selected in a market and then positioning the
business uniquely to meet those criteria. As a result of that a premium price can be charged.
Charging a premium price is beneficial because it covers the research and development cost.
There are several methods by which a product differentiation can be done:
• Superior product quality (features, benefits, durability, reliability)

• Branding (strong customer recognition and desire, brand loyalty)
• Industry wide distribution across all major channels.
• Consistent promotional support through advertising, sponsorships, etc.
E.g.: McDonald’s.
Differentiation Focus – only one selected segment

According to the strategy a business aims to differentiate within just one or a small number of
target market segments.
E.g. Chanel sells bags at £ 3000 and Hermes is at £ 5000
The advantage arises here that while the competitors are targeting broader group of customers
the particular company would try targeting a particular market and get the advantage of that
market.
In order to have differentiated focus strategy, following conditions should be there:
• The consumers of selected market should have a particular need by which the firm can
differentiate.
• The existing competitor products don’t meet that need.
Differentiation focus strategy is much similar to niche marketing strategy.
Limitations of Porter’s Generic Strategy
Differentiation Strategy
• Differentiation strategy calls for the high research and development which involves high
cost.
• Customers might become price sensitive rather than product uniqueness.
• Customers may no longer need the differentiation factor.
• Imitation by competitors and change in customer taste.
• Rivals follow the focus strategy therefore losing the advantage in certain markets.
Cost Leadership
• Other firms will also be able to lower their costs.
• When technology improves the competition would be high and therefore cost will
not be an important factor.
• If there are price-wars, it will reduce the profitability.
• It is difficult to sustain cost leadership in the long-run.
• The businesses that use cost focus strategy may have a better advantage in certain
markets. (
• Price discrimination would be more appropriate)
Cost Focus and Differentiation Focus
• Limited opportunities for growth.

• The danger of decline in the chosen segment or niche market.
• The reputation for specialization might limit moving into a new sector.
Ansoff Matrix
Ansoff Matrix is a marketing planning model that helps a business to determine its product and
market growth strategy.
Ansoff Matrix suggests that a business attempts to grow depending on whether it markets a new
or existing product in a new or existing market. The strategies proposed by Ansoff are:
• Market Penetration
• Product Development
• Market Development
• Diversification
Market Penetration
Market Penetration is the name given to a growth strategy where the business focuses on selling
existing products into an existing market. This is the lowest risk strategy. There are 4 main
objectives of market penetration:
• Maintain or increase the market share of current products.

E.g.: advertising, promotions, personal selling, etc.
• Secure dominance in growth markets (remaining market leader).
• Driving out the competitors from the market through aggressive promotional campaign,
low pricing, etc.
• Increase usage by existing customer.

E.g.: loyalty cards.
Product Development
Product development is the name given to a growth strategy where a business aims to introduce
new products into existing markets.
This strategy may require the development of new competencies and requires the business to
develop modified products which can appeal to existing markets.
This strategy is particularly suitable for a business where the products need to be differentiated
in order to remain competitive.
A successful product development strategy places the marketing emphasis on:
• Research and development and innovation

• Detailed insight into customer needs
• Being first to market
Market Development
Market development is the name given to a growth strategy where the business seeks to sell its
existing products into new markets.
There are many possible ways of approaching this strategy:
• New geographical markets. Eg: exporting the products to a new country.

• New product dimensions. Eg: packaging (changing).
• New channels of distribution. Eg: moving from selling in retail to selling online.
• Different pricing policies to attract different customers or create new market segments.
(Price discrimination)
Market development is a riskier strategy than market penetration because new markets are
targeted.
Diversification
Diversification is the name given to the growth strategy where business markets new products in
new markets.
This is the riskiest strategy because the business is moving into markets in which it has little or no
experience.
For a business to adopt a diversification strategy it must have a clear idea about what it expects
to gain from the strategy and an honest assessment of the risk.
If the business can do a good assessment about the risk and reward, diversification can be best
strategy for any business.
Risks and rewards of each strategy
Strategy Risks Rewards

Market penetration • Few risks should arise • Since customers and
other than the decline the competitors are
in the product life known error free
cycle decisions can be made
• Lack of ambition may • Returns on extra
make the best of your investments are
staff to take up predictable
challenging jobs
elsewhere
Market development • Subtle cultural • There are huge
differences add potential economies
hugely to the risk of scale if your
• Practical difficulties product succeeds
such as distribution elsewhere
channels, consumer • If you take time to
legislations and understand the
differences in cultural differences
managing staff you may be able to
localise new product
range effectively such
as Mc Donald does
Product development • Most new products • As shown by Apple
fail therefore risk level nothing adds value
is high and create
• Because new product differentiation more
success is tough than innovative
businesses will product development
appoint their best • Continuous successful
people to those product development
products and means the
therefore ordinary organisation lives
brands would suffer forever
Diversification • Not knowing the • When diversification
market and having a works it can transform
brand-new product the size and the
means the risk level is opportunities for the
multiplied by two business
• Therefore, it is vital to • Radical diversification
plan for the such as Google making
operational risk of cars can be hugely
diversifying by making exciting for workers

sure your financial helping the company
position is secure to recruit the best
Benefits of Ansoff’s Matrix
• By identifying the different strategic areas in which a business could expand, the matrix
allows managers to analyze the degree of risk associated with each one
• Managers can then apply decision-making techniques to assess the costs, potential gains
and risks associated with all options.
• Clearly, the risks involved in these four strategies differ substantially. By opening up these
options, Ansoff’s matrix does not direct a business towards one particular future strategy.
In practice, it is common for large businesses, in today’s fiercely competitive world, to
adopt multiple strategies for growth at the same time.
Limitations of Ansoff’s Matrix
• It only considers two main factors in the strategic analysis of a business’s options – it is
important to consider SWOT and PEST analysis tool in order to give a more complete
picture.
• Recommendations based purely on Ansoff would tend to lack depth and hard
environmental evidence.
• Management judgment especially based on experience of the risks and returns from the
four options, may be just as important as any one analytical tool for making the final choice.
• The matrix does not suggest – and to be fair to Ansoff, it was never intended to – actual
detailed marketing options. For instance, market development may seem to be the best
option but which market/country and with which of the existing products produced by the
business? Further research and analysis will be needed to supply answers to these
questions.
Chapter 3
SWOT Analysis
Internal audit
It is an analysis of business and how it operates and it identifies internal strengths and
weaknesses for example skills of the workers, quality, and financial situations, organizational
structure etc. can be given
It is the basis for SWOT analysis strengths and weaknesses.
It is normally carried out by internal mangers.
External audit
It is an audit of an external environment of a business. For example, economic environment,

government intervention, actions of competitors can be given.
It is the basis for the opportunities and threats of SWOT analysis.
It can be carried out by internal managers with the help of external experts.
SWOT Analysis
SWOT analysis is the strategic planning technique used to help a person/organization to identify
the strengths, weaknesses, opportunities and threats related to business competition and project
planning.
SWOT is an acronym which stands for:
• Strengths – These are the things a company does well; they are the qualities that
separate a business from competitors. They involve internal resources such as skilled and
knowledgeable staff, intellectual property such as patents and copyrights and
technological knowledge.
• Weaknesses – It involves what a company lacks and they are the things by which
competitors are superior to the business. They involve resource limitations such as lack of
finance, lack of skill or inappropriate locations, lack of capacity, etc.
• Opportunities – They are the under-served market for specific products which also might
involve having a few competitors in the market. It also involves an emerging need for a
particular product or service in the market. Moreover, it might mean press and media
coverage.
• Threats – Might mean unfavourable external conditions for a business. It might involve
emerging competitors, changing regulatory environment, negation threats or media
coverage or change in customer needs.
SWOT analysis aims to discover:
• What the business does better than the competitors (Strengths)
• What competitors do better (Weaknesses)
• Whether it is making the most of the opportunities available (Opportunities)
• How a business should respond to changes in its external environment (Threats)
The key point to remember about SWOT is that:
Strengths and weaknesses
• Are internal to 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
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. The key words are match and
convert.
Benefits of SWOT Analysis
• SWOT is helpful for a business to match the resources of a firm and strengths to the
opportunities available externally.
• The process of carrying out SWOT analysis has little or no costs because it is done by
internal managers.
• SWOT analysis is a good self-reflection to a business which would bring the managers
together.
• SWOT analysis would be helpful to address weaknesses, detect threats, capitalize on

opportunities and take advantage on strengths.
Limitations of SWOT Analysis
• SWOT analysis is an over-simplified analysis where it becomes just a list with no priority
or quantitative measures given to each factor.
• It doesn’t provide solutions or alternative decisions.
• Can generate too many ideas but do not help to say which one is the best.
• SWOT analysis is subjective (one manager sees things differently than the others) and it is
based on the views of the analyst.
Chapter 4
Impact of External influences
PESTLE Analysis
A PESTLE analysis is an acronym for a tool used to identify the macro/external forces facing an
organization. The letters stand for: Political, Economic, Social, Technological, Legal and
Environmental.
Political Influence
These are the factors which determine the extent to which the government may influence the
economy or an industry. This includes tax policies, fiscal policy, tariffs, monetary policy, changes
of governments, etc. Business organizations need to be able to respond to the current and
anticipated changes on the political environment because governments always intervene in
economic activities.
Economic Influence
Economic factors have a significant impact on how an organization does business and how
profitable they are. These factors include economic growth, interest rate, exchange rates,
inflation, disposable income, etc. For example, government can use interest rate control in order
to handle demand and expenditure patterns.
Social Influence
These are also known as socio-cultural factors and they involve shared beliefs and attitudes of the
population. These factors include population growth, age distribution, health consciousness,
career attitudes, etc. These factors are of particular interest as they have a direct effect on how
markets understand customers and what drives them.
Technological Influence
This includes advances in Information Technology (IT), new product and production processes,
improved management techniques such as TQM and JIT, etc. Technological factors affect
marketing and the management in different ways.
• New ways of producing goods and services

• New ways of distributing goods and services
• New ways of communicating with the market
Legal Influence
Legal factors include health and safety legislations, equal opportunities, advertising standards,
consumer rights, product labelling, product safety and various other legislations within which a
business should act. Companies should know what is legal and not in order to trade successfully.
Particularly it is important to know the legal framework if the business is trading in another
country.
Environmental Influence
Environmental factors include the increasing awareness of customers with regard to

environmental issues. They include environmental pollution, ethical and sustainable production,
scarcity of raw materials, carbon footprint, etc.
These issues have compelled consumers and governments to demand more and more
environmentally friendly production from businesses. There are also pressure groups who
relentlessly work on environmental issues.
Benefits and Limitations of PESTLE Analysis
Easy to understand because this analysis PESTLE is a list of points without
would provide the impact of several priorities, therefore it may need further
influences on a business in an easy to Critical analysis.
Understand language.
It provides an understanding of wider External environment is dynamic; therefore,

business environment. PESTLE may need constant updates.
It encourages the analysis of the business Since it is an analysis of macro-environment,

environment which provides deeper there can be some inaccurate information.
understanding to the business when
formulating objectives and strategies.
PESTLE analysis also helps to recognize The final judgments based on

opportunities and threats faced by a business
so that actions can be taken to maximize the PESTLE analysis might require the relative
advantages of opportunities and minimize the importance of each factor.
disadvantages of threats.
For MNCs, this is really useful because they

are operating in different environments.
Impact of External Influences
External influences have an impact on: -
a) Demand; external influences are likely to result in lower revenue, profits and weaker cash
flows, and vice versa.
b) Costs; external influences are likely to raise costs, reduce profit margins, thereby forcing
businesses to increase prices, and vice versa.
c) Operations; external influences will lead to a change in the operational methods. Ex:
minimum wage legislations will make a business use capital intensive production.
Porter's Five Forces Model of Industry Competition
Michael Porter provided a framework that models an industry as being influenced by five forces
Barriers to entry
This means the ease with which other firms can join the industry and compete with existing
businesses. This threat of entry is greatest when:
• economies of scale are low in the industry
• the technology needed to enter the industry is relatively cheap
• distribution channels are easy to access, e.g., retail shops are not owned by existing
manufacturers in the industry
• there are no legal or patent restrictions on entry the importance of product
differentiation is low, so extensive advertising may not be required to get established
The power of buyers

This refers to the power that customers have on the producing industry. For example, if there
are four major supermarket groups that dominate this sector of retailing, their buyer power over
food and other producers will be great.
Buyer power will also be increased when:
• There are many undifferentiated small supplying firms, e.g., many small farmers
supplying milk or chickens to large supermarket businesses
• the cost of switching suppliers is low
• buyers can realistically and easily buy from other suppliers
The power of suppliers

Suppliers will be relatively powerful compared with buyers when
• The cost of switching is high, e.g., from PC computers to Macs when the brand being sold
is very powerful and well known, e.g., Cadbury’s chocolate or Nike shoes
• Suppliers could realistically threaten to open their own forward-integration operations,
e.g., coffee suppliers open their own cafés
• Customers have little bargaining power as they are small firms and fragmented, e.g.
dispersed around the country as with independent petrol stations.
The threat of substitutes

In Porter’s model, ‘substitute products’ does not mean alternatives in the same industry, such as
Toyota for Honda cars. It refers to substitute products in other industries.
Threats of substitution will exist when:
• New technology makes other options available, such as satellite TV instead of traditional
antenna reception
• Price competition forces customers to consider alternatives – for example, lower bus
fares might make some travelers switch from rail transport
• Any significant new product leads to consumer spending that result in less being spent on
other goods – for example, increasing spending on mobile (cell) phones by young people
reduces the available cash they have to spend on clothes.
Competitive rivalry
This is the key part of this analysis – it sums up the most important factors that determine the
level of competition or rivalry in an industry. Competitive rivalry is most likely to be high where:
• it is cheap and easy for new firms to enter an industry
• there is a threat from substitute products
• suppliers have much power
• Buyers have much power.
• there are a large number of firms with similar market share
• high fixed costs force firms to try to obtain economies of scale
• there is slow market growth that forces firms to take a share from rivals if they wish to
increase sales
Benefits of Porter’s five forces model

• By analyzing new markets in this way, it helps firms decide whether to enter or not. It
provides an insight into the potential profitability of markets. Is it better to enter a highly
competitive market or not?
• By analyzing the existing markets, a business operates in, decisions may be taken
regarding: ‘Do we stay in these markets in future if they are becoming more
competitive?’ and ‘How could we reduce the level of competitive rivalry in these markets
– and thus increase potential profitability?’
• With the knowledge gained and the power of competitive forces, businesses can develop
strategies that might improve their own competitive position. These could include the
following:
o Product differentiation, e.g., Honda hybrid cars with a distinctive appearance.
o Buying out some competitors, e.g., Exxon taking over Shell to reduce rivalry.
o Focus on different segments that might be less competitive, e.g., Nestlé entering niche
confectionery markets such as vegan chocolates.
o Communicate and collude with rivals to reduce competition, e.g., the major cement
producers in the European Union have been accused of this.
Problems with Porters five forces model

• It analyses an industry at just one moment in time – static analysis – and many industries
are changing very rapidly due to, for example, globalization and technological changes
• The model can become very complex when trying to use it to analyze many modern
industries with joint ventures, multiple product groups and different market segments
within the same industry – which have their own competitive forces
Structure of the Markets
The structure of the market depends on the level of competition and based on the competitors.
There are;
a) Competitive Markets; competitive markets mean that there are a large number of buyers
and seller. There are close substitutes. Low barriers to entry and exit. No firm has control
over the price.
b) Uncompetitive Markets; in uncompetitive markets, there are few firms, high barriers to
entry and exit and dominant firms decide the price. They can be a monopoly or oligopoly
market.
Monopoly means one large firm (one seller) whereas oligopoly means several large firms (few,
big sellers) in the market. Competitiveness of a market depends on various factors, namely;
a) Ability of new entrance to come into the market

b) Coming of new products into the market
c) Consolidation; which means the ability of a firm to take over another business
Chapter 5
Business Growth
Motivations for Business Growth
1. Profit motive – when businesses grow, it will provide returns for shareholders.
2. Cost motive – when there is a business growth, economies of scale can be achieved because
there is an increase in production capacity of the business which leads to lower average cost.
This helps to raise profits margins at the given market price.
3. Market power motive – firms may wish to increase market dominance by growth. It gives the
power of setting price in the market. This can also be used as a barrier to entry for other
firms. It also will lead the businesses to become monopoly (one supplier) and monopsony
(one customer).
4. Risk motive – through diversification of the business across products and markets businesses
are able to reduce investor risks.
5. Managerial motives – managers whose objectives differ might accelerate business

expansion.
Economies of scale:
It means reductions in a firm’s unit (average) costs of production that result from an increase in
the scale of operations.
Internal economies of scale

Internal economies of scale are cost savings that arise from within the business
Purchasing economies
• These economies are often known as bulk-buying economies.
• Suppliers will often offer substantial discounts for large orders. This is because it is cheaper
for them to process and deliver one large order rather than several smaller ones.
• In addition, they will obviously be keener to keep a very large customer happy due to the
profits made on the large quantities sold.
• Big firms employ specialist ‘buyers’ who may travel the globe to strike the best possible
deals at the lowest possible prices for materials and components.
• Recently there has been a growing trend towards firms buying supplies over the Internet,
and cheaper deals are offered for greater quantities ordered.
Technical economies
There are two main sources of technical economies.
• Large firms are more likely to be able to justify the cost of flow production lines. If these
are worked at a high-capacity level, then they offer lower unit costs than other production
methods.
• The latest and most advanced technical equipment – such as computer systems – is often
expensive and can usually only be afforded by big firms. Such expense can only be justified
when output is high so that fixed costs can be spread ‘thinly’.
Financial economies
Large organizations have two distinct cost advantages
• When it comes to raising finance. Firstly, banks and other lending institutions often show
preference for lending to a big business with a proven track record and a diversified range
of products. Interest rates charged to these firms are often lower than the rates charged
to small, especially newly formed, businesses.
• Secondly, raising finance by ‘going public’ or by further public issues of shares for existing
public limited companies is very expensive. Therefore, the average cost of raising the
finance will be lower for larger firms selling many millions of dollars’ worth of shares.
Marketing economies
• Marketing costs obviously rise with the size of a business, but not at the same rate.
• Marketing cost can be spread over a higher level of sales for a big firm and this offers a
substantial economy of scale.
Managerial economies
• As a firm expands, it should be able to afford to attract specialist functional managers who
should operate more efficiently than general managers.
• The skills of specialist managers and the chance of them making fewer mistakes because
of their training is a potential economy for larger organizations.
Risk-bearing economies of scale

• Occur as large firms tend to produce a range of products and operate in many locations.
This diversity spreads risks as weak sales in one country can be supported by strong sales
in another
Research and development economies of scale

• Occur as large firms may be able to fund research and development, and therefore can be
innovative and create products that enable them to be leaders in their area of business
External economies of scale

External economies of scale are economies of scale that arise due to the location of the firm and
are therefore external to the business.
1. Proximity to related firms -A garment manufacturer will benefit from having firms that
produce zippers, buttons, thread and fabrics located nearby, as this will give it easy
access to its suppliers and reduce transport costs.
2. Availability of skilled labor - pool of skilled workers makes recruitment workers with the
necessary skills relatively easy.
3. The reputation of the geographical area - This provides a firm with free publicity and
exposure.
4. Access to transport - Manufacturing firms benefit from being located near to major road
networks, ports and cargo facilities.
Consequences of growth
Increased market power
When a business becomes bigger it may become dominant in the market. It will result in
• Charging higher prices from the consumers if there is limited competition
• Can bargain better with suppliers.
• However, it can be a problem if they come under the investigations of monopoly
authorities
Increased market share and brand recognition

This might lead to various benefits such as
• Charge a higher price
• Make the product distinct from rivals
• Create customer loyalty
• Achieve greater customer recognition
• Develop better image
• Launch new products easily
• Increased media attention
Increased profitability
One of the main objectives of growth is making more profits. Bigger businesses have potential to
make more profits than the smaller ones
Classification of Growth
Growth can be classified into:
• Organic/internal growth - a business growth strategy that involves a business growing
gradually using its own resources
• Inorganic/external growth - a business growth strategy that involves two or more
businesses joining together to form one much larger one
Key difference of these two strategies is that organic growth less risky than the inorganic
growth and inorganic growth much quicker than the organic growth.
Chapter 6
Organic Growth
Organic (or internal) growth involves expansion from within a business, for example by
expanding the product range, or number of business units and location. Organic growth builds
on the business’ own capabilities and resources. For most businesses, this is the only expansion
method used.
Organic growth involves strategies such as:

• Developing new product ranges
• Launching existing products directly into new international markets (e.g. exporting)
• Opening new business locations – either in the domestic market or overseas
• Investing in additional production capacity or new technology to allow increased output and
sales volumes
• Franchising
• New business model such as getting into online platform
Some examples of businesses that have implemented successful organic growth strategies are
Dominos UK, Apple and Costa Coffee.
Benefits and Drawbacks of Organic Growth
Benefits
• Less risky -Organic growth can be a safer option than inorganic growth as it relies on a
tried and trusted business model
• Relatively cheaper- Can be financed through internal funds (e.g. retained profits)
• Keep control for the original owners
• Better protection - Allows the business to grow at a more sensible rate
• Avoids culture clashes with a takeover of a rival business which often happens when
inorganic growth occurs
• Creates more sustainable growth which can build on existing strengths (e.g. brands,
customers)
• Avoids diseconomies of scale
Drawbacks
• Growth achieved may be dependent on the growth of the overall market

• Hard to build market share if business is already a leader
• Franchises (if used) can be hard to manage effectively
• Slow pace of the growth - Organic growth often is a very slow way to grow and shareholders
may prefer more rapid growth of revenues and profits. Also if the market is growing rapidly
this may be highly inappropriate
• Organic growth can also lead to a lack of new ideas from outside of the business which often
happens with inorganic growth
• Lack of resources for growth such as new technology or human capital
• Unable to be competitive specially if the competitors are growing rapidly
• Unable to exploit the economies of scale
Chapter 7
Inorganic Growth
This refers to expansions achieved through mergers and takeovers (integration).
Takeover means where one business acquires a controlling interest in another business which
means a change of ownership.
Merger means combination of 2 previously separate businesses into a new business.
E.g.: Craft taking over Cadbury, Google and Motorola, Tata and JLR, British Airways and Iberia.
Benefits and Drawbacks of Inorganic Growth
Benefits
• Speedy growth; growth is much quicker than internal growth and will lead to high market
share, lower cost due to economies of scale, and profit.
• Strategic benefits; it means inorganic growth will lead to compensating weaknesses in one
company with the strength of the other company.
• Economies of scale: when the company expands due to external growth the scale of
operation also will expand
• Eliminate competition; inorganic growth means that the number of competitors in the
market would be reduced and some companies will be stronger in the market.
Drawbacks
• Regulatory intervention; means when firms become bigger with integrations, they will come
under the scrutiny of competition authorities (preventing a monopoly)
• Drain of resources; usually mergers and takeovers are costly and that will create cash flow
problems for the acquiring business (very expensive)
• Culture clash; since the value systems of businesses are different, clashes would be created
amongst integrated firms, especially with regard to management
• Alienation of customers; when a huge firm takes over a small one, or when a small business
becomes larger due to mergers, customers will not feel as close to the business as they were
before
• Loss of managerial control; due to takeovers, new management layers are created, then
hierarchy would be longer, and there would be wider span of control, etc. All this would lead
to the loss of managerial control
• Diseconomies of scale; poor communication, lack of control and co-ordination, poor worker
motivation, bureaucracy (Refer Chapter 8 – Page 55)
Key Motives of Takeovers and Mergers
• Rapid technological change which destroys certain industries and markets.

• To have synergies – literally means that ‘the whole is greater than the sum of parts’, so in
integration it is often assumed that the new, larger business will be more successful than the
two, formerly separate, businesses were.
• Need for economies of scale to remain cost and price competitive in world markets.
• Globalisation of markets have encouraged international mergers and takeovers
• Need to be able to supply customers globally (international takeovers and mergers).
• Low demand growth in mature economies therefore it is necessary to get into international
markets.
• To have access to more distribution networks.
• Investment in faster growing emerging markets where per capita incomes are rising quickly.
• Quick way of expanding the business than the internal growth
• Cheaper than growing internally
• Some businesses have extra cash and they want to spend it effectively
• Mergers happens in order to consolidate in the market
• Some mergers happen to face the economic changes (e.g., BREXIT)
Classification of Inorganic Growth
Inorganic growth can be divided into 4 categories:
• Horizontal integration
• Vertical forward integration
• Vertical backward integration
• Conglomerate integration
Horizontal Integration
It is integration with firms in the same industry and at the same stage of production.
Advantages
• It increases the size of the business and allows for more internal economies of scale – lower
long run average costs – improved profits and competitiveness
• One large firm may need fewer workers, managers and premises than two – a process known
as rationalization again designed to achieve cost savings
• Mergers often justified by the existence of “synergies”
• Creates a wider range of products - (diversification). Opportunities for economies of scope
• Reduces competition by removing rivals – increases market share and pricing power
Disadvantages
• Certain rationalizations may bring bad publicity such as monopolistic practices and loss of
jobs.
• May lead to monopoly investigation by the government if the combined business exceeds
certain market share limits.
The impacts on main stakeholders are:
• Consumers now have less choice.

• Workers may lose job security as a result of rationalization.
Vertical Forward Integration
It means integrating with a business in the same industry but a customer of the existing business.
(Acquiring the next stage of supply chain)
• Shoe manufacturer taking over shoe retailer.

• Film distributors owning cinemas
• Brewers owning and operating pubs
• Tour operators / Charter Airlines / Travel Agents
• Crude oil exploration all the way through to refined product sale
• Sportswear manufacturers and retailers
Advantages
• Business is now able to control promotion and pricing of its own products.
• Secure outlet for the firm’s product may now exclude competitor’s products.
Disadvantages
• Consumers may suspect uncompetitive activity and react negatively.

• Lack of experience in this sector of the industry (a successful manufacturer doesn’t
necessarily make a good retailer).
• Workers may have greater job security because the business has secure outlets.
• There may be more varied career opportunities.
• Consumers may resent due to lack of competition in the retail outlet because of the
withdrawal of competitive products.
Vertical Backward Integration
It is the integration with a business in the same industry but a supplier of the existing business.
(Acquiring of the previous stage of the supply chain)
Advantages
• It gives control over quality, price and delivery times of suppliers.

• It encourages joint research and development into improved quality of supplies of
components.
• Improved access to important raw materials used in manufacturing.
• Business may control supplies of materials to competitors.
Disadvantages
• May lacks experience of managing a supplying company. E.g. shoe manufacturer may not be
a good leather manufacturer.
• Supplying business may become complacent due to having a guaranteed customer. (Since
shoe company will definitely buy from Leather Company which they have integrated with,
Leather Company wouldn’t care about quality and efficiency since they know Shoe Company
will buy no matter what).
The impacts on stakeholders are:
• Possibility of greater career opportunities for workers.

• Consumers may obtain improved quality and more innovative products.
• Control over supplies to competitors may limit competition and choice for consumers.
Conglomerate Integration
It means integration with a business in a different industry.
Advantages
• Diversifies the business away from its original industry and markets.
• This should spread and may take the business into a faster growing market.
Disadvantages
• Lack of management experience in the acquired sector.
• There could be a lack of clear focus and direction now that the business is spread across
more than one industry.
• Greater career opportunities for workers.

• More job security because risk is spread across more than one
Financial rewards and risks of inorganic growth
Financial rewards
• Stakeholder benefits – shareholders of the target company may get financial premium
during the takeover
• Stronger balance sheet -The takeover might result in stronger asset base for the
company
• Lower cost – the acquisitions and merger might lead to larger scale and which leads to
economies of scale.
• Lower taxes – if the acquired business is in a low tax location there can be tax advantages
Financial risks
• Integration cost in terms of money, time and resources

• Overpayment – it can happen due to overestimation of the benefits of takeover
• Bidding wars – it happens sometimes if there is more than one buyer for the firm and
business has to give a greater bid.
Chapter 8
Problems arising from Growth
Diseconomies of scale:
They are the factors that cause average costs of production to rise when the scale of operation is
increased. This can be internal or external.
Internal Diseconomies of scale:
There are internal diseconomies of scale which means internal factors which lead to rising average
cost as the firm grow.
1. Communication problems
Large-scale operations will often lead to poor feedback to workers
• Excessive use of non-personal communication media,
• Communication overload with the sheer volume of messages being sent
• Distortion of messages caused by the long chain of command.
These communication inefficiencies may lead to
• Poor decisions being made, due to inadequate or delayed information.
• Poor feedback reduces worker incentives.
• Communication overload is ‘noise’ that may prevent the really important messages being
acted upon first.
All of these factors will reduce management efficiency.
2. Alienation of the workforce and demotivation

• The bigger the organization, the more difficult it becomes to directly involve every worker
and to give them a sense of purpose and achievement in their work.
• They may feel so insignificant to the overall business plan that they become demotivated
and fail to give of their best.
3. Poor coordination
• Coordination really means that all divisions of the business are aiming to achieve the same
objectives by adopting similar ethical standards and by producing goods that are consistent
with each other.
• Business expansion is often associated with a growing number of departments, divisions
and products. The number of countries a firm operates in often increases too.
• A major problem for senior management is to coordinate and control all of these
operations. And it will increase the cost of the business
4. Technical diseconomies
• Plants, machinery and equipment usually have optimum capacity. If they are over used
then they become inefficient after sometimes.
5. Bureaucracy
• If business becomes too bureaucratic it means too many resources used in administration
and too much time be filling in forms and writing reports. It can lead to inefficiencies.
Avoiding diseconomies
Three approaches could be used to overcome the impact of potential diseconomies:
1. Management by objectives: This will assist in avoiding coordination problems by giving
each division and department agreed objectives to work towards that are components of
the long-term aims of the whole business.
2. Decentralization: This gives divisions a considerable degree of autonomy and
independence. They will now be operated more like smaller business units, as control will
be exercised by managers ‘closer to the action’. Only really significant strategic issues
might need to be communicated to the center, and such issues might be the only ones
requiring decisions from the center.
3. Reduce diversification: The recent movement towards less-diversified businesses that
concentrate on ‘core’ activities may help to reduce coordination problems and some
communication problems.
External Diseconomies of scale:
• This occurs when an industry growing in size causes negative externalities – and rising
long-run average costs. The environmental pollution can affect a business in the long run.
• External diseconomies of scale occur when an industry growing in size causes negative
externalities – and rising long-run average costs. For example, if an industry grows rapidly
in size – it may cause traffic congestion.
• Alternatively, the competition for scarce resources may push up the cost of rent/labour /
raw materials. For example, many financial firms wish to set up in the City of London to
benefit from the existing infrastructure, but as a result, they face very high cost of renting.
Internal Communication
There can be problems of internal communication as the companies grow.
• As the companies grow the hierarchy will be longer and that will lead to delays in decision
making
• Sometime resources might be wasted due to duplication of resources as two departments
may do the same thing due to lack of communication
• Sometime silo mentality of individual departments might lead to unhealthy competition or
resources which can lead to lack of productivity
Over trading
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.
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 of Overtrading
• High revenue growth but low gross and operating profit margins
• 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
Managing 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.
• Reducing inventory levels

• Scaling back the pace of revenue growth until profit margins and cash reserves have
improved
• Leasing rather than buying capital equipment
• Obtaining better payment terms from suppliers
• Enforcing better payment terms with customers (e.g.,through prompt-payment discounts)
Chapter 9
Quantitative Sales Forecasting
Sales forecasting is the prediction of future sales revenue often based on the sales data of the
previous years. Sales forecasting is beneficial for several reasons
1. It is important to forecast future cash flows of the business (revenue is the main cash
inflow)
2. It is necessary business to order stocks, raw materials and other resources for
production.
3. It is important to make sure that business has got enough staff to carry out the
production
4. It is important to plan the capacity of the business
There are various quantitative sales forecasting techniques which associate with statistical
analysis.
Calculating Time-Series Analysis
Time-series analysis is a method that allows a business to predict future levels from past figures.
There are four main components in the time-series analysis:
• Trend
• Seasonal fluctuations
• Cyclical fluctuations
• Random fluctuations
These are:
1. The trend: the underlying movement in a time series.

2. Seasonal fluctuations: the regular and repeated variations that occur in sales data within a
period of 12 months.
3. Cyclical fluctuations: these variations in sales occur over periods of time of much more
than a year and are due to the business cycle.
4. Random fluctuations: these can occur at any time and will cause unusual and unpredictable
sales figures – examples include exceptionally poor weather or negative public image
following a high-profile product failure.
Moving averages
This method is more complex than simple graphical extrapolation. It allows the identification of
underlying factors that are expected to influence future sales.
Calculation of moving average
Making the graph

Calculation of seasonal variation and average seasonal variation
The advantages of moving average method
• It is useful for identifying and applying the seasonal variation to predictions.

• It can be reasonably accurate for short-term forecasts in reasonably stable economic
conditions.
• It identifies the average seasonal variations for each time period and this can assist in
planning for each quarter in future
The disadvantages of moving average method
• It is a fairly complex calculation.

• Forecasts further into the future become less accurate as the projections made are
entirely based on past data.
• External environmental factors can change.
• Forecasting for the longer term may require the use of more qualitative methods that are
less dependent on past results.
Extrapolation
The most basic method of predicting sales based on past results is termed extrapolation.
Extrapolation means basing future predictions on past results. When actual results are plotted
on a time-series graph, the line can be extended, or extrapolated, into the future along the trend
of the past data
This assumes that sales patterns are stable and will remain so in the future. However, it is
ineffective when this condition does not hold true.
Advantages of using extrapolation

• A simple method of forecasting
• Not much data required
• Quick and cheap
Disadvantages of using extrapolation

• Unreliable if there are significant fluctuations in historical data
• Assumes past trend will continue into the future – unlikely in many competitive business
environments
• Ignores qualitative factors (e.g., changes in tastes & fashions)
Correlation
Correlation is another method of sales forecasting. Correlation looks at the strength of a
relationship between two variables.
For marketing, it might be useful to know that there is a predictable relationship between sales
and factors such as advertising, weather, consumer income etc.
Correlation is usually measured by using a scatter diagram, on which data points are plotted. For
example, a data point might measure the number of customer enquiries that are generated per
week (x-axis) against the amount spent on advertising (y-axis). This is illustrated below:
It is normal convention to show the:

Independent variable (the factor that causes the other variable to change) on the x-axis
Dependent variable (the variable being influenced by the independent variable) on the y-axis
How can a marketing manager make sense and use of all the data points once they have been
plotted on the scatter diagram?
The answer is a "line of best fit" (the regression line) which attempts to plot the mathematical
relationship between the variables based on the data points. This can be drawn by hand or using
an Excel spread sheet or specialist marketing software.
There are three kinds of possible correlation:

1. Positive correlation: A positive relationship exists whereas the independent variable
increases in value, so does the dependent variable
2. Negative correlation: A negative relationship exists whereas the independent variable
increases in value, the dependent variable falls in value
3. No correlation: there is no any discernible relationship between the independent and
dependent variable
The line of best fit indicates the strength of the correlation.
Strong correlation means that there is little room between the data points and the line.
Weak correlation means that the data points are spread quite wide and far away from the line of
best fit. If the data suggests strong correlation, then the relationship might be used to make
marketing predictions.
The big danger with correlation is of believing there is really a causal link between two variables
when, in fact, they are not related.
It is logical to believe that there is a causal link between the daily temperature and sales by ice-
cream vans. However, is there a link between increasing childhood obesity and increasing
disposal incomes for households? Both these variables have risen over the long-term, but they
are probably not directly related
Qualitative sales forecasting methods
Sales force composite
A method of sales forecasting that adds together all of the individual predictions of future sales
of all of the sales representatives working for a business.
This method has the advantage of being quick and cheap to administer.
However,
• Sales representatives may not be aware of macro-economic developments or

competitors’ actions that could have a substantial impact on future.
• Customer businesses may give overestimated purchases to have better supply
agreement
Delphi method
It is a long-range qualitative forecasting technique that obtains forecasts from a panel of expert’s
opinions and forecasts.
Consumer surveys
Refer to market research
Jury of experts
Jury of experts: uses the specialists within a business to make forecasts for the future.
Sales forecasting is a crucial part of business planning.

The sales forecast forms the basis for most other common parts of business planning:
• Human resource plan: how many people we need linked with expected output
• Production / capacity plans
• Cash flow forecasts
• Profit forecasts and budgets
• Part of regular competitor analysis and helps to focus market research
Key Factors Affecting the Accuracy and Reliability of Sales Forecasts

Sales forecasting requires a subjective judgement about an uncertain future. So, it is inevitable
that actual sales will differ from those forecasts. Key factors that create this variability include:
1. Consumer trends
Demand in many markets changes as consumer tastes & fashions change
Affects both overall market demand & the market shares of existing competitors
2. Economic variables
Demand often sensitive to changes in variables such as exchange rates, interest rates,
taxation etc. Overall strength of the economy (GDP growth) also important
3. Competitor actions
Hard to predict, but often significant reason why sales forecasts prove over-optimistic
Circumstances Where Sales Forecasts Are Likely to be Inaccurate

The situations where actual sales are most likely to be significantly different from the sales
forecast include:
• Business is new – a start-up (notoriously difficult to forecast sales)
• Market subject to significant disruption from technological change
• Demand is highly sensitive to changes in price and income (elasticity)
• Product is a fashion item – they will be out-dated
• Significant changes in market share (e.g., new market entrants)
• Management have demonstrated poor sales forecasting ability in the past
Chapter 10
Investment Appraisal
Investment appraisal means evaluating the profitability or desirability of an investment project.

Investment appraisal is the process of using techniques to decide whether to proceed with
capital expenditure. There are various investment appraisal techniques:
• Simple payback period

• Average rate of return (ARR)
• Net present value (NPV)
Simple Payback Period
It means the length of time it takes for the net cash inflows to payback the original cost of the
investment.
Project A
E.g.: We need to recover 250000
Year 1+2= 190000
Year Net Cash Flow/A Net Cash Flow/B
250000-190000=60000
0 (250000) (140000)
1 110000 60000
60000 x 12 months = 9.6
2 80000 35000
75000
3 75000 25000
Therefore, it takes 2 years and 9.6 months
4 65000 20000 to recover the initial investment
5 50000 15000
Project B
Year 1+2+3+4= 140000
Payback period -4 years
The shorter the payback period, the better. This is because it reduces the risk of investment
falling and money being lost. This also means that money is returned to the business quickly and
therefore can be invested in another project.
The benefits of payback period method are:

• It is quick and easy to calculate.
• The results are easily understood by managers.
• The emphasis on speed of return of cash flows gives the benefit of concentrating on the
more accurate short-term forecasts of the project’s profitability.
• The result can be used to eliminate or ‘screen out’ projects that give returns too far into
the future.
• It is particularly useful for businesses where liquidity is of greater significance than overall
profitability
However, there are limitations of payback period method:
• It does not measure the overall profitability of a project – indeed; it ignores all of the cash
flows after the payback period. It may be possible for an investment to give a really rapid
return of capital, but then to offer no other cash inflows.
• This concentration on the short term may lead businesses to reject very profitable
investments just because they take some time to repay the capital.
• It does not consider the timing of the cash flows during the payback period – this will
become clearer when the principle of discounting is examined in the final appraisal
method
Average Rate of Return (ARR)
It is an investment appraisal which shows annual average profits generated by the investment
over its lifetime as a percentage of cost of investment.
Eg: ARR = Average Profit x 100

Year Net Cash Flow/A Net Cash Flow/B Initial Investment
0 (250000) (140000)
1 110000 60000 If interest rate in the country is higher
2 80000 35000 than ARR, it is useless but better to save.
3 75000 25000 Therefore, depends on interest rate.
4 65000 20000
5 50000 15000
Project A
First find average profit (add and subtract values and divide by lifetime)
Average profit = (110000+80000+75000+65000+50000)-250000 / 5 = 26000

ARR = 26000/250000 x 100 = 10.4%
Project B
Average Profit = (60000+35000+25000+20000+15000)-140000 / 5 = 3000

ARR = 3000/140000 x 100 = 2.14%
Higher the ARR the better because this shows that money invested is being increased at a
greater rate per year on average. However, the directors might regard the ARR is better or worse
only based on the interest rate and other alternative investments.
ARR is useful in various ways:

• It uses all of the cash flows – unlike the payback method.
• It focuses on profitability, which is the central objective of many business decisions.
• The result is easily understood and easy to compare with other projects that may be
competing for the limited investment funds available.
• The result can be quickly assessed against the predetermined criterion rate of the
business.
However, there are limitations of this method:

• It ignores the timing of the cash flows. This could result in two projects having similar ARR
results, but one could pay back much more quickly than the other.
• As all cash inflows are included, the later cash flows, which are less likely to be accurate,
are incorporated into the calculation.
• The time value of money is ignored as the cash flows have not been discounted
Net Present Value (NPV)
NPV means today’s value of the estimated cash flows resulting from an investment.
Eg:
Year Net Cash Flow Discount Factor (10%) Discounted Cash Flow
0 (250000) 1 (250000)
1 100000 0.909 90900
2 100000 0.826 82600
3 100000 0.751 75100
4 100000 0.683 68300
5 100000 0.621 62100
For a project to be accepted, NPV should be positive 129000
Interpretation of NPV
The NPV illustrates the total net value of the project in today’s value. The higher the discount
rate the lesser would be the NPV. It also indicates that under difficult economic conditions
whether to carry on a project or not (can change discount factor for a more realistic value).
Usually projects with higher NPV are selected if there are alternative projects. If the NPV is
negative, then it is most likely (unless it has to be selected) that it will be rejected.
Advantages of NPV are:

• It considers both the timing of cash flows and the size of them in arriving at an appraisal.
• The rate of discount can be varied to allow for different economic circumstances. For
instance, it could be increased if there was a general expectation that interest rates were
about to rise.
• It considers the time value of money and takes the opportunity cost of money into
account
However, there are limitations of NPV:
• It is reasonably complex to calculate and to explain – especially to non-numerate

managers.
• The final result depends on the rate of discount used, and expectations about interest
rates may be wrong.
• Net present values can be compared with other projects, but only if the initial capital cost
is the same. This is because the method does not provide a percentage rate of return on
the investment
Qualitative Influences on Investment Appraisals
Other than the quantitative appraisals of an investment proposal there are other qualitative
factors to be considered in an investment appraisal.
• Length of the project – the longer the project, the greater would be the risk because
estimated cash flows would be unrealistic when the project is longer.
• Source of the data – accuracy of investment appraisal depends on the accuracy of data
entered into it. E.g.: cash flow, discount factor.
• Size of the investment – if the investment is a large one then more risk is involved. Therefore,
positive investment appraisals alone will not guarantee success.
• The economic market environment – external environment is not under control of the
business; therefore, assumptions will go wrong.
• Experience of management team – if the management is well experienced forecast regarding
the project likely to be accurate and if not it would be less accurate.
• Impact on employees – a project cannot be rejected easily if it has got a negative impact on
employees such as losing jobs.
• Impact on product quality and customer service.
• Consistency of the investment decision with corporate objectives (cannot deviate).
• The business’s brand image and reputation.
• A business’s responsibility (ies) to society and external environment.
• Implication for production and operations including disruptions or change to the existing set-
up.
Chapter 11
Decision Trees
A decision tree is a mathematical model used to help managers to make decisions.

A decision tree uses estimates and probabilities to calculate likely outcomes.
A decision tree helps to decide whether the net gain from a decision is worth-while.
Example 1:
This is a business which conduct concerts. They have 2 options to have them indoor or outdoor.
Cost of having indoor is $ 2000. Cost of having outdoor is $ 3000. Following table gives the
expected returns under fine weather and poor weather. 0.6 probability for fine weather. 0.4
probability for good weather.
Example 2:
Option Probability of success or failure Forecasted economic return
Option A 0.70 success £12m gain

0.30 failure £2m loss
Capital cost = £5m
Option B 0.50 success £10m gain

0.50 failure £1m loss
Capital cost = £3m
Example 3:
CC operates a chain of coffee shops. It’s looking at 2 options to increase revenue across the
chain. The estimated impact of the 2 options on sales and their probabilities are shown below.
Launching loyalty card (A) Cut prices (B)
Cost of option £500000 £300000
Probability of high 0.6 0.8

sales
Probability of low sales 0.4 0.2
Result of high sales £1000000 £800000
Result of low sales £750000 £500000

Expected Value
Expected value is the financial value of an outcome calculated by multiplying the estimated
financial effect by its probability.
E.g.: above example, 900000 and 740000 is expected value.
Net Gain
Net gain is the value to be gained from taking a decision. Net gain is calculated by deducting
initial investment from the expected value E.g.: above example, 400000 and 440000 is net gain.
Benefits of using Decision Trees
• Choices of a business are set out in a logical way.

• Potential options and choices are considered at the same time.
• Use of probabilities enables the risk of the options to be addressed.
• Likely costs are considered together with potential benefits.
• Easy to understand and tangible results.
• It identifies all aspects of a decision.
• It encourages the discipline of the decision-making process.
Limitations of using Decision Trees
• The probabilities are just estimates, which are always prone to error.
• Uses only quantitative data and ignores qualitative aspects of a decision.
• Assignment of probabilities could be biased.
• Decision making techniques doesn’t reduce the amount of risk.
• Decision trees aren’t able to take into account the dynamic nature of the business.
Sometimes, with the changes in the market, decisions can be out-dated.
• Some decision makers may manipulate the data.
• This process could be time-consuming (however, computer-based decision trees are
available).
Chapter 12
Critical Path Analysis
CPA is the process of breaking down the project into individual discreet activity placing them in
sequence to identify the most effective route to complete a project on time.
Project
A project is a specific temporary activity with a starting and ending date, clear goals, defined
responsibilities and a budget. E.g.: building a house/ bridge. The project would start and then
finish; it doesn’t continue. CPA is a technique which is being used in project management.
Project Management
Project management means using modern management techniques to carry out and complete a
project from start to finish in order achieving project targets of quality, time and cost.
The key elements of project management include:
• defining the project carefully, including the setting of clear objectives

• dividing the project up into manageable tasks and activities
• controlling the project at every stage to check that time limits are being kept to
• giving each team member a clear role
• providing controls over quality issues and risks
Reasons for Project Failure
• Customer is not involved when planning the project.

• Inadequate resources (human resources, financial resources, capital resources).
• The specification of the project keeps changing.
• Project is overtaken by external events such as political changes, bad weather, natural
disasters, etc.
• Incompetent project team and poor senior management.
Consequences of Project Failure
• The firm has to pay a penalty payment.

• Bad publicity for the firm.
• Future contracts may be lost.
Constructing A Network Diagram
Network diagram is a planning technique to identify all the tasks in a project, put them into
correct sequences and allow for identification of critical path. Network diagram is used in CPA
which shows:
• Sequence of activities
• Logical dependencies
• Duration of each activity
• Earliest start time of each activity (EST)
• Latest finish time of each activity) LFT)
Example 1:
Activity Proceeding activity Duration

A - 8
B - 6
C A 12
D B, C 6
E A 14
F E 6
G F, D 3
H B, C 14
I G, H 3
J I 4
Critical path A- E – F –G –I –J (8+14+10+3+3+4= 42)
FLOAT TIMES
Total float = LFT – Duration – EST
B: 21-6-0 =15
C: 21 -12 -8 = 1
D: 32-6=20 = 6
Free float = EST of next activity – duration – EST of this activity
B= 20-6-0 = 14
C = 20-12-8 = 0
D = 32-6-20 = 6
Example 2:
Activity Duration (weeks) Proceeding activity

A – dig foundation 6 -
B – drain site 5 -
C – construct building frame 2 A, B
D – complete external walls 10 A, B
E – building roof 7 C, D
F – insert windows and door 3 E
G – seal floor 4 F
H – complete internal wood work 3 G
I – install a/c systems 5 G
J – plaster and decorate 5 H
K – install equipment 3 J
Example 3:
Activity Proceeding activity Duration

A - 6
B - 5
C B 4
D A, C 3
E A 7
F E 8
G E 2
H G 3
I D 4
J I 1
K I 2
L H, K 3
Example 4
Activity Preceding activity Duration
A - 4
B A 6
C A 7
D B 12
E C 9
F D, E 3
G A 16
H G,F 3
Critical Path
It is the sequence of activities that must be completed on time for the whole project to be
completed in the shortest possible time.
Node
It is the diagrammatic representation of the beginning or end of the activity.
EST is found by looking at proceeding activities and EST for the last activity is overall minimum
duration of the project.
LFT is found by working backwards in time from subsequent activities and it is the maximum
possible time an activity can be delayed without delaying the next activity.
Float Times
It represents spare time available for an activity. This shows the duration of time by which an
activity can be delayed without slowing the completion of the overall project.
Total float = LFT – Duration – EST
Free float = EST of next activity – duration – EST of this activity
TOTAL FLOAT: How long an activity can be delayed without delaying the total project time.
FREE FLOAT: How long an activity can be delayed without delaying the next activity.
Benefits of CPA
• Using the diagram to calculate the total project duration allows businesses to give accurate
delivery dates. Customers may insist on a particular completion date and the critical time
shows whether the firm can make this date or not.
• Calculating an EST for each activity allows the operations manager to order special
equipment or materials needed for that task at the correct time. This ties the use of
network analysis in with JIT strategies and assists in the control of cash flow and working
capital.
• Calculating the LFT of each activity provides a useful control tool for the operations
manager. The manager will be able to see whether the project is up to schedule by
checking the actual completion times of activities against the network LFT.
• Knowing the critical path can be very useful. If there is a delay on a critical activity, there is
no float because it is critical and the delay will, unless quick action is taken, put back the
whole project. This could lead to expensive damage claims from the customer. By knowing
the critical path, the operations manager can see which other activities need to be speeded
up if one has been delayed.
• The additional resources for speeding up a critical activity could come from the non-critical
ones and the project time can be shortening
• The sequential and logical structure of the diagram lends itself well to computer
applications and nearly all business applications of network analysis will now be run on
computer.
• The need to put all activities into sequence in order to structure the diagram forces
managers to plan each project carefully by putting activities in the correct order.
• The need for rapid development of new products has never been greater in the fast -
changing consumer markets of today. Network analysis gives design and engineering
departments a positive advantage by showing them the tasks that can be undertaken
simultaneously in developing a new product. This will help to reduce the total time taken
by the new project and supports the principle of simultaneous engineering.
Limitations of CPA
• Reliability of CPA is largely based on accurate estimates and assumptions made.

• CPA doesn’t guarantee the success of a project; that still needs to be managed properly.
• Resources may not actually be as flexible as management hopes when they come to address
the network float.
• Too many activities would make the network diagram so complicated.
• There are certain activities which might themselves have to be broken down into mini
project
Chapter 13
Contribution
Contribution is the difference between the selling price and variable cost of a product.
Contribution is important for a business for several reasons

• To calculate the breakeven point
• To calculate the amount of profits made by a business
• To calculate the amount to be produced in order to reach a particular profit targets
• Useful when a business has to make a choice which product to be produced and which to
be avoided
• To decide the price for a product
Breakeven calculation
Profit calculation
Profit = total contribution – fixed cost
Contribution and profit target
Unit Contribution
Selling price per unit – variable cost per unit
Total contribution
Total revenue – Total variable cost

OR
Unit contribution × Number of units sold
Contribution margin ratio
(Contribution ÷ Price per unit) × 100

This means percentage of revenue available to pay the overhead costs
Contribution Pricing and Contribution Costing
This method does not try to allocate the fixed costs to specific products. Instead of this, the firm
calculates a unit variable cost for the product in question and then adds an extra amount that is
known as a ‘contribution’ to fixed costs. If enough units are sold, the total contribution will be
enough to cover the fixed costs and to return a profit
It is obvious that maintaining a product as long as it makes a positive contribution would bring
more profit into the business. So, in practical use, when businesses make pricing decisions, they
could go with contribution rather than total cost.
Example 1
• A firm produces a single product that has direct costs of $2 per unit and the total fixed
costs of the firm are $40,000 per year.
• The firm sets a contribution of $1 per unit and so sells the product at $3.
• Every unit sold makes a contribution towards the fixed costs of $1.
• If the firm sells 40,000 units in the year, then the fixed costs will be covered.
• Every unit sold over 40,000 will return a profit.
• Thus, if the firm sells 60,000 units, then the fixed costs will be covered and there will be
20,000 profit made
Example 2
1. If the fixed cost are $ 10,000 calculate the profit for the business
2. If the product Z is dropped, calculate the new profit
Chapter 14
Corporate Culture
It is the code of conduct usually unwritten within the business organization which reflects its
values and embodies the shared beliefs and assumptions that have influence on the decision-
making culture.
Can also be defined as “the way things are done around here”.
Factors Affecting the Corporate Culture
• Leadership style. Example: autocratic leadership will lead more towards power culture.
• Values, beliefs are inherited by the business throughout its existence (history of the
business).
• The way people interact within the business.
• External influences such as competition and risk.
• Expectations about teamwork and collaborations.
Strong vs. Weak Culture
Strong Culture: is one which is deeply embedded into the ways a business or organization does
things. With a strong culture, employees and management understand what is required of them
and they will try to act in accordance with the core values. Goes by values and not rules.
Weak culture is where the core values aren’t clearly defined, communicated or widely accepted
by those working for the organization. Don’t understand values so rules are implemented.
Advantages of a Strong Culture
• There is less need for detailed policies and procedures because the way things are done
around here is clearly understood and accepted
• Requires less management and supervision
• Core values of the business are communicated to customers and can act as competitive
advantage
• Strong loyalty to the business by employees
• Staff turnover would be low
• Efficient organization where everyone is committed to continuous improvement
• Quicker decision making
Disadvantages of a Strong Culture

• People are very much committed to traditions rather than changes, therefore when they
are operating in a changing environment, they will be less flexible
• Less creativity and new ideas at the lower level of the hierarchy
Examples: South West airlines – employee centric culture

• IKEA – teamwork
• Disney theme park – customer is a guest
• John Lewis partnership – customer service and teamwork
Advantages of a Weak Culture
• Roles and responsibilities are clearly defined

• There will not be risky development within the business because people work according
to procedures
Disadvantages of a Weak Culture
• There can be high bureaucracy in a weak culture in order to get things done in the
desired way
• Weak cultures might lead to poor customer service due to lack of commitment of the
employees
• Low productivity
Strong and weak corporate culture
Factors leading to a strong or weak culture
• Surface manifestation (appearance) –This includes artifacts, ceremonials, training

courses, heroes of the business, language used in the business, mottos of the business,
stories of the business, myths about the organization, norms of the business, physical
layout and the rituals.
• Core organizational values – Core values are the most important/central values of an
organization.
• Basic assumptions – These are the unspoken beliefs and ways of working.
Cultural dimensions suggested by Geert Hofstede;
He recognizes 5 dimensions which affects the culture of an organization.
• Power distance – This is the distance between managers and subordinates. Lower power
distance will lead to greater collaboration.
• Individualism – It means people can focus on their own success above that of the
organisation/team. The contrast is collectivism.
• Masculinity vs. femininity – Masculine organisations have got competitive and assertive
culture, whereas feminine organisations have got the characteristics of a caring and
corporative attitude.
• Uncertainty avoidance – Businesses with high level of uncertainty avoidance will want
evidence, security and proof before acting. Organisations with low uncertainty avoidance
are more entrepreneurial and agile.
• Long term versus short-term orientation: some organisation aims at achieving long term
goals whereas others may have short term goals. Growth is a long-term goal. Shareholder
value is a short-term goal.
Charles Handy’s Classification of Business Culture
Charles Handy, a leading author of organization cultures, defined 4 different types of cultures,
namely:
• Power culture
• Role culture
• Task culture
• Person culture
Power Culture
In an organization with a power culture, power is held by just a few individuals whose influence
spreads throughout the organization. There are few rules and regulations in a power culture
because those with power decided what happens.
Employees are judged by what they achieve for the organization rather than what they do.
In a power culture, decisions can be made quickly (however it doesn’t mean they are the best
decisions). A power culture is usually a strong culture.
Role Culture
Organizations with a role culture are based on rules. They are highly controlled with everyone in
the organization knowing what their roles and responsibilities are.
In an organization where there is role culture the power is decided by the position of the person
in the structure.
In a role culture, there would be a long hierarchy, therefore longer chain of command and
decision making could be slower.
Role cultures lead to bureaucracy. Role cultures usually tend to be weak cultures (because they
only care about their responsibility).
Task Culture
Task culture forms when teams in an organization are formed to address specific problems or
progress projects.
The task is the most important thing so power within the team will often shift depending on the
mix of team members and status of the problem or project (Power and leadership will change
with the nature of project. Example: if the project is about manufacturing clothes, the person
from production will be made leader since he is more closely related to manufacturing than
marketing, finance or any other).
Usually, task culture is based on matrix structure therefore there is no single power source.
The effectiveness of task culture depends on the team dynamics which includes skills,
personalities, leadership, creativity, etc.
Person Culture
In organizations with person culture, individuals very much see themselves as unique and
superior to the organization and widely found in professional businesses such as doctors,
consultants, lawyers, accountants, etc.
A business with person culture is full of people with similar training, background and expertise.
An organization with person culture is really just a collection of individuals who happen to be
working for the same organization.
Advantages and Disadvantages of Corporate Culture
Culture Advantages Disadvantages
Power Culture Rules, policies and procedures are at There is an autocratic leadership style
minimum
Highly flexible and encourage Lack of creativity in the lower down

entrepreneurship the hierarchy because employees are
framed into one set of values
Suitable for small businesses

Role Culture Suitable for large businesses such as This type of culture often becomes
MNCs stale due to following the same
procedure over and over
Employees are well aware of roles Because of rigid procedures and
and responsibilities policies, it is difficult to react quickly
to change in market situations
Task Culture This is a flexible approach for Individual team objectives may clash
businesses which are operating in with corporate objectives
dynamic environment
This culture is associated with Roles and responsibilities of
democratic leadership style individuals aren’t clearly defined
Person Culture Individual creativity is encouraged No centralized decision making and

there can be management problems
Related to laissez faire leadership If something goes wrong, there is no

style one to take responsibility
Changing the Corporate Culture
Sometimes it is necessary to change the culture of a business due to various reasons:
• Poor business performance

• Poor customer service
• Changes in the market/economy
• Changes in the ownership
• High labour turnover
• Change in leadership
Changing the culture should follow the following steps:
• Focus on developing the positive aspects of the business

• Obtain full commitment of senior staff to the change.
• Establish new objectives and a mission statement.
• Encourage the participation of all staff when changing the culture.
• Train the staff in new procedures.
• Change the staff reward system in a way that new culture is promoted.
Difficulties in Changing an Established Culture
• It is difficult to identify the factors that contribute towards that culture and how
significant they are.
• Within a culture, there can be various sub-cultures.
• It is easy to change policies, rules and procedures. However, it is difficult to change
people’s attitudes and beliefs.
• To change the culture, people have to be trained in the new culture and that would be
costly for the business.
Chapter 15
Stakeholder Influences on Corporate Objectives
Stakeholders are people or group of people who can be affected by and therefore have an
interest in any action by an organization
They can be classified into
1. Internal stakeholders - Internal stakeholders are people whose interest in a company

comes through a direct relationship, such as employment, ownership, or investment
2. External stakeholders -. External stakeholders are those who do not directly work with a
company but are affected somehow by the actions and outcomes of the business.
Suppliers, creditors, and public groups are all considered external stakeholders.
Internal stakeholders
1. Business owners –. Internal shareholders can be directors, managers or employees.

External shareholders may be other businesses, institutes and funds.
2. Employees - they are interested in Competitive salaries and wages, safe working
environment, generous terms and conditions such as paid holidays and job satisfaction.
Some employees may belong to trade unions.
3. Managers and directors – they are interested in Industry competitive salaries, share
options, fringe benefits and increased status within the company. Small businesses the
owners will play the managerial roles of organizing, decision making, planning and
control. However, in bigger businesses specialist mangers are being used. Mostly the
directors are making strategic decisions and mangers are responsible for implementing
them
External Stakeholders
1. Shareholders – these are the shareholders who do not participate in the day today
activities of the business. They have only a financial interest and can participate in AGM.
They can sell their shares and invest somewhere else whenever they want.
2. Customers – they buy goods and services from the business.
3. Creditors – they lend money to the business. They can be banks, private individuals,
venture capitalists or other businesses. They want money to repay on time with the
interest, clear communication and links.
4. Suppliers – they provide components, raw materials, commercial services and utilities.
Businesses expect Supplier loyalty and better credit terms.
5. Pressure groups – they try to influence the business decisions and activities. Trade
unions, local pressure groups and international pressure groups such as GREEN PEACE
are some of the examples. They involve in various activities such as protest campaigns,
media campaigns etc. in order to pressurize the businesses.
6. The local community – businesses may have both positive and negative impacts on local
community. For example, there can be positive impacts such as providing jobs, improving
infrastructure and purchasing from local suppliers. On the other hand, there can be
negative impacts such as pollution and unemployment due to closure.
7. The government – the government may be interested on businesses Following the
government legislations, paying taxes on time, providing accurate information to
government who needs economic information for policy decisions and seeking for export
markets.
8. The environment – the environment can be affected by business activities specially by
environmental pollution
Stakeholder objectives
Stakeholders Objectives
Shareholders Maximizing the shareholder value which depends on the dividends and share
price
interested in Growth in company profits, higher dividends and share prices
Employees Implementing labour laws
Providing training opportunities
Paying more than minimum wage
Good working conditions
Involve staff in decision making
Managers Industry competitive salaries
share options
fringe benefits
increased status within the company
Customers Concern for customer expectations such as quality, design, durability and
customer service.
Providing goods for reasonable price.
Not to break laws regarding customer protection.
Accurate advertising
Not exploiting customers
Suppliers Paying promptly

Place regular orders
Offer long term contracts
Government Following the government legislations
Paying taxes on time
Providing accurate information to government who needs economic

information for policy decisions
Seeking for export markets
Environment Not to have negative impact on the environment
Local Offer secure employment for people

community
Spend as much as possible on local suppliers
Reduce the transport impact of business activity
Keep the adverse environmental effect minimum
Shareholder Approach and Stakeholder Approach
Shareholder approach is the management approach which puts shareholder’s requirements at

the heart of all decision making. The sole purpose of the management is to maximize
shareholder value. This had been a traditional approach.
Stakeholder approach is the management approach that attempts to consider the needs of all
the stakeholders within a business and not just the shareholders. This is the accepted approach
in modern days
Shareholder approach
This can lead to various conflicts of objectives
1. Shareholders and employees – meeting employee objectives such as Paying more than
minimum wage, good working conditions and Training can increase cost, reduce profits
and dividends. Not providing employee demands might lead to industrial actions
2. Shareholders and customers – meeting customer expectations such as lower prices,
quality, design, durability and customer service might reduce the profits. Moreover,
spending on R & D also might reduce profits. But not meeting these requirements might
lead to loss of customer base
3. Shareholders and directors and mangers – due to divorce between ownership and
control in public limited companies there can be conflicts such as long-term investments
and short-term profit gains. Also, there can be conflicts with regard to increased
remuneration for manager and dividend payments.
4. Shareholders and the environment – in an attempt to increase the profits businesses
might forget their responsibilities towards environment may be through pollution,
deforestation, excessive use of nonrenewable resources etc. that can lead to global
warming, distruction of habitats and various health concerns
5. Shareholders and the government – this can happen due to breaking the laws and tax
avoidance. However, this can be sorted out by a strong judiciary.
Solving Conflicts of Stakeholder Objectives

Due to the fact that different stakeholders have different objectives sometimes there can be
conflicts. Example: profit objectives of owners and welfare objectives of employees.
Businesses can respond to this situation in 2 different ways:
• Compromise – trying to reach an agreement among conflicting parties so that they would
change their original position. E.g.: you ask for Rs 1000 salary increase. Company can
offer only Rs 500 Increase. Compromising means parties agree for Rs 750.
• If compromise isn’t possible – choose the most important stakeholder given the situation
and give into their objective.
Chapter 16
Business Ethics
Ethics of Strategic Businesses

All businesses have to make ethical decisions as a part of their corporate strategy and these are
usually the responsibility of the senior management. Following is some of the common ethical
issues.
• The environment; environmental pollution and social costs, recycling materials and
profits, environmental protection and weak laws regarding the environment.
• Animal rights; protecting the rights of animals during the production process –
agricultural activities in animal habitats, using animals in experiments.
• Workers in developing countries; some companies exploit workers in developing
countries to increase profits. It is also due to the influences of the government to keep
salaries low.
• Corruption; bribing and other favours done to the government officials and politicians to
carry out certain business dealings. Sometimes, businesses can’t say no to these things if
competitors also practise the same unethical approaches.
• New technologies; certain new technologies – such as nuclear power generators or
genetically-modified (GM) crops – have been controversial because of their potential
health risks.
• Product Availability; sometimes consumers aren’t able to consume essential products for
their survival due to the high price with which the products come to the market
(medicines and medical treatments). It is questionable whether a business can make
profit out of this situation.
• Trading issues; some countries have been condemned (disapproved) and are sanctioned
(prohibited) from importing and exporting certain goods and services due to certain
political issues.
Ethical influences on business objectives and decisions

Many businesses are adopting ethical code to influence their decision making
Ethical code is a document detailing a company’s rules and guide lines that must be followed by
all employees
Ethical code is important to sort out ethical dilemmas
E.g., Advertising to children or not / offering bribe or not/ investing in weapon manufacturing or
not/ closing a factory to prevent loss or to keep it save jobs etc.
Codes of Practice
This is the document which explains how employees in the business should respond in situations
where they encounter ethical issues. It includes environmental responsibility, how to deal with
customers and suppliers, how to compete fairly with competitors and how to treat employees.
Trade-off between profits and Ethics

When a business acts ethically there is a trade-off. It means for a business acting ethically when
not required do so by the law can have a negative impact on profits in number of different ways.
1. It can raise cost: for example, paying higher wages than is necessary to overseas workers
increases cost. Paying higher wages than the minimum wage increases the cost.
2. It can reduce revenue: for example, a business losing contract because it does not offer
bribes.
3. Ethical sourcing increases the supply cost
4. Limiting advertisement reduce sales revenue
5. Not fixing price with competitors reduces profits
However, adopting an ethical stance can produce benefits

1. Some companies might use ethical stance for making their purposes such as attracting
investments. (Ethical investors)
2. Some businesses promote their ethical beliefs when marketing their products
3. Can easily recruit ethical and skillful workers
4. There is less risk of legal issues and legal expenses
5. Ethical policies can create positive publicity and long-term customer and supplier loyalty
6. can be awarded by government contracts
Corporate Social Responsibility (CSR)

CSR is a concept that business should consider the interest of the society in its actions and
decisions over and above its legal responsibilities.
Advantages and Disadvantages of CSR
Customer loyalty CSR policies may increase the business cost.

E.g., better working conditions, higher pay, etc
Employee loyalty and improved motivation May receive a negative publicity if CSR is
perceived as Window Dressing (just to show)
or Green Wash (only looking environmentally
friendly)
Increased sales revenue because of socially CSR may cause less short-term profits and
concerned customers shareholders may sell their shares if
profitability goes down
Gov may give more preferences in granting Some customers do not care about CSR. For
contracts for those businesses which are them what is important is quality and lower
socially responsible prices
Less risk for legal challenges In the economic theory it is believed profit
maximization is the most beneficial policy for
a business
Good publicity for the business because of
supporting local charities and good customer
service
Local community is more likely to accept
expansion plans
All of the above reasons finally may lead to
long term sales revenue for the business
Advantages and Disadvantages of Having an Ethical Approach
It displays a caring image for the business Conflict of objectives: it may be impossible for
which appeals to consumers directors to pursue all the ethical principles
while they are being pressurized to maximize
profits
Ethical image can be used as a USP Reduction of profits: increased cost for ethical
practices may reduce the profitability. E.g.,
sustainable production methods, training
employees, salaries above MW
By upholding ethical principles, new niche Conflicts with existing policies: certain new
markets can be found ethical practices might conflict with existing
policies of the business. E.g., policy of
recruiting only unmarried people as trainees
might go against the discrimination policy
Helps to increase public relations (PR)

Firms can charge a premium price which
customers are ready to pay for
Ethical businesses are able to recruit qualified
people since they are attracted to the
business
Employees may feel more comfortable

working for an ethical business
Better ethical practices such as employee
welfare might increase worker motivation
Ethical approach may attract ethical minded

investors
Higher revenue can be achieved as more
customers are attracted by an ethical image
When businesses follow ethical principles

there will be less legal costs
Chapter 17
Interpretation of Financial Statements and Ratio Analysis
The main business accounts

1. Income statement (formerly known as profit and loss account)
2. Statement of financial position (formerly known as the balance sheet)
3. Cash-flow statement
Income statement (formerly known as profit and loss account)

Income statement records the revenue, costs and profit (or loss) of a business over a given period
of time.
It shows the gross and operating profit of the company, Details of how the operating profit is split
up (or appropriated) between dividends to shareholders and retained earnings (profit).
The sections of income statement are
The trading account

This shows how gross profit (or loss) has been made from the trading activities of the business
Revenue (formerly called sales turnover): the total value of sales made during the trading period
= selling price × quantity sold.
Cost of sales (or cost of goods sold): this is the direct cost of the goods that were sold during the
financial year
Gross profit: equal to sales revenue less cost of sales
Profit and loss account section

This section of the income statement calculates both the operating profit (or profit before interest
and tax) and the profit for the year (profit after tax) of the business
Operating profit (formerly referred to as net profit): gross profit minus overhead expenses.
Profit for the year (profit after tax): operating profit minus interest costs and corporation tax
Appropriation account
This final section of the income statement shows how the profit for the year of the company is
Distributed between the owners
Dividends: the share of the profits paid to shareholders as a return for investing in the company.
Retained earnings (profit): the profit left after all deductions, including dividends, have been
made, this is ‘ploughed back’ into the company as a source of finance.
The uses of income statements

The information contained in income statements can be used in a number of ways:
• It can be used to measure and compare the performance of a business over time or with
other firms – and ratios can be used to help with this form of analysis
• The actual profit data can be compared with the expected profit levels of the business.
• Bankers and creditors of the business will need the information to help decide whether
to lend money to the business.
• Prospective investors may assess the value of putting money into a business from the
level of profit being made
Low quality and High quality profits

Low-quality profit: one-off profit that cannot easily be repeated or sustained.
High-quality profit: profit that can be repeated and sustained.
The Statement of financial position

It is an accounting statement that records the values of a business’s assets, liabilities and
shareholders’ equity at one point in time. It shows the net worth or equity of the company. This is
the difference between the value of what a company owns (assets) and what it owes (liabilities).
Features of a statement of financial position
• Asset: an item of monetary value that is owned by a business

• Non-current assets: assets to be kept and used by the business for more than one year.
Used to be referred to as ‘fixed assets’.
• Intangible assets: items of value that do not have a physical presence, such as patents,
trademarks and good will
• Intellectual capital or property: the amount by which the market value of a firm exceeds
its tangible assets
• Goodwill: arises when a business is valued at or sold for more than the balance-sheet
value of its assets.
• Current assets: assets that is likely to be turned into cash before the next balance-sheet
date.
• Inventories: stocks held by the business in the form of materials, work in progress and
finished goods.
• Trade receivables (debtors): the value of payments to be received from customers who
have bought goods on credit.
• Liability: a financial obligation of a business that it is required to pay in the future
• Current liabilities: debts of the business that will usually have to be paid within one year.
• Accounts payable (creditors): value of debts for goods bought on credit payable to
suppliers; also known as ‘trade payables’.
• Working capital: it can be calculated from the Statement of financial position by the
formula: current assets – current liabilities. It can also be referred to as net current
assets.
• Non-current liabilities: value of debts of the business that will be payable after more than
one year.
• Shareholders’ equity: total value of assets – total value of liabilities
• Share capital: the total value of capital raised from shareholders by the issue of shares
Internal and external users of accounting information

The following lists give details of all users of accounts and the reasons why they need accounting
data
Business managers:
• To measure the performance of the business to compare against targets, previous time
periods and competitors
• To help them take decisions, such as new investments, closing branches and launching
new products
• To control and monitor the operation of each department and division of the business
• To set targets or budgets for the future and review these against actual performance.
Banks:
• To decide whether to lend money to the business
• To assess whether to allow an increase in overdraft Facilities
• To decide whether to continue an overdraft facility or a loan.
Creditors, such as suppliers:

• To see if the business is secure and liquid enough to pay off its debts
• To assess whether the business is a good credit risk
• To decide whether to press for early repayment of outstanding debts.
Customers:
• To assess whether the business is secure
• To determine whether they will be assured of future supplies of the goods they are
purchasing
• To establish whether there will be security of spare parts and service facilities.
Government and tax authorities:

• To calculate how much tax is due from the business
• To determine whether the business is likely to expand and create more jobs and be of
increasing importance to the country’s economy
• To assess whether the business is in danger of closing down, creating economic problems
• To confirm that the business is staying within the law in terms of accounting regulations.
Investors, such as shareholders in the company:

• To assess the value of the business and their investment in it
• To establish whether the business is becoming more or less profitable
• To determine what share of the profits investors are receiving
• To decide whether the business has potential for growth
• if they are potential investors, to compare these details with those from other businesses
before making a decision to buy shares in a company
• If they are actual investors, to decide whether to consider selling all or part of their
holding.
Workforce:
• To assess whether the business is secure enough to pay wages and salaries
• To determine whether the business is likely to expand or be reduced in size
• To determine whether jobs are secure
• To find out whether, if profits are rising, a wage increase can be afforded
• To find out how the average wage in the business compares with the salaries of directors.
Local community:
• To see if the business is profitable and likely to expand, which could be good for the local
economy
• To determine whether the business is making losses and whether this could lead to
closure.
Chapter 18
Ratio analysis
Ratio analysis involves the calculation and interpretation of key financial performance indicators
to provide useful insights. Financial statements are always prepared to satisfy the needs of various
interested parties. They seek information to find out 3 fundamental questions:
1. How is the business trading?

2. How strong is the financial position?
3. What are the future prospects for the business?
Performance ratios include:
• GP margin
• Operating Profit Margin
• NP margin
• ROCE
• Current ratio
• Acid test ratio
• Gearing ratio
Gross Profit Margin
Gross profit is the difference between revenue and cost of sales.
GPM = GROSS PROFIT x 100

SALES
This ratio indicates the value addition of the business. It is also an indication of marketing
success of the business.
Net Profit Margin
It is the net profit as a percentage of revenue.

NP = GP – Expenses. When there are no non-operational revenues and expenditures the
operating and NP margin are equal.
NPM = NET Profit x 100

SALES
NPM indicates how effectively a business turns its sales into profits. NPM also indicate how
efficiently a business is run because high NP indicates how efficiently overhead cost is controlled
by the business.
Sa
Return on Capital Employed
This ratio indicates the level of profits earned by a business related to the amount of capital
invested in.
ROCE = OPERATING/NET PROFIT x 100
CAPITAL EMPLOYED
Capital employed = long term liabilities + equity
Capital employed = noncurrent assets + current assets -current liabilities
This ratio is mainly used by potential investors because it indicates the efficiency of the capital of
a business. If ROCE is higher than the return which could be obtained from alternative
investments, then the investors will be more likely to invest.
This is also used by existing investors to see if ROCE is lower than the alternative investments. If
so, they may sell their shares and invest elsewhere.
It is also useful for managers when raising debt finance because if ROCE is less than the effective
interest rate then it is likely to raise debt finance.
However, there are limitations of ROCE:
• ROCE used in isolation isn’t useful which means it has to be compared with similar
businesses.
• Without looking at the trends overtime it is difficult to comment on ROCE because certain
one-off events may change the ROCE figure.
Current Ratio
Current ratio and acid test ratio are used to measure the liquidity of a business. Liquidity refers
to the ease and speed with which assets can be turned into cash.
Current ratio measures the liquidity of a business by showing how easily it can cover its short -
term debts.
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITIES
The answer is expressed as a ratio or decimal. Usually, the accountants consider the ratio above
1.5 is a healthy figure.
A too low current ratio is an indication of a working capital problem. A too high current ratio
indicates inefficiency where business is holding too much cash unnecessarily.
However, there is no ideal value common for all the businesses because the need for liquidity
depends on the product, how it is produced and the current circumstances.
E.g.: In supermarkets current ratio is high because large amounts of stocks are held.
Acid–Test Ratio
This relates current assets excluding inventories to current liabilities.
ACID TEST RATIO = CURRENT ASSETS – INVENTORIES

CURRENT LIABILITIES
For many businesses ratio of 1 is acceptable and 1.5 can be a more comfortable figure. If there is
a risk of bad debts, ratio of 1.1 may not be sufficient.
Certain businesses such as supermarkets which may have large stocks may not worry even if the
acid test ratio is less than 1.
Responding to Liquidity Ratio
Low liquidity ratio indicates that:

• Business may be about to have difficulties meeting its short-term liabilities if its stocks cannot
be sold quickly.
• Business is in need of more working capital.
• Risk has to be assessed and action should be taken.
High liquidity ratio suggests:

• That the business is keeping more cash in reserves than it is necessary.
• The cash could be invested to produce a better return.
Gearing Ratio
This is the ratio which measures the proportion of long-term loans related to capital employed.
GEARING RATIO = LONG-TERM LOANS x 100

CAPITAL EMPLOYED
• capital employed = long term liabilities + equity

• Capital employed = noncurrent assets + current assets -current liabilities
Higher the gearing ratio, riskier for the business. A realistic gearing ratio might be less than 50%
and anything over 50% is considered as high gearing. However, under the situation where the
prevailing interest rate is very low and if the business is making a very high profit, having a high
gearing ratio may not be a concern.
Banks will usually consider gearing ratio before deciding whether or how much they will lend.
Potential investors will also consider gearing ratio when they invest in a business because high
gearing ratio means more interest payments and it will result in paying less dividends.
Evaluation on Performance Ratio
• Financial ratio analysis is a useful tool for users of financial statements.

• It simplifies the financial statements.
• It helps in comparing companies of different size with each other.
• It helps in trend analysis which involves comparing a single company over a period of time.
• It highlights the important information in simple form quickly (can judge a company just by
looking at few numbers instead of reading the whole financial statement).
However;
• Different companies operate in different industries each having different environmental

conditions such as regulations, market structures, etc. Such factors are so significant that a
comparison of 2 companies from different industries might be misleading.
• Financial accounting information is affected by estimates and assumptions.
• Accounting standards allow different accounting policies which impair comparability and
hence ratio analysis is less useful in such situations.
• Ratio analysis explains the relationship between past information while users are more
concerned about future
Chapter 19
Human Resource Competitiveness
Human Resource Competitiveness means the efficiency of the labour (how competitive the
labour of a business is compared to its competitors).
Labour refers to the people who are working within an organization for the reward of wages and
salaries.
Labour efficiency is measured to see if the labour is competitive compared to the labour in other
businesses. There are 2 ways to measure labour efficiency/human resource competitiveness,
namely:
• Labour productivity
• Labour turnover
Labour Productivity
Labour productivity is concerned with the amount of output that is obtained from each
employee.
LABOUR PRODUCTIVITY = TOTAL OUTPUT
NO. OF WORKERS
Labour productivity is important for several reasons:
• Labour costs are usually a significant part of total cost.

• Business efficiency and profitability closely linked to productive use of labour.
• In order to remain competitive a business needs to keep its unit cost down and labour
productivity enables it to do so.
Achieving higher labour productivity is not a simple task. Several factors influence how
productive the workforce is:
• Extent and quality of fixed assets. Example: equipment, ICT systems.

• Skills, ability and motivation of the workforce.
• Methods of production (batch, flow).
• External factors such as reliability of suppliers.
Improving Labour Productivity
• Measure performance and set targets; it is often claimed that what gets measured gets
done.
• Streamline production process in such a way that everybody knows what they should do.
• Invest in capital equipment such as automation and computerization.

• Invest in employee training and skill development.
• Make the workplace conducive to productive effort.
Labour Turnover
It is a measure of the rate at which people leave their jobs and need to be replaced. It is
expressed as a percentage of workforces per time period.
LABOUR TURNOVER= TOTAL NO. OF WORKERS LEAVING DURING A TIME PERIOD x 100
NUMBER OF WORKERS
It is important to remember that all businesses lose staff for a variety of reasons.
Example: retirement, maternity, death, long term illness, incompetency, changes in strategy such
as closing down of business.
However, labour turnover has more concern with a person who leaves the job voluntarily which
is voluntary staff turnover.
Labour turnover levels vary between industries.

Example: high level of labour turnover is found in retailing, hotels, catering, leisure, etc. (this
happens mainly due to seasonal and part-time jobs).
High labour turnover creates problems for businesses:
• Increases recruitment cost.

Example: advertising for replacement and carrying out interviews, paying part-time workers
until job vacancy is full.
• Labour turnover reflects poor moral and so low productivity levels.
• It increases training cost and staff development cost.
• There is a loss of productivity while new workers settle in.
However, in spite of above problems labour turnover offers some advantages to business as
well:
• It gives the chance for new people to be brought into the business who may have fresh ideas
and up-to-date market knowledge.
• Workers with specialist knowledge or expertise can be employed rather than having to train
low skilled employees.
• When people continue in a job for a long time, their salary levels reach to a maximum and
this could be a financial burden for firms. It’s rather advantageous to employ new people for
lower salaries.
Reasons for Labour Turnover
• Low pay; this leads the workers to leave the job and get into highly paid jobs.
• Fewer opportunities for promotion and development.
• Poor working conditions
• Poor selection and recruitment
• During the economic growth, people may leave their jobs as more jobs are available.
Improving Labour Retention
A business can improve its employee retention by offering:
• Financial incentives. Example: bonus, salary rise.

• Non-financial incentives. Example: promotion, delegation, decision making power, job
enrichment, and empowerment.
• Improving the effectiveness of its recruitment and selection process so that no unsuitable
people are employed.
• Conducting research to understand why employees are leaving so that it can be prevented.
• Increase the flexibility of workforce.
LABOUR RETENTION RATIO = NO. OF STAFF STAYING OVER A PERIOD OF TIME x 100
AVERAGE NUMBER OF STAFF
Absenteeism
Absenteeism is when workers fail to turn up for work without any good reason.
Absenteeism is a problem for a business for a number of reasons:
• Business has to pay if it is a sick leave.

• Temporary staff has to be brought in to cover the jobs of the absent workers – two times the
cost (high cost).
• Output may go down due to absent workers because temporary workers may not be
productive.
• Continuous absenteeism will delay the projects of the business.
• High absenteeism might lead to low-quality customer service.
• High absenteeism demotivates the workers who are present as the workload increases.
Rate of Absenteeism
RATE OF ABSENTEEISM = NO. OF STAFF ABSENT ON A DAY x 100

TOTAL NO. OF STAFF EMPLOYED
AVERAGE RATE OF ABSENTEEISM = NO. OF STAFF ABSENT DAYS OVER A YEAR x 100
TOTAL NO. OF DAYS STAFF SHOULD’VE WORKED
There are several reasons why annual absenteeism days are different from business to business:
• Smaller businesses have lower rate of absenteeism than bigger businesses. This is because
workers in small businesses feel their importance than workers in larger businesses.
• If there are good health and safety procedures, workers will not be absent.
• Nature of task the workers have (whether repetitive or interesting).
• If there is a trendy and happy culture in the workplace, absenteeism is likely to be low in the
businesses with these cultures.
• Stress level of the job (whether high or low).
• Workers who feel that they are not enough are more likely to be absent than workers who
are satisfied with their pays.
Chapter 20
Key Factors in Change
Organisational change is a process in which a large company or organisation changes its working
methods or aims. For example, to develop with new situations or markets.
The Possible Causes of Change in Businesses (why change happens)
• Business size; businesses grow organically and inorganically. Most businesses have their
objectives as growth. Growth is one of the main satisfactions for stakeholders, such as
shareholders and managers. When businesses grow in size, they have to restructured
(changes in the structure). Furthermore, when there is inorganic growth (mergers and
takeovers), there will be changes in culture as well. Therefore, it is necessary to have change
management.
• Poor business performance; this can mean several things, such as losing customers, decrease
in sales and profits, losing reputation, etc. In such situations, change is inevitable to prevent
the failures. Change includes changes in senior management, changes in leadership and
business strategies.
• Market changes and other external factors; these factors include PESTLE factors, and when
they change the business also has to change their strategies.
• Changes in ownership; ownership can be changed internally or externally. For example, a

private limited company becoming a public limited company is an internal change. But when
the business is acquired by another business, then there will be an external change in
ownership.
Managing Change (what will change)
Change management is the process of organising and introducing new methods of working in a
business. These changes can be from within the business or a result of external changes.
Organisational Culture
Culture means the way things are done around the business. During a merger or takeover, the
culture has to be changed in order to prevent culture clashes. The following measures can be
taken to change the cultures:
1. Identify and analyse the cultural differences before a merger goes ahead.
2. Communicate with employees to explain the purpose of the merger and its possible effects.
It is also necessary to gather feedback to identify their feelings & concerns.
3. Define and implement a new culture by clarifying behavioural norms, the structure of the
organisation and its strategies.
4. Celebrate and accept change by emphasising the benefits and opportunities that the staff
might enjoy.
Size of the Organisation
When the business is growing in size, it will increase the rigidity of the business and due to the
longer chain of command, it will be difficult to make quick decisions. Moreover, in big
businesses, employees will feel isolated. As a result of that, it is necessary that businesses do
things such as delayering, decentralisation, franchising, etc.
Time or Speed of Change
Organic change would take place gradually and in contrast, inorganic change happens quickly.
Moreover, changes in the market also define the speed of change. For example, grocery markets
change slowly, but fashion industries change quickly.
Managing Resistance to Change
Different stakeholder groups would resist change for different reasons:
a) Workers/Employees: They resist change due to;

• Fear of the unknown
• Fear of losing colleagues
• They fear that they will be unable to carry out new ideas
b) Owners: They fear change due to;

• Fear of the unknown
• Increased risk
• Losing control of the business
c) Customers might fear change due to changes in product quality and price, availability of
product, new methods of distribution and location.
d) Suppliers may fear about continuous orders, proper payment and the bargaining power of
the business.
e) Commonly, all the stakeholders might resist for the following reasons:
• Disagreements with the reasons for the need to change
• Fear of the impact of the change
• Lack of understanding
• Lack of involvement
• Disagreement with the process of change
• General inertia (having no logical reason for an opinion)
Transformative Leadership
This is when a new leadership (such a new CEO) brings change with a purpose of improving the
business. New leaders can have a positive impact on the business. If they have good track
record, this can inspire the workers.
Transformative leadership is needed
• Introduce new strategic vision and direction to the business
• Following a challenging period of performance
• To bring new and fresh ideas to the business
• To make big changes and motivate the workforce

Chapter 21
Business Contingency Planning
Contingency plans are the plans which are prepared for sudden or unlikely changes that could
lead to situations where things could go wrong. Contingency planning is a disciplined approach
to deal with uncertainty in the future.
The aim of contingency planning is to minimize the impact of a significant foreseeable event and
plan for how the business will resume normal operations after the event.
Contingency planning involves:
• Preparing for predictable and quantifiable problems.

• Preparing for unexpected and unwelcome events.
Contingency planning is important because of the business risk.
Business Risk
Business risk involves the possibility that events will not turn out as expected. Business risk can
be of two types, namely: internal risk and external risk.
Internal Risk
• Human factors; trade union actions, health and safety issues, failure of suppliers,
incompetence of the workforce, late payment of customers.
• Technological factors; introduction of new production technology, problems with quality,
problems with productivity.
• Physical factors; failure of machines and equipment, fire, floods, damages to
premises/property.
External Risk
• Economic factors; competitive environment, unemployment, consumer income, inflation,

changes in AD, changes in taste and fashion.
• Political factors; changes in government and government policies, consumer/company
legislations, social unrest local and internationally.
• Natural disasters
Stages of Contingency Planning
1) Identify the trends and issues; it means looking at the external environment and
understanding the types of threats the business might have. (Refer to PESTLE Analysis notes)
2) Identify possible crisis; the business has to imagine different crises and scenarios as they
have to be realistic.
3) Plan the response; this means identifying the impact and developing a plan to deal with the
scenarios.
4) Identify the most likely crisis; this means that the business has to prioritise the possible crises
and scenarios.
5) Capitalise on the crisis; this means applying the plan on response if the crisis happens.
Risk Assessment
This means identifying and evaluating the potential risks that may be involved in an activity that
a business proposes to do and then assuring compliance with the health and safety laws.
Therefore, risk assessment considers two aspects:
• Probability of the risk

• Impact of the risk, if it occurs
Possible Crises
The main crises that arise are from various sources:
• Natural disasters; floods, tsunamis, volcanic eruptions, hurricanes, epidemics,

earthquakes, tornadoes, such disasters will end up in high level damages to humans and
properties.
• IT system failures; this includes cyber-attacks, hacking, security breaches, leaking
information to the wrong hands, etc.
• Loss of key staff; key staff can be lost due to resignations, sudden deaths, or illnesses.
Therefore, businesses should have contingency plans for their key staff. Contingency
plans for top management who are leaving the business will lead to a decrease their
bargaining power as their replacements are available. On the other hand, this makes sure
that the workers, in spite of death of owners, will continue working.
Planning for Risk Mitigation
Mitigation means reducing the impact of a crisis. They include taking out insurance policies,
for possible losses, setting up safety locations for explosions, fire, floods, etc. Maintaining
extra reserves of funds to use when there is a cash shortage.
Business Continuity Planning
It is a plan which shows how a business will operate after a serious incident and how it
expects to return back to normal operations in the fastest time possible. This includes four
stages:
1) Carrying out a business impact analysis; this means assuring the impact of the disaster in
terms of revenue, loss of customers, increased cost or penalties.
2) Formulate a recovery strategy; this means businesses should take actions to restore the
business to a minimum acceptable level after an incident. For example; getting the help
of another business or subcontracting, shifting production from one plant to another.
3) Plan development; this means developing a plan to ensure that recovery strategies are
carried out in an organised way.
4) Testing and training; this means that the continuity plan should be tested to see whether
it really works for the business. If it works, staff has to be trained on the procedures.
Succession Planning
Succession planning means identifying and developing people who have the potential to
occupy key roles in the business in the future (it means finding new staff to replace the ones
leaving the business). Succession planning involves various stages:
1) Identify characteristics a successor would possess.

2) Decide how the successor will be found. Example: Knowing qualified candidates internally
or getting the help of external recruiting agencies.
3) Have a rigorous selection process.
4) Make the right decision.
5) Communication of decisions to relevant people.
6) Implement training and preparation plan.
Possible Actions for Risk Management
Some examples of how action can be taken to reduce risk include:
• Marketing; avoid over-reliance on customers and products, develop multiple distribution

channels, test marketing for new products.
• Operations; hold spare capacity, vigorous quality assurance and control procedure.
• Finance; insurance against bad debts, investment appraisal techniques.
• People; insurance to protect people at work, key man insurance (protect against loss of key
staff – managers), rigorous recruitment and selection procedure.
Factors to Consider when developing a Contingency Planning
There are several factors which should be taken into consideration when preparing contingency
planning.
• Finance; large businesses with high financial capability are able to set apart more finance for
contingency planning.
• Management; strong leadership and management will be vital to ensure an appropriate plan
is put to action.
• Production; it is very essential to continue the production process without failure for certain
organizations and alternative production source has been maintained.
Example: outsourcing and subcontracting.
• Communication; communication channels must be effective to ensure that decisions and
instructions are passed to relevant people quickly.
• Public relations and company image; for businesses that have a great concern for their image
it is extremely important that contingency planning is in place in case of crisis or emergency.
Evaluation on Contingency Planning
Benefits of Contingency Planning
• Maintain production even in adverse conditions.

• Maintain sales and income flow after disaster or an unexpected event.
• Contingency planning would allow a business to react quickly to potentially damaging events
without wasting time and help to minimize potential losses/costs
• contingency planning would help a business defend its reputation for quality standards, and
help to maintain relationships with stakeholders
• contingency planning can give a competitive advantage over rivals if a business is better
prepared than the competitors for changes in the market/changes in foreign currency
• with an awareness of potential risks, if they arrive, they will not be such a shock as the
business will be prepared and have plans in place to mitigate the risk
Drawbacks of Contingency Planning
• It would be impossible to cover all possible crises scenarios especially for a business which
has expanded to foreign markets.
• Actual planning process will take time and resources away from the main purpose of the
business, so company must take into account the opportunity cost involved (as in the
company shouldn’t spend more money on making a contingency plan than business
operations).
• If the plan requires a large contingency fund, this could affect the overall corporate plan by
limiting the amounts of funds available for expansion and investment.
• Due to the nature of contingencies, which is highly unlikely and undesirable, managers
may not have much interest on contingency planning.
• The development of new technology/social media was an inevitable consequence of IT
developments and contingency planning may not have been able to do anything about it.
• Changing attitudes in the industry would not have been taken into account by
contingency planning. For example, contingency planning cannot take into account all
eventualities.
• Contingency planning has an opportunity cost in terms of the time and resources
involved and may never be needed.
• The costs associated with contingency planning may outweigh the cost of the problem
that they are designed to avoid.
• Contingency planning does not prevent things from going wrong. For example,
contingency plans might be out of date or too complex to be effective.
• Most evaluation of contingency planning would conclude that it is essential for a
business, a bit like insurance – it needs to be in place, with the hope that it is never
needed.
• To be effective, contingency planning will need to focus on a realistic risk assessment and
not concentrate on unlikely extremes such as the earth being hit by a meteor etc.

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1|Pa g e – U N I T 3 – Prepa red B y - Sa ma ntha C o o ra y

It can also be defined as the long-term visions or goals of a business.

Aims and Mission Statement

Mission Statement is the statement of business’s core aims and purposes.

Mission statement is usually set out in published form – not a secret.

A good mission statement should have the following: -

• Purpose - why the business exists.

Advantages and Disadvantages of Mission Statement

It may need to be revised frequently if the

SMART is an acronym which stands for:

• M – Measurable: it means objectives should be expressed in terms of quantitative

Common Corporate Objectives

Factors Affecting Corporate Objectives

• Actions of competitors – a dramatic increase in the degree of competition in the market

• Legislations – certain government legislations may force a business to change their

Divisional, departmental and individual objectives

Divisional objectives set by the mangers in order to make sure that

• Coordination between divisions – otherwise there will be disagreements and confusions

Further they would be broken down to departmental and individual objectives

Developing a Corporate Strategy

Developing a corporate strategy involves the following steps:

Identification of mission and aims

Analysis of current situation

Planning and developing strategies to achieve objectives

Implementing the strategy

Monitoring and evaluation

Strategy and tactics

Long term decision short- to medium-term

Boston Matrix (Portfolio Analysis)

Possible Strategies based on Boston Matrix

Advantages and Disadvantages of Portfolio Analysis

It encourages managers to take strategic Boston Matrix identifies the position of a

It helps managers to prepare themselves Market is dynamic therefore market growth

Porter’s Generic Strategies

A competitive advantage is an advantage over competitors gained by offering consumers greater

The 4 strategies suggested by Porter are summarized in the figure below.

• High levels of productivity

E.g.: Pepsi, video gaming market.

Differentiation Leadership (Differentiation) – whole industry.

There are several methods by which a product differentiation can be done:

• Superior product quality (features, benefits, durability, reliability)

Differentiation Focus – only one selected segment

E.g. Chanel sells bags at £ 3000 and Hermes is at £ 5000

In order to have differentiated focus strategy, following conditions should be there:

Differentiation focus strategy is much similar to niche marketing strategy.

Limitations of Porter’s Generic Strategy

• Other firms will also be able to lower their costs.

• If there are price-wars, it will reduce the profitability.

• It is difficult to sustain cost leadership in the long-run.

• Price discrimination would be more appropriate)

Cost Focus and Differentiation Focus

• Limited opportunities for growth.

• Maintain or increase the market share of current products.

• Secure dominance in growth markets (remaining market leader).

• Increase usage by existing customer.

A successful product development strategy places the marketing emphasis on:

• Research and development and innovation

There are many possible ways of approaching this strategy:

• New geographical markets. Eg: exporting the products to a new country.