Understanding Business Objectives, Growth Strategies, and External Factors, Study notes of Business

Download Understanding Business Objectives, Growth Strategies, and External Factors and more Study notes Business in PDF only on Docsity! This page intentionally left blank iii Contents Topic 1 Business organisation and environment 1 The nature of business activity 1 2 Types of organisation 8 3 Organisational objectives 22 4 Stakeholders 39 5 External environment 45 6 Organisational planning tools 57 7 Growth and evolution 68 8 Change and the management of change 82 9 Globalisation 89 Topic 2 Human resources 10 Human resource planning 96 11 Organisational structure 108 12 Communication 119 13 Leadership and management 129 14 Motivation 140 15 Organisational and corporate cultures 156 16 Employer and employee relations 163 17 Crisis management and contingency planning 171 Topic 3 Accounts and fi nance 18 Sources of fi nance 174 19 Investment appraisal 185 20 Working capital 195 21 Budgeting 205 22 Financial accounts 212 23 Ratio analysis 226 Topic 4 Marketing 24 The role of marketing 240 25 Marketing planning 250 26 Product 271 27 Price 281 H H H H H iv Contents 28 Promotion and place (distribution) 293 29 International marketing and e-commerce 307 Topic 5 Operations management 30 Production methods 316 31 Costs and revenues 324 32 Break-even analysis 335 33 Quality assurance 342 34 Location 353 35 Innovation 364 36 Production planning 369 37 Project management 383 Topic 6 Business strategy 38 Business strategy 393 Examination skills 39 Examination skills 407 Glossary 426 Index 439 Acknowledgements 448 H H H v Introduction Nature of the subject The IB Diploma Programme Business and Management is designed to develop an understanding of essential busi- ness theory and the ability to apply business principles, practices and skills. It encourages students to analyse the diverse range of business organisations and activities and the cultural and economic context in which busi- nesses operate. The emphasis is placed on strategic deci- sion-making and the business functions of marketing, production, human resource management and fi nance. Business and management is the study of both the way in which individuals and groups interact in an organisa- tion and of the transformation of resources. It is, there- fore, perfectly placed within the group 3 subject area (individuals and societies) of the IB Diploma Programme hexagon. Who is this book for? This book accurately and comprehensively follows the Inter- national Baccalaureate (IB) higher level (HL) and standard level (SL) syllabus for Business and Management. If you are a student preparing for the assessments based on this syllabus, or a teacher preparing students for the assessments, you can be confi dent that the book provides comprehensive coverage of the course. Other students of business management courses at equivalent levels could also greatly benefi t from the subject content, activities and advice that this book contains. What are the aims of the book? Apart from providing the appropriate subject content for the IB Business and Management course, the book aims to: introduce business and management as a study of the ● ways in which individuals and groups interact in an organisation and of how resources are transformed by businesses explain that business and management is a rigorous ● and rewarding subject that examines dynamic deci- sion-making processes and assesses how these deci- sions impact on and are affected by internal and external environments help students to develop an understanding of busi- ● ness theory and the ability to apply business princi- ples, practices and skills encourage students to consider the activities of business ● in a global market and appreciate cultural diversity evaluate the diverse range of business organisations ● and activities develop in students an awareness of the cultural and ● economic context in which businesses operate encourage the appreciation of ethical issues and the ● concept of social responsibility in the global business environment enable the development of decision-making skills ● through the use of case studies that enhance students’ ability to make informed business decisions make a clear distinction between higher level and ● standard level content help students improve their performance on the ● internal and external assessments used in the Business and Management syllabus show how the Business and Management syllabus ● relates to the Theory of knowledge part of the IB Programme. The focus on the higher level topic of business strategy in Chapter 38 also means that the book highlights the following very important aspects of business management: Strategic decision-making is holistic and cannot be ● undertaken effectively by studying a series of discon- nected subject areas. There is no single perfect solution to a business ● problem – a variety of strategic solutions might exist that refl ect the objectives of the business, the external environment and the cultures of both the organisa- tion and the countries in which it operates. The nature of business activity 2 01 Introduction This chapter explains what a business is and what busi- nesses do. It outlines the main business functions (or departments) and explains the differences between primary, secondary and tertiary sectors of industry. Higher Level additional material analyses the impact on business activity of changes in economic structure. What is a business? A business is any organisation that uses resources to meet the needs of customers by providing a product or service that they demand. There are several stages in the prod- uction of fi nished goods. Business activity at all stages involves adding value to resources such as raw mate- rials and semi-fi nished goods and making them more desirable to – and thus valued by – the fi nal purchaser. Without business activity we would all still be entirely dependent on the goods that we could make or grow ourselves – as people in some communities still are. Business activity uses the scarce resources of our planet to produce goods and services that allow us all to enjoy a much higher standard of living than would be possible if we remained entirely self-suffi cient. What do businesses do? Businesses identify the needs of consumers or other fi rms. They then purchase resources, which are the inputs of the business, or factors of production, in order to produce output. The ‘outputs’ of a business are the goods and services that satisfy consumers’ needs, usually with the aim of making a profi t. Business activity exists to produce goods or services, which can be classifi ed in several ways: consumer goods, consumer services and capital goods. ● Land – this general term not only includes land itself but all of the renewable and non-renewable resources of nature, such as coal, crude oil and timber. ● Labour – manual and skilled labour make up the work- force of the business. Some fi rms are labour intensive, that is they have a high proportion of labour inputs to other factors of production, e.g. house cleaning services. ● Capital – this consists of the fi nance needed to set up a business and pay for its continuing operations as well as all of the man-made resources used in produc- tion. These include capital goods such as computers, machines, factories, offi ces and vehicles. Some fi rms are capital intensive, that is they have a high propor- tion of capital to other factors of production, e.g. power stations. ● Enterprise – this is the driving force of business, provided by risk-taking individuals, which combines the other factors of production into a unit that is capable of producing goods and services, It provides a managing, decision-making and co-ordinating role. Without this essential input, even very high quality land, labour and capital inputs will fail to provide the goods and services that customers need. Businesses have many other needs before they can successfully produce the goods and services demanded by customers. Figure 1.1 shows the wide range of these needs. Business functions Most businesses have four main functional departments. These will be staffed by people with specifi c qualifi ca- tions and experience in the work of the functional areas. MARKETING This department is responsible for market research and for analysing the results of such research so that consumer wants can be correctly identifi ed. This infor- mation will then be discussed with other departments of the business so that the right product decisions are made. Once a product is available for sale, the marketing func- tion will have to make important decisions concerning its pricing, how and where to promote it and how to sell it and distribute it for sale. FINANCE This function has responsibility for monitoring the fl ow of fi nance into and out of the business, keeping and analysing accounts and providing fi nancial informa- tion to both senior management and other departments. Without adequate fi nance, no effective decisions can be made within the other functional areas, so fi nance is a key division of any business. KEY TERMS consumer goods the physical and tangible goods sold to the general public. They include cars and washing machines, which are referred to as durable consumer goods. Non- durable consumer goods include food, drinks and sweets that can only be used once. consumer services non-tangible products that are sold to the general public and include hotel accommodation, insurance services and train journeys capital goods physical goods that are used by industry to aid in the production of other goods and services, such as machines and commercial vehicles What are business ‘inputs’? FACTORS OF PRODUCTION These are the resources needed by business to produce goods or services. Firms will use different combinations of inputs, depending on the product being produced and the size of the business. There are four main inputs: 3 HUMAN RESOURCE MANAGEMENT Human resource (HR) management identifi es the work- force needs of the business, recruits, selects and trains appropriate staff and provides motivational systems to help retain staff and encourage them to work product- ively. It also draws up contracts of employment and covers the redundancy or redeployment of staff if these become necessary. OPERATIONS MANAGEMENT Once known simply as the ‘production function’, oper- ations management has responsibility for ensuring adequate resources are available for production, main- taining production and quality levels and achieving high levels of productive effi ciency. INTERRELATIONSHIP OF FUNCTIONS It should not be assumed that all business decisions taken within these departments are separate and unconnected 1 BUSINESS ORGANISATION AND ENVIRONMENT KEY TERMS from the other parts of the business. Nothing could be further from reality! Effective strategic decision-making develops from the functions working closely together. Good communication, co-operation and close interrela- tionships between functions are essential before major decisions are taken. For example, the decision by Peugeot Citroen in 2010 to launch the world’s fi rst hybrid diesel car required interaction between: ● marketing – will consumers be prepared to buy this car and at what price? ● fi nance – do we have the capital needed to develop and produce it? ● HR management – do we need to recruit additional engineers before this project can be turned into a market-ready car? ● operations management – can we produce this product at a cost which allows the marketing department to set a profi table price level? A business needs Government Customers Suppliers Labour Land Site for buildings Skilled Permanent Unskilled Temporary Raw materials Finance Factories/offices Roads/Rail/Airports Schools/Colleges Risk takers Coordinators Decision makers Law and order Machines Capital Enterprise Figure 1.1 What businesses need 4 Sectors of industry All production can be classifi ed into three broad types of business activity, or sectors of industry. These categories are also the three stages involved in turning natural resources, such as oil and timber, into the fi nished goods and services demanded by consumers. The stages are the primary, secondary and tertiary sectors of industry. The nature of business activity01 KEY TERMS primary sector business activity fi rms engaged in farming, fi shing, oil extraction and all other industries that extract natural resources so that they can be used and processed by other fi rms secondary sector business activity fi rms that manufacture and process products from natural resources, including computers, brewing, baking, clothing and construction tertiary sector business activity fi rms that provide services to consumers and other businesses, such as retailing, transport, insurance, banking, hotels, tourism and telecommunications Country Primary Secondary Tertiary United Kingdom 2 17 81 China 40 28 32 Ghana 53 21 26 Table 1.1 Employment data 2010 – as percentage of total employment Some people also refer to a fourth sector – the ‘quaternary sector’ – which is focused on information technology (IT) businesses and information service providers, but this distinction is not made in the IB syllabus. The balance of the primary, secondary and tertiary sectors in the economy varies substantially from country to country. It depends on the level of indus- trialisation in each country. The balance between the sectors is often referred to as a country’s ‘economic structure’. Table 1.1 shows the different economic structures of three countries. Tertiary sector – the breathtaking Burj Al Arab hotel in Dubai Primary production – dairy cattle following milking Secondary production – clothing factory in India 1 BUSINESS ORGANISATION AND ENVIRONMENT RECESSION SPARKS NEW BUSINESS IDEAS Disney, McDonald’s, Burger King, Procter & Gamble, Johnson & Johnson, Microsoft – what do they all have in common? They all started during a recession or depression. The message, delivered to around 40 would-be entrepre- neurs at a workshop in Stratford, east London is clear: don’t let bad economic headlines put you off. Most of the people at this session are not aiming to create new multinational corporations. But during the coffee break, they seem pretty confi dent that their ideas can prosper even in the current climate. ‘I’m here to fi nd out about starting up a business providing CVs to school leavers,’ says Jessica Lyons, wearing a lapel badge with My First CV, the name of the future business, written on it. ‘For my particular business idea I think this is the ideal time, because there are more people than ever out there looking for work.’ The recession is causing a spike in interest in setting up small businesses. Another interesting example was from a gym instructor who wants to take his equipment to companies around London, giving people a lunchtime workout without them having to leave their offi ces. Most of the would-be entre- preneurs in Stratford are looking at potential opportunities in the tertiary sector which don’t require large amounts of start-up fi nance to purchase capital equipment and rely more on their own skills and interests. Source: Adapted from various sources EXAM PRACTICE QUESTION Read the case study and then answer the questions that follow. 12 marks, 21 minutes 1 Using examples from these articles, explain the statement that ‘BP operates in all three sectors of industry’. [6] 2 Explain why the decision to open 500 new petrol stations in China will involve effective cooperation between all four business functions. [6] 10 marks, 18 minutes 3 Discuss how changes in the economic structure of Australia could impact on BP’s Kwinana refi nery. [10] H BP Kwinana refi nery is now the largest refi nery in Australia Signifi cant improvements to this oil refi ning and processing plant have led to Kwinana becoming one of the most modern in the region, enabling a wide range of fuels to be produced for drivers and for industry, and materials for the plastics and chemical industries. BP to open 500 more petrol stations in the Jiangsu province of China A huge new investment by BP in petrol retailing stations will lead to a huge increase in the sales of petrol in China of this large multinational business. 25 marks, 45 minutes 1 Explain the following terms in the text: a entrepreneur b tertiary sector c start-up fi nance d capital equipment. [8] 2 Outline the factors of production needed to set up the business providing CVs to school leavers. [5] 3 Using the gym instructor’s business as an example, list the business functions involved in this business. [5] 4 Explain the reasons why most of the would-be entrepreneurs were choosing to set up businesses in the tertiary sector. [7] 7 Types of organisation 1 BUSINESS ORGANISATION AND ENVIRONMENT 02 This chapter covers syllabus section 1.2 SETTING THE SCENE On completing this chapter you should be able to: Dulip’s business is a success Dulip’s business had been operating successfully for two years when he decided to expand it by opening his own furniture making factory. He wanted his business to grow so that he could bring his two sons into the venture. Dulip realised that he would need more capital to build a furniture making factory. Although his business was profi table it was not making enough of a surplus to pay for the extra costs involved. ‘Why don’t you ask one of your friends to invest in your business as a partner?’ suggested Maria, his wife. ‘This would mean that you would not have to borrow so much.’ Dulip replied: ‘I could do this and also ask them to help me manage the business. I am not sure that I could carry all of the management responsibilities. I might make my business a legally recognised organisation – a company – because this would be easier to leave to our sons and offers some protection for our savings.’ Forestry businesses in Dulip’s country have been criticised by environmental pressure groups for cutting down too many trees. Dulip has responded to this pressure by planting more trees for each one his business cuts down. ● distinguish between organisations in the private sector and public sector, applying these distinctions to your own country ● explain reasons for starting a business, how to identify a market opportunity and the problems faced by business start-ups ● distinguish between different types of profi t-based organisations: sole traders, partnerships and companies ● evaluate the most appropriate form of legal organisation for different businesses ● compare and contrast the objectives of non-profi t and non-governmental organisations and analyse the impact of their actions ● explain the nature of public–private partnerships, analysing the costs and benefi ts of co-operation between the public and private sectors. H Points to think about: ● Do you think it is a good idea for this business, currently only producing timber, to make and sell furniture? Explain your answer. ● Would you advise Dulip to involve one of his friends in the business as a partner? Explain your answer. ● What benefi ts does Dulip seem to think a ‘company’ will offer him? ● Why do some businesses change their decisions in response to pressure from environmental and other groups? Photo 2.1 8 1 BUSINESS ORGANISATION AND ENVIRONMENT 9 Introduction The fi rst chapter looked at the classifi cation of business into different economic sectors. This chapter further classifi es business activity into: ● the private and public sectors ● profi t-based and non-profi t-based organisations. Profi t-based businesses in the private sector can take different legal forms and the advantages and disadvan- tages of these are very important. The growing importance of non-profi t-based and non-governmental organisations is also analysed in this chapter. Public and private sector organisations Industry may be classifi ed by public or private sector and by type of legal organisation. These two types of classifi - cation are interlinked as some types of legal structure are only found in the private sector. The relative importance of the private sector compared to the public sector is not the same in all mixed econ- omies. Those economies that are closest to free-market systems have very small public sectors. Those countries with central planning command economies will have very few businesses in the private sector. KEY TERMS private sector comprises businesses owned and controlled by individuals or groups of individuals public sector comprises organisations accountable to and controlled by central or local government (the state) mixed economy economic resources are owned and controlled by both private and public sectors free-market economy economic resources are owned largely by the private sector with very little state intervention command economy economic resources are owned, planned and controlled by the state LINKS BETWEEN SECTORS In most mixed economies, certain important goods and services are provided by state-run organisations – they are in the public sector. It is argued that they are too signifi cant to be left to private sector businesses. They include health and education services, defence and law and order (police force). In some countries, important ‘strategic’ industries are also state owned and controlled, such as energy, telecommunications and public trans- port. These public sector organisations therefore provide essential goods and services for individual citizens and organisations in the private sector, and they often have objectives other than profi t; for example: ● ensuring supplies of essential goods and services – perhaps free of charge to the user, e.g. health and educa- tion services in some countries ● preventing private monopolies – single fi rms that dominate an industry – from controlling supply ● maintaining employment ● maintaining environmental standards. In recent years, there has been a trend towards selling some public sector organisations to the private sector – privatisation – and this means that they put profi t making as one of their main objectives. KEY TERM privatisation the sale of public sector organisations to the private sector Starting a business ROLE OF THE ENTREPRENEUR KEY TERM entrepreneur someone who takes the fi nancial risk of starting and managing a new venture New business ventures started by entrepreneurs can be based on a totally new product or customer service idea or a new way of offering a service. People who set up their own new business show skills of ‘entrepreneurship’. They have: ● had an idea for a new business ● invested some of their own savings and capital ● accepted the responsibility of managing the business ● accepted the possible risks of failure. The personal qualities and skills needed to make a success of a new business venture are described below. Innovative The entrepreneur may not be a ‘product inventor’, but they must be able to carve a new niche in the market, attract consumers in innovative ways and present their business as being ‘different’. This requires original ideas and an ability to do things innovatively. Commitment and self-motivation It is never an easy option to set up and run your own business. It is hard work and may take up many hours of each day. A willingness to work hard, a keen ambition to succeed, energy and focus are all essential qualities of a successful entrepreneur. Multi-skilled An entrepreneur will have to make the product or provide the service, promote it, sell it and count the money. These Types of organisation02 12 Entrepreneurs may be very keen, willing to work hard and with undoubted abilities in their chosen fi eld; for example, a new restaurant owner may be an excellent chef but management skills may be lacking. Some learn these skills very quickly once the business is up and running, but this is a risky strategy. Some entrepreneurs buy in the experience by employing staff with manage- ment experience, but this is an expensive option. It is wrong to think, just because a business is new and small, that enthusiasm, a strong personality and hard work will be suffi cient to ensure success. This may prove to be the case, but it often is not. Potential entrepreneurs are encouraged to attend training courses to gain some of these skills before putting their capital at risk or seek management experience through employment. Changes in the business environment Setting up a new business is risky. Not only are there the problems and challenges referred to above but there is also the risk of change, which can make the original business idea much less successful. New businesses may fail if any of the following changes occur, which turn the venture from a successful one to a loss-making enterprise: ● new competitors ● legal changes, e.g. outlawing the product altogether ● economic changes that leave customers with much less money to spend ● technological changes that make the methods used by the new business old-fashioned and expensive. This list of changes could, no doubt, be added to, but even these four factors indicate that the business environment is a dynamic one, and this makes owning and running a business enterprise very risky indeed. EXAM TIP The reasons for business failure could apply at any stage of the development of a business, but the fi rst few months are the riskiest of all. ACTIVITY 2.2 Read the case study below and then answer the questions that follow. Farah branches out on her own Farah was a well-qualifi ed dress maker. She had worked for two of the biggest dress shops in town, but was keen to set up her own business. Her father agreed to invest $5000 into her business, but she would have to fi nd the rest of the capital needed – about $10 000 she guessed – from her savings and a bank loan. She investigated the prices of shop premises, and was shocked by how expensive city centre locations were. Her father suggested a cheaper, but less busy, out-of-town location. She contacted an accountant who offered to look after the fi nancial side of the business, but he would charge at least $2000 per year. Farah wondered if she could learn to keep the accounts herself if she attended accounts classes. She wanted to make her shop very different from all of the competitors in the city, and planned to offer lessons in dress making as well as selling fi nished dresses. She had been asked many times by customers ‘How did you do that?’ when they were pleased with her latest dress designs and she was sure this was a great business opportunity. What she had not realised was the amount of paperwork she would have to complete before her business could even start trading. 16 marks, 28 minutes 1 Outline three problems that Farah has to deal with in setting up her business. [6] 2 Which of these problems do you think is the most important one for Farah to fi nd a good solution to? Explain your answer. [6] 3 Is Farah’s business operating in the private or public sector? Explain your answer. [4] 1 BUSINESS ORGANISATION AND ENVIRONMENT 13 Profi t-based organisations Figure 2.1 shows the main types of profi t-based private-sector businesses. A partnership agreement does not create a separate legal unit; a partnership is just a grouping of individ- uals. Partnerships are formed in order to overcome some of the drawbacks of a sole trader. When planning to go into partnership it is important to choose business part- ners carefully – the errors and poor decisions of any one partner are considered to be the responsibility of them all. This also applies to business debts incurred by one partner – in most countries there is unlimited liability for all partners should the business venture fail. In the UK, it is possible to set up limited liability partnerships. It is usual, although not a legal requirement, to draw up a formal Deed of Partnership between all partners. This would provide agreement on issues such as voting rights, the distribution of profi ts, the management role of each partner and who has authority to sign contracts. Partnerships are the most common form of busi- ness organisation in some professions, such as law and accountancy. Small building fi rms are often partner- ships too. Many other owners of businesses prefer the company form of organisation and these are considered next. The advantages and disadvantages of partnerships are summarised in Table 2.2. LIMITED COMPANY There are three important differences between compa- nies and sole traders and partnerships: limited liability, legal personality and continuity. Table 2.1 Sole traders – advantages and disadvantages Advantages Disadvantages ● Easy to set up – no legal formalities ● Owner has complete control – not answerable to anyone else ● Owner keeps all profi ts ● Able to choose times and patterns of working ● Able to establish close personal relationships with staff (if any are employed) and customers ● The business can be based on the interests or skills of the owner – rather than working as an employee for a larger fi rm ● Unlimited liability – all of owner’s assets are potentially at risk ● Often faces intense competition from bigger fi rms, e.g. food retailing ● Owner is unable to specialise in areas of the business that are most interesting – is responsible for all aspects of management ● Diffi cult to raise additional capital ● Long hours often necessary to make business pay ● Lack of continuity – as the business does not have separate legal status, when the owner dies the business ends too Profit-based private-sector businesses Sole traders Private (Ltd) Co-operativesLimited companies Partnerships Public (plc) Figure 2.1 Legal structure of profi t-based organisations SOLE TRADER KEY TERM sole trader a business in which one person provides the permanent fi nance and, in return, has full control of the business and is able to keep all of the profi ts This is the most common form of business organisation. Although there is a single owner in this business organ- isation, there may be employees but the fi rm is likely to remain very small. Although they are great in number, sole traders account for only a small proportion of total business turnover. All sole traders have unlimited liability. This means that the owner’s personal possessions and property can be taken to pay off the debts of the business should it fail. This can discourage some potential entre- preneurs from starting their own businesses. Another problem faced by sole traders involves fi nance for expansion. Many sole traders remain small because the owner wishes to remain in control of their own busi- ness, but another reason is the limitations that they have in raising additional capital. As soon as partners or share- holders are sought in order to raise fi nance, then the sole trader becomes another form of organisation altogether. In order to remain a sole trader the owner is dependent on own savings, profi ts made and loans for injections of capital. This type of business organisation is most commonly established in construction, retailing, hairdressing, car servicing and catering. The advantages and disadvan- tages of sole traders are summarised in Table 2.1. PARTNERSHIP KEY TERM partnership a business formed by two or more people to carry on a business together, with shared capital investment and, usually, shared responsibilities Types of organisation02 14 Limited liability The ownership of companies is divided into small units called shares. People can buy these and become ‘share- holders’ – they are part owners of the business. It is possible to buy just one share, but usually these are owned in blocks, and it is possible for one person or organisation to have complete control by owning more than 50% of the shares. Individuals with large blocks of shares often become directors of the business. All share- holders benefi t from the advantage of limited liability. KEY TERMS limited liability the only liability – or potential loss – a share- holder has if the company fails is the amount invested in the company, not the total wealth of the shareholder Nobody can make any further claim against shareholders should the company fail. This has two important effects: ● People are prepared to provide fi nance to enable companies to expand. ● The greater risk of the company failing to pay its debts is now transferred from investors to creditors (those suppliers/lenders who have not been paid). Cred- itors, as a result, are very interested in both ensuring that the word ‘limited’ appears in the company name and scrutinising the company’s accounts for signs of potential future weakness. Legal personality A company is legally recognised as having an identity separate from that of its owners. This means, for example, that if the products sold by a company are found to be dangerous or faulty, the company itself can be prose- cuted, not the owners, as would be the case with either a sole trader or a partnership. A company can be sued and can sue others through the courts. Continuity In a company, the death of an owner or director does not lead to its break-up or dissolution. All that happens is that ownership continues through the inheritance of the shares, and there is no break in ownership at all. Private limited companies The protection that comes from forming a company is therefore substantial. Small fi rms can gain this protection when the owner(s) create(s) a private limited company. KEY TERMS private limited company a small to medium-sized business that is owned by shareholders who are often members of the same family. This company cannot sell shares to the general public shareholder a person or institution owning shares in a limited company share a certifi cate confi rming part ownership of a company and entitling the shareholder to dividends and certain shareholder rights The word ‘Limited’ or ‘Ltd’ (‘Pte’ in some countries) indi- cates that the business is a private company. Usually, the shares will be owned by the original sole trader (who may hold a majority of the shares to keep control of the company), relatives, friends and employees. New issues of shares cannot be sold on the open market and existing shareholders may only sell their shares with the agreement of the other shareholders. Legal formalities must be followed in setting up a private limited company and these can be expensive and time consuming in some countries. The advantages and disadvantages of private limited companies are summa- rised in Table 2.3. Public limited companies These can be recognised by the use of ‘plc’ or ‘inc.’ (incor- porated) after the company name. It is the most common form of legal organisation for really large businesses, for the very good reason that they have access to very substantial funds for expansion. Converting a private limited company to public limited company (plc) status is referred to as a stock market fl otation. Table 2.2 Partnerships – advantages and disadvantages Advantages Disadvantages ● Partners may specialise in different areas of business management ● Shared decision-making ● Additional capital injected by each partner ● Business losses shared between partners ● Greater privacy and fewer legal formalities than corporate organisations (companies) ● Unlimited liability for all partners (with some exceptions) ● Profi ts are shared ● As with sole traders, no continuity and the partnership will have to be reformed in the event of the death of one of the partners ● All partners bound by the decisions of any one of them ● Not possible to raise capital from selling shares ● A sole trader, taking on partners, will lose independence of decision-making 1 BUSINESS ORGANISATION AND ENVIRONMENT 17 1 ‘All countries have organisations that are part of the private sector; they come in the form of business organisations that exist to create a profi t for their owners. All countries also have public sector organisations that exist to improve the welfare of all people in society. As a consequence of this, governments should look to expand the proportion of countries’ organisations that are owned by the state.’ a Analyse the evidence you would use to prove or disprove this statement. b In the light of this statement, discuss some of the reasons why so many countries have privatised former public sector organisations. 2 ‘Organisations always run more effi ciently when they are free of government control.’ In groups, discuss to what extent you agree or disagree with this statement. Non-profi t and non-governmental organisations Not all organisations in the world aim to make profi ts. There are many thousands of organisations that have objectives other than profi t: for example, charities and pressure groups. Many of these are also termed non- governmental organisations (NGOs). KEY TERMS non-profi t organisation any organisation that has aims other than making and distributing profi t and which is usually governed by a voluntary board non-governmental organisation (NGO) a legally constituted body with no participation or representation of any government Non-profi t organisations include charities and pressure groups. Charities may employ professional managers, but they often depend greatly on the work of unpaid volun- teers. Profi t is not an objective, but they are still usually trying to increase their income to put more money back into achieving their charitable objectives. For example, the ASHA charity in India has, as its primary objective: ‘To provide education for underprivileged children in India.’ Well-known international charities include Oxfam, Red Cross and Red Crescent Societies and Médecins sans Frontières. Apart from raising money to support and promote their work, many charities aim to inform the public, persuade them to support their causes and try to convince governments to give more attention to the problems the charities are trying to solve such as poverty, gender inequality, hardship in old age or protection of wildlife. Many charities have only a national or local presence, but they can still have a signifi cant impact on the people they aim to support. Non-governmental organisations cover a very wide range of activities, but their common feature is that they are separate from government. They are often char- ities too and many of them are involved in develop ment, health and humanitarian issues. Their work can support and add to the efforts made by government organi- sations, for example in disaster or poverty relief. The objectives of NGOs are not profi t-based but are specifi - cally focused on social or humanitarian objectives. In Russia, the GLOBUS group aims to ‘stimulate an effec- tive national response to the HIV/AIDS epidemic’. Also in the humanitarian fi eld, the International AIDS Alliance in Ukraine aims to ‘reduce HIV incidence and death rates from AIDS’. PRESSURE GROUP Pressure groups are non-profi t-making organisations that aim to change the behaviour and decisions of either organisations or governments. KEY TERM pressure group an organisation created by people with a common interest or objective who lobby businesses and governments to change policies so that the objective is reached Perhaps the best-known international examples are: ● Greenpeace – campaigns for greater environmental protection by both businesses adopting green strategies and governments passing tighter anti-pollution laws. ● Fairtrade Foundation – aims to achieve a better deal for agricultural producers in low-income countries. ● WWF – aims to improve animal welfare, espe- cially protecting and conserving the habitat of wild animals. ● Amnesty International – rigorously opposes anti- human rights policies of governments. ● Jubilee 2000 – campaigns for western governments to reduce or eliminate the debt burden on developing countries. Pressure groups want changes to be made in three important areas: ● governments to change their policies and to pass laws supporting the aims of the group ● businesses to change policies so that, for example, less damage is caused to the environment THEORY OF KNOWLEDGE Types of organisation02 18 ● consumers to change their purchasing habits so that businesses that adopt ‘appropriate’ policies see an increase in sales, but those that continue to pollute or use unsuitable work practices see sales fall. Pressure groups try to achieve these goals in a number of ways. Publicity through media coverage Effective public relations are crucial to most successful pressure group campaigns. Frequent press releases giving details of undesirable company activity and coverage of ‘direct action’ events, such as meetings, demonstra- tions and consumer boycotts will help to constantly keep the campaign in the public eye. The more bad publicity the group can create for the company concerned, then the greater the chance of it succeeding in changing corporate policy. The pressure group may spend money on its own advertising campaign – as Amnesty International does – and the success of this approach will depend upon the fi nancial resources of the group. Infl uencing consumer behaviour If the pressure group is so successful that consumers stop buying a certain company’s products for long enough, then the commercial case for changing policy becomes much stronger. The highly successful consumer boycott of Shell petrol stations following a decision to dump an old oil platform in the sea led to a change of strategy. Shell is now aiming to become ‘the leading multinational for environmental and social responsibility’. Public sympathy for a pressure group campaign can increase its effectiveness signifi cantly. Lobbying of government This means putting the arguments of the pressure group to government members and ministers because they have the power to change the law. If the popularity of the govern- ment is likely to be damaged by a pressure group campaign that requires government action, then the legal changes asked for stand a greater chance of being introduced. SOCIAL ENTERPRISE Social enterprises are not charities, but they do have objectives that are often different from those of an entre- preneur who is only profi t motivated. Making a profi t may be one of their objectives, but it will be much less impor- tant than the organisation’s social objectives. In other words, a social enterprise is a proper business that makes its money in socially responsible ways and uses most of any surplus made to benefi t society. Social entre- preneurs are not running a charity, though – they can and often do keep some of any profi t made for themselves. ACTIVITY 2.4 Read the case study below and then answer the questions that follow. The oil giant BP Amoco will face renewed action next week from Tibetan pressure groups to withdraw from PetroChina, the state-run Chinese oil company which is building a gas pipeline through ethnic Tibetan areas. Tibetan activ- ists will coordinate a worldwide series of protests starting next Thursday while the Free Tibet Campaign is planning to disrupt BP’s AGM in April. It has tabled a resolution calling on BP to dispose of its PetroChina stake on the grounds that it is against the company’s ethical policy on human rights and the environment. The pressure group may also call for a consumer boycott of BP petrol stations. A govern- ment minister admitted to reporters in Beijing that BP and PetroChina would face a public relations ‘disaster’ if the resolution is passed. 17 marks, 35 minutes 1 What change in the strategy of BP and PetroChina is the Tibetan pressure group attempting to bring about? [3] 2 Explain what impact a ‘public relations disaster’ could have on BP. [6] 3 Evaluate the factors that will determine whether this pressure group’s campaign is successful. [8] Beijing M O N G O L I A CH I N A Sebei Xining Lanzhou Hanoi Likely route for gas pipeline Tibet protesters target BP over PetroChina stake 1 BUSINESS ORGANISATION AND ENVIRONMENT 19 Social enterprises compete with other businesses in the same market or industry. They use business princi- ples to achieve social objectives. Most social enterprises have these common features: ● They directly produce goods or provide services. ● They have social aims and use ethical ways of achieving them. ● They need to make a surplus or profi t to survive as they cannot rely on donations as charities do. Objectives of social enterprises Social enterprises often have three main aims: ● Economic – to make a profi t or surplus to reinvest back into the business and provide some return to owners. ● Social – to provide jobs or support for local, often disadvantaged, communities. ● Environmental – to protect the environment and to manage the business in an environmentally sustain- able way. These aims are often referred to as the triple bottom line. This means that profi t is not the sole objective of these enterprises. KEY TERMS social enterprise a business with mainly social objectives that reinvests most of its profi ts into benefi ting society rather than maximising returns to owners triple bottom line the three objectives of social enterprises: economic, social and environmental Below are two examples of social enterprises: ● SELCO in India provides sustainable energy solu- tions to low-income households and small businesses. In one scheme, solar-powered lighting was provided by SELCO to a silkworm farmer who depended on dangerous and polluting kerosene lamps. The farmer could not afford the upfront cost, so SELCO helped with the fi nance too. ● The KASHF Foundation in Pakistan provides microfi - nance (very small loans) and social support services to women entrepreneurs who traditionally fi nd it very diffi - cult to receive help. This enables the women to set up their own businesses in food production, cloth making and other industries. The loans have to be repaid with interest, but the interest rates are much lower than a profi t-maximising international bank would charge. H HIGHER LEVEL Public–private partnership (PPP) KEY TERM public–private partnership (PPP) involvement of the private sector, in the form of management expertise and/ or fi nancial investment, in public sector projects aimed at benefi ting the public There are three main types of PPP: ● Government funded – these are privately managed schemes. In this type of venture, the government provides all or part of the funding, but the organisa- tion is managed by a private business that uses private sector methods and techniques to control it as effi - ciently as possible. For example, the Hope Clinic Lukuli in Kampala, Uganda, receives government funding for its malaria prevention and HIV testing services. These are managed effi ciently and successfully by this private sector, but non-profi t making, clinic. Analysts believe that the clinic operates the health services more effi ciently than a government department would with many offi cials becoming involved. ● Private sector funded – these are government or state- managed schemes. In this type of venture, which often involves large sums of capital investment, the government is released from the fi nancial burden of fi nding taxpayers’ money to pay for the project. Once the assets have been paid for and constructed, they are then managed and controlled by a government department which pays rent or a leasing charge to the private sector business that constructed the project. This form of PPP started in Australia and the UK and is known as the Private Finance Initiative (PFI). ● Government directed but with private sector fi nance and management – this type of PPP encourages both private sector funding and some private sector management control of public projects. For example, a new London hospital has been built using private sector fi nance – it is leased to the state-controlled health authority which manages and controls the hospital’s health services; in Australia, the international bank HBOS has invested in several PFI schemes for public sector projects such as new prisons in Victoria and the new toll road into Melbourne city centre. KEY TERM Private Finance Initiative (PFI) investment by private sector organisations in public sector projects The potential costs and benefi ts of public–private part- nerships are shown in Table 2.6. Organisational objectives 1 BUSINESS ORGANISATION AND ENVIRONMENT 03 This chapter covers syllabus section 1.3 SETTING THE SCENE On completing this chapter you should be able to: Health and Beauty for You Since setting up their beauty salon Health and Beauty for You, June Wong, with her brother Will, had managed to keep the business going through three diffi - cult years. They agreed that their initial business objective should be survival. Despite the country’s economic diffi culties and fi erce competition, the busi- ness had built up a good customer base and had covered all costs for the fi rst three years. Now the pair had decided to plan for the next three years, and were keen to focus on a new set of business objectives. June wanted the business to grow. She believed the best way to do this was to buy a beauty salon in another area of the city. ‘This will get the business name really well known and will give us the basis for further sales growth of around 20% a year,’ she told Will. He was not so sure that he wanted the staffi ng and marketing problems associated with another salon. ‘I think we should aim to make as much profi t as we can from the existing salon. We could offer a wider range of services and increase our prices. I think we could aim for a profi t of $40 000 per year. After all, we went into business with the intention of becoming rich!’ he reminded June. After much discussion, June and Will agreed that the new business objective should be, in the short term, to open a new salon and to double sales within three years. After this had been achieved, the aim should be to maximise long- term profi ts from the two locations by improving image and raising prices – Will thought a fi ve-year target of $90 000 per year was realistic. ● explain the importance of setting objectives in managing an organisation ● explain the purpose of mission statements and vision statements ● distinguish between objectives, strategies and tactics and discuss how these interrelate ● analyse the potential confl icts between corporate objectives and why objectives might change over time ● examine the reasons why organisations set ethical objectives and analyse the advantages and disadvantages of ethical objectives ● explain the different views that fi rms may take of their social responsibility in an international context ● evaluate the need for fi rms to change objectives over time ● discuss why a fi rm’s view of its social responsibilities and its strategies towards them may change over time. H H Points to think about: ● What do you understand by the term ‘objective’? ● Do you think it is important that Health and Beauty for You should have clear objectives? Explain your answer. ● Why do you think June and Will are thinking of changing the objectives for their business over time? Photo 3.1 22 1 BUSINESS ORGANISATION AND ENVIRONMENT 23 Introduction Businesses of any size can benefi t from setting clear objec- tives. In small businesses, such as sole traders, these objec- tives are often not written down or formalised in any way, but the owners will often have a clear idea of what they are trying to achieve. In partnerships, it is important for partners to agree on the direction their business should take to avoid future disagreements. Limited companies must state the overall objectives of the business in their Memorandum and Articles of Association, but this often lacks much strategic detail. This chapter focuses on the importance of business objectives, the different forms that these can take, including ethical and social targets, and how they can be used to direct the work of all staff in an organisation. Importance of objectives A business aim helps to direct, control and review the success of business activity. In addition, for any aim to be successfully achieved, there has to be an appropriate strategy – or detailed plan of action – in place to ensure that resources are correctly directed towards the fi nal goal. This strategy should be constantly reviewed to check whether the business is on target to achieve its objec- tives. Both the aims of an organisation and the strategies it adopts will often change over time. Indeed, a change of objective will almost certainly require a change of plan too. A poor plan or strategy will lead to failure to reach the target. The most effective business objectives usually meet the following SMART criteria: S – Specifi c Objectives should focus on what the business does and should apply directly to that business. For example, a hotel may set an objective of 75% bed occu- pancy over the winter period – the objective is specifi c to this business. M – Measurable Objectives that have a quantitative value are likely to prove to be more effective targets for directors and staff to work towards, for example to increase sales in the south-east region by 15% this year. A – Achievable Objectives must be achievable. Setting objectives that are almost impossible to achieve in a given time will be pointless. They will demotivate staff who have the task of trying to reach these targets. R – Realistic and relevant Objectives should be realistic when compared with the resources of the company, and should be expressed in terms relevant to the people who have to carry them out. For example, informing a factory cleaner about ‘increasing market share’ is less relevant than a target of reducing usage of cleaning materials by 20%. T – Time-specifi c A time limit should be set when an objective is established. For example, by when does the business expect to increase profi ts by 5%? Without a time limit it will be impossible to assess whether the objective has actually been met. EXAM TIP Remember the acronym: SMART. Aims, objectives, plans and strategies Figure 3.1 shows the links between the different stages in the setting of aims and objectives. AIM MISSION CORPORATE OBJECTIVES DIVISIONAL OBJECTIVES DEPARTMENTAL OBJECTIVES INDIVIDUAL TARGETS Corporate aims are the long-term goals which a busi- ness hopes to achieve. The core of a business’s activity is expressed in its corporate aims and plans. A typical corporate aim is: ‘To increase shareholder returns each year through business expansion.’ This example demon- strates a typical corporate aim. It tells us that the company aims to give shareholders maximum returns on their investment by expanding the business. Other corporate aims tend to concentrate on customer-based goals, such as ‘meeting customers’ needs’, or market-based goals, such as ‘becoming the world leader’. Corporate aims are all-embracing, and are designed to provide guidance to the whole organisation, not just a part of it. Corporate aims have several benefi ts: ● They become the starting point for departmental objectives on which effective management is based. This is shown by their position at the top of the hier- archy of objectives in Figure 3.1. ● They can help develop a sense of purpose and direc- tion for the whole organisation if they are clearly and unambiguously communicated to the workforce. Figure 3.1 The hierarchy of objectives Organisational objectives03 24 ● They allow an assessment to be made, at a later date, of how successful the business has been in attaining its goals. ● They provide the framework within which the strat- egies or plans of the business can be drawn up. A business without a long-term corporate plan or aim is likely to drift from event to event without a clear sense of purpose. This will become obvious to the workforce and customers, who may respond in adverse ways. It is becoming increasingly common for businesses to express the corporate aim in one short, sharp ‘guiding hand’ statement to be made known to as many stake- holders as possible. This is known as the mission state- ment, and is discussed in the next section. Mission statements and vision statements A mission statement is an attempt to condense the central purpose of a business’s existence into one short paragraph. It is not concerned with specifi c, quantifi able goals but tries to sum up the aims of the business in a motivating and appealing way. It can be summed up as a statement about ‘who we are and what we do’. KEY TERMS mission statement a statement of the business’s core aims, phrased in a way to motivate employees and to stimulate interest by outside groups vision statement a statement of what the organisation would like to achieve or accomplish in the long term Here are some examples of mission statements: ● College offering IB and A Level qualifi cations – ‘To provide an academic curriculum in a caring and supportive environment’. ● BT – ‘To be the most successful worldwide telecom- munications group’. ● Nike, Inc. – ‘To bring inspiration and innovation to every athlete in the world’. ● Microsoft – ‘To enable people and businesses throughout the world to realise their full potential’. ● Google – ‘To organise the world’s information and make it universally accessible and useful’. ● Merck – ‘Provide society with superior products and services by developing innovations and solutions that improve the quality of life and satisfy customer needs, to provide employees with meaningful work and advancement opportunities and investors with a supe- rior rate of return’. An effective mission statement should answer three key questions: ● What do we do? ● For whom do we do it? ● What is the benefi t? Mission statements outline the overall purpose of the organisation. A vision statement, on the other hand, describes a picture of the ‘preferred future’ and outlines how the future will look if the organisation achieves its mission. It is a clear statement of the future position that offers the ideal of what owners and directors want their business organisation to become. Table 3.1 compares the mission and vision statements of three organisations. Organisation Vision statement Mission statement Nokia Our vision is a world where everyone is connected. Nokia exists to connect people with each other and the information that is important to them with easy-to-use and innovative products. Nokia aims to provide equipment, solutions and services for consumers, network operators and corporations. Minnesota Health Department (USA) Keeping all residents healthy. To protect, maintain and improve the health of all residents. McDonald’s Restaurants Where the world buys more McDonald’s than any other fast food. McDonald’s aims to be the world’s best quick service restaurant experience. Being the best means providing outstanding quality, service, cleanliness and value so that we make every customer in every restaurant smile. Table 3.1 Comparing vision and mission statements Source: www.samples-help.org.uk So what is the link between vision statements, mission statements and strategies? It is simple. Without the direc- tion and focus brought to an organisation by vision and mission statements, planning new strategies will be like trying to steer a ship with no idea of either where 1 BUSINESS ORGANISATION AND ENVIRONMENT 27 earn more profi t. Once a ‘satisfactory’ level of profi t has been achieved, the owners consider that other aims take priority, such as more leisure time. Growth The growth of a business – in terms of sales or value of output – has many potential benefi ts for the managers and owners. Larger fi rms will be less likely to be taken over and should be able to benefi t from economies of scale. Managers may gain higher salaries and fringe bene- fi ts. Businesses that do not attempt to grow may cease to be competitive and, eventually, will lose their appeal to new investors. Business objectives based on growth have limitations: ● Over-rapid expansion can lead to cash-fl ow problems. ● Sales growth might be achieved at the expense of lower profi t margins. ● Larger businesses can experience diseconomies of scale. ● Using profi ts to fi nance growth – retained profi ts – can lead to lower short-term returns to shareholders. ● Growth into new business areas and activities – away from the fi rm’s ‘core’ activities – can result in a loss of focus and direction for the whole organisation. Increasing market share Closely linked to overall growth of a business is the market share it enjoys within its main market. It is possible for an expanding business to suffer a loss of market share if the market is growing at a faster rate than the business itself. Increasing market share indicates that the marketing mix of the business is proving to be more successful than that of its competitors. Benefi ts resulting from being the brand leader with the highest market share include: ● Retailers will be keen to stock and promote the best- selling brand. ● Profi t margins offered to retailers may be lower than competing brands as the shops are so keen to stock it – this leaves more profi t for the producer. ● Effective promotional campaigns are often based on ‘buy our product with confi dence – it is the brand leader’. Survival This is likely to be the key objective of most new busi- ness start-ups. The high failure rate of new businesses means that to survive for the fi rst two years of trading is an important aim for entrepreneurs. Once the business has become fi rmly established, then other longer-term objectives can be established. Corporate social responsibility (CSR) KEY TERM corporate social responsibility this concept applies to those businesses that consider the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities and the environment Objectives that focus on meeting social responsibili- ties are increasingly important for most business organ- isations. The reasons for this and the consequences for businesses are considered below. Maximising short-term sales revenue This could benefi t managers and staff when salaries and bonuses are dependent on sales revenue levels. However, if increased sales are achieved by reducing prices, the actual profi ts of the business might fall. Maximising shareholder value Management, especially in public limited companies, take decisions that aim to increase the company share price and dividends paid to shareholders. These targets might be achieved by pursuing the goal of profi t maxim- isation. This shareholder value objective puts the inter- ests of shareholders above those of other stakeholders. ISSUES RELATING TO CORPORATE OBJECTIVES Some important issues relating to corporate objectives include the following: ● They must be based on the corporate aim and should link in with it. ● They should be achievable and measurable if they are to motivate employees. ● They need to be communicated to employees and investors in the business. Unless staff are informed of the objectives and their own targets that result from these, then the business is unlikely to be successful. ● They form the framework for more specifi c depart- mental or strategic objectives – see below. ● They should indicate a time scale for their achieve- ment – remember SMART! CONFLICTS BETWEEN CORPORATE OBJECTIVES Confl icts between objectives can often occur. These confl icts will need to be resolved by senior managers and decisions taken on the most signifi cant objective for the next time period. The most common confl icts that can occur are: ● growth versus profi t – achieving higher sales by raising promotional expenditure and by reducing prices will be likely to reduce short-term profi ts Organisational objectives03 28 ACTIVITY 3.3 Read the case study below and then answer the questions that follow. Reuters achieving its aims Reuters, one of the world’s largest news agencies, has returned to profi tability after several years of losses. It aims to increase value for shareholders and the fact that Reuters shares have risen 7% faster than average share prices suggests that the company is becoming increasingly successful. Profi ts are being made for two main reasons. Many jobs have been lost in the company in recent years as a result of chief executive Tom Glocer’s policy of cutting costs. Secondly, an ambitious growth objective has been established to increase sales and this target is being reached. New products – such as electronic trading – and new markets – such as China, Russia and India – have allowed an increase in sales of over 6% this year. This is above the growth target that was set. Some analysts are predicting a 40% increase in profi t for the company next year. Source: business.timesonline.co.uk (adapted) 18 marks, 32 minutes 1 What evidence is there that Reuters is meeting its objectives? [4] 2 Explain two benefi ts to the managers and other employees of the company from having clearly stated company aims and objectives. [6] 3 To what extent does the policy of increasing shareholder value confl ict with other objectives the business might have? [8] ACTIVITY 3.4 Read the case study below and then answer the questions that follow. Is STS plc successful? STS plc collects waste from houses, offi ces and factories. Most of the waste is burnt to produce heat and electricity for the company’s own use. This saves costs and reduces the impact on the environment by not using areas of land to bury the rubbish. A recent increase in customers has meant that not all of the waste can be burnt and the company has dumped it in old quarries where it causes smells and gas emissions. Investment in labour- saving equipment has allowed the business to save on wage costs. The company’s new mission statement is ‘to become the country’s number one waste business and to protect the environment for our children’s benefi t’. This has been explained to all shareholders in a recent letter to them, but the workers of the company were not involved in helping create the mission statement and they have not been informed of it. The latest company accounts stated: ‘We aim to maximise returns to shareholders through a strategy of aggressive growth. Our objectives are to expand year on year.’ These accounts contained the following data. 2007 2008 2009 2010 Sales revenue ($m) 20 25 35 40 Net profi t ($m) 3 8 10 20 Total value of country’s waste market ($m) 120 140 160 180 Number of employees 1000 950 900 800 20 marks, 35 minutes 1 How useful is the company’s new mission statement? [4] 2 The company’s objectives are not completely SMART. Explain the problems that might result from this. [6] 3 Using the information provided, to what extent is the business achieving success? Explain your answer. [10] ● short term versus long term – lower profi ts and cash fl ow may need to be accepted in the short term if managers decide to invest heavily in new technology or the development of new products that might lead to higher profi ts in the longer term ● stakeholder confl icts – these are covered in detail in Chapter 4, page 40. 1 BUSINESS ORGANISATION AND ENVIRONMENT 29 FACTORS DETERMINING CORPORATE OBJECTIVES There are several reasons why fi rms have different objectives. Corporate culture This can be defi ned as the code of behaviour and atti- tudes that infl uence the decision-making style of the managers and other employees of the business. Culture is a way of doing things that is shared by all those in the organisation. According to the Cadbury plc 2007 Annual Report, ‘Culture is about people, how they deliver, what they are accountable for, how aggressive they are in the pursuit of objectives and how adaptable they are in the face of change.’ If directors are aggressive in pursuit of their aims, keen to take over rival businesses and care little about social or environmental factors, then the objectives of the business will be very different to those of a business owned and controlled by directors with a more ‘people’ or ‘social’ orientated culture. Size and legal form of the business Owners of small businesses may be concerned only with a satisfi cing level of profi t. Larger businesses, perhaps controlled by directors rather than owners, such as most public limited companies, might be more concerned with rapid business growth in order to increase the status and power of the managers. This is often a result of the divorce between ownership and control (see Chapter 2, page 15). Directors and managers may be more concerned about their bonuses, salaries and fringe benefi ts – which often depend on sheer business size – than on maximising returns to shareholders. Public sector or private sector businesses State-owned organisations tend not to have profi t as a major objective. When the service these organisations provide is not ‘charged for’, such as education and health services, then a fi nancial target would be inappropriate. Instead, quality of service measures are often used, such as the maximum days for a patient to wait for an oper- ation. Even businesses earning revenue in the public sector, such as the postal service, may have among their objectives the target of maintaining services in non- profi table locations. In contrast are recent branch closures in rural areas by private sector banks in order to raise profi ts. Well-established businesses Newly formed businesses are likely to be driven by the desire to survive at all costs – the failure rate of new fi rms in the fi rst year of operation is very high. Later, once well established, the business may pursue other objectives such as growth and profi t. Interrelated objectives, strategies and tactics Corporate objectives relate to the whole organisation. They need to be broken down into specifi c tactical or operational objectives for separate divisions. KEY TERM tactical or operational objectives short- or medium-term goals or targets which must be achieved for an organisation to attain its corporate objectives Divisional, operational objectives are set by senior managers to ensure: ● co-ordination between all divisions – if they do not work together, the focus of the organisation will appear confused to outsiders and there will be disagreements between departments ● consistency with strategic corporate objectives ● adequate resources are provided to allow for the successful achievement of the objectives. The objectives of these two organisations will be very different Organisational objectives03 32 decisions also be infl uenced by the needs of other stake- holders? When a fi rm fully accepts its legal and moral obli- gations to stakeholders other than investors, it is said to be accepting corporate social responsibility (CSR). One important measure of a fi rm’s attitude to its social responsibility is the way in which it deals with environ- mental issues. Our environment can be greatly affected by business activity. Air and noise pollution from manu- facturing processes, road congestion caused by heavy trucks, business expansion into country areas, emissions of gases that can lead to global warming and the use of scarce non-renewable natural resources are all environ- mental issues that are of increasing concern to people and governments all over the world. How should business managers react to these concerns? Should they respond by adopting environmentally safe or green policies, even if these are expensive, or should they always take the cheapest option no matter what the consequences for the environment might be? Other issues connected with the concept of CSR cross over into ethical decisions. In fact, the two concepts are closely linked. Examples of recent CSR developments include: ● the growth in the number of fi rms that promote organic and vegetarian foods ● increasing numbers of retailers emphasising the proportion of their products made from recycled materials ● businesses that refuse to stock goods that have been tested on animals or foods based on genetically modi- fi ed ingredients. In these cases, is the action being taken because trade and reputation might be lost if it is not or because such action is increasingly profi table? Might businesses be criticised for paying lip service to CSR rather than praised for their genuine concern for society and the environ- ment? Conceivably, fi rms are being ethical or environ- mentally conscious because they have an objective that Peter Drucker, a famous writer on management, calls ‘public responsibility’, because they want to behave in these ways. However, many consumer groups and pres- sure groups are still dubious as to whether these objec- tives are based on genuinely held beliefs. Table 3.3 looks at the benefi ts and drawbacks for busi- nesses of adopting CSR policies. ACTIVITY 3.5 Read the case study below and then answer the questions that follow. Siam Cement Group (SCG) The SCG has a strict ethical code of conduct. Its key features are shown in the table below. Business ethics Code of conduct ● Fairness to all who have business relationships with the company, including society and environment. ● Making business gains in a proper manner. ● No alliances with political parties. ● Non-discriminatory treatment of all staff and stakeholder groups. ● Upholding the principles of honesty and fairness. ● Protecting the properties and reputation of SCG. ● Conducting business in the best interests of SCG and its stakeholders. ● Behaving appropriately at all times towards others. According to a report by Judith Ross, as SCG expanded beyond Thailand managers came under pressure to compromise on its corporate code of ethics. The compa- ny’s standards on bribes and other improper payments, for example, made it diffi cult to compete in places where such unethical payments are a way of life. This example demonstrates the classic problem: should fi rms conform to the standards of the country they operate in or should they try to export their own high moral principles to other lands? Source: http://hbswk.hbs.edu (adapted) 22 marks, 38 minutes 1 Explain what you understand by the terms: a business ethics b code of conduct. [4] 2 Explain how SCG and its employees might benefi t from the clear statement of business ethics and the code of conduct. [8] 3 Should a business such as SCG ever use unethical methods in a country where they are the ‘norm’, for example the giving and accepting of bribes? Justify your answer. [10] 1 BUSINESS ORGANISATION AND ENVIRONMENT 33 Benefi ts Drawbacks ● The image of the business and its products can be improved with a green or socially responsible approach. This could become a major competitive advantage, attracting new customers and loyalty from existing customers. ● Attracting the best motivated and most effi cient employees may become easier as many workers will prefer to work for and be associated with socially aware businesses. ● Bad publicity and pressure group activity resulting from socially irresponsible behaviour should not arise. ● The goodwill of other stakeholder groups, resulting from socially responsible behaviour, could lead to better relations with workers, suppliers, customers and the local community. ● Higher long-term profi tability should result from all of the factors above. ● Short-run costs could increase, e.g. fi tting anti-pollution equipment, paying workers above-poverty wage levels, paying suppliers promptly, not exploiting vulnerable groups in advertising. ● Shareholders may be reluctant to accept lower short-run profi ts (even though long-run profi tability might increase). ● Loss of cost and price competitiveness if rival businesses do not accept social responsibilities and have lower costs as a result. ● Consumers may be prepared to pay higher prices for products made in a socially responsible manner, but during an economic recession, they might just prefer low prices and worry less about how products were made. ● There could be a considerable social backlash against a business that claims to be socially responsible but is discovered to operate in socially irresponsible ways, e.g. a furniture maker claims to use sustainable timber but buys from rainforest suppliers – this is sometimes referred to as ‘greenwash’. Table 3.3 Benefi ts and drawbacks of corporate social responsibility Air pollution is one way in which business activity can damage the environment – should companies be forced to use cleaner production methods? ACTIVITY 3.6 Read the case study below and then answer the questions that follow. Virgin’s environmental policies – green or just ‘greenwash’? The Virgin Atlantic jumbo jet that fl ew between London and Amsterdam using a proportion of bio-fuel was a world fi rst. This fuel was derived from Brazilian babassu nuts and coconuts and is much less polluting than ordinary jet kero- sene. The airline’s boss, Sir Richard Branson, hailed this as a ‘vital breakthrough’ for the industry. Other well-publicised fuel saving measures used by the airline are the towing of aircraft to the runways for take-off instead of using their own engines and offering fi rst-class passengers train tickets to travel to the airport in place of chauffeur-driven cars. Unfortunately, very few passengers have taken up this last offer, and towing of aircraft has been stopped as it causes damage to the undercarriage. Greenpeace’s chief scientist has labelled these efforts to make air travel more environmentally friendly ‘high altitude greenwash’ and said that ‘less air travel was the only answer to the growing problem of climate changing pollution caused by air travel’. A Friends of the Earth spokesman said that bio-fuels do little to reduce emissions, and large-scale production of them leads to higher food prices. Source: www.bbc.co.uk, article number 7261214 (adapted) 18 marks, 32 minutes 1 Analyse why Virgin Atlantic is making efforts to reduce the amount of jet fuel (kerosene) used by its aircraft. [8] 2 To what extent will the company lose or benefi t from these well-publicised attempts to reduce air pollution? [10] Organisational objectives03 34 ENVIRONMENTAL AUDITS An audit simply means an independent check. It is most commonly known in connection with the accounts of a company which have to be verifi ed as a true and fair record by an external auditor. Accounts only measure the fi nancial performance of a business. In recent years, some businesses have been using the auditing approach to evaluate their performance in other ways than just profi t and loss. KEY TERM environmental audit assesses the impact of a business’s impact on the environment Environmental factors are often diffi cult to measure in monetary terms and they do not, currently, have to be legally included in published accounts. An environ- mental audit would check the pollution levels, wastage levels, energy use, transport use and recycling rates of the business and compare them with previous years, pre-set targets and possibly other similar businesses. At present, these audits are entirely voluntary. Those fi rms who undertake them and publish the results nearly always have a very good environmental record – that is why they are published. Firms with a poor reputation or record in this area are unlikely to carry out an audit unless it becomes compulsory. Those fi rms that do publish the results of environ- mental audits expect to gain something from the process. Favourable consumer reaction could lead to increased sales. Positive media coverage will give free publicity. Working towards the common aim of reducing harm to the environment could help to bring workers and managers together as a team. SOCIAL AUDITS KEY TERM social audit an independent report on the impact a business has on society. This can cover pollution levels, health and safety record, sources of supplies, customer satisfaction and contribution to the community Social audits report on a fi rm’s ‘social’ performance, that is the impact it has on society and how effectively its ethical behaviour matches up to its ethical objectives. Social audits can include an environmental audit (see above), but they give details of other impacts on society too. These include: ● health and safety record, e.g. number of accidents and fatalities ● contributions to local community events and charities ● proportion of supplies that come from ethical sources, e.g. Fairtrade Foundation suppliers ● employee benefi t schemes ● feedback from customers and suppliers on how they perceive the ethical nature of the business’s activities. The social audit will also contain annual targets to be reached to improve a fi rm’s level of social responsibility and details of the policies to be followed to achieve these aims. By researching and publishing these reports, fi rms are often able to identify potentially anti-social behav- iour and take steps to root this out of the company’s prac- tices. Publishing detailed and independently verifi ed social and environmental audits can improve a fi rm’s public image, increase consumer loyalty and give the business a clear direction for future improvements in its socially responsibility achievements. The benefi ts and limitations of social audits are considered in Table 3.4. Benefi ts Limitations ● Identifi es what social responsibilities the business is meeting – and what still needs to be achieved. ● Sets targets for improvement in social performance by comparing audits with the best- performing fi rms in the industry. ● Gives direction to the action plans a business still needs to put into effect to achieve its social/ethical objectives. ● Improves a company’s public image and this can be used as a marketing tool to increase sales. ● If the social audit is not independently checked – as published accounts must be – will it be taken seriously by stakeholders? ● Time and money must be devoted to producing a detailed social audit – is this really necessary if it is not legally required? ● Many consumers may just be interested in cheap goods, not whether the businesses they buy from are socially responsible. ● A social audit does not prove that a business is being socially responsible. Table 3.4 Benefi ts and limitations of social audits Evaluation of audits ● Until environmental and social audits are made compulsory and there is general agreement about what they should include and how the contents will be verifi ed, some observers will not take them seriously. ● Companies have been accused of using them as a publicity stunt or a ‘smokescreen’ to hide their true intentions and potentially damaging practices. ● They can be very time consuming and expensive to produce and publish and this may make them of limited value to small businesses or those with very limited fi nance. 1 BUSINESS ORGANISATION AND ENVIRONMENT 37 REVISION ACTIVITY Read the case study below and then answer the questions that follow. Peugeot Citroen’s road ahead laid out the most competitive car markets in the world, the target is to increase sales by 300 000 cars a year by the same date. Departmental operating targets have also been estab- lished. For example, the human resources department must prepare for up to 8000 job losses and operations must aim to cut fi xed manufacturing costs by 30% and costs of purchasing car parts by 4–6% a year. Marketing must plan to launch 12 new models in the Chinese market. Mr Streiff also announced his intention to take both car brands upmarket and establish them as premium car brands that increasing numbers of customers will want to own. Source: www.timesonline.co.uk 24 marks, 42 minutes 1 Analyse whether Peugeot Citroen’s objectives fi t the SMART criteria. [6] 2 Analyse the importance of the chairman not only setting an overall aim for the company but also establishing departmental objectives. [10] 3 Do you think Peugeot Citroen’s shareholders would be pleased by Mr Streiff’s new objectives for the company? Explain your answer. [8] 10 marks, 18 minutes 4 To what extent might these objectives have to be changed before the 2015 target date is reached? [10] The chairman of the car maker Peugeot Citroen, Mr Streiff, has set the company the aim of becoming the ‘most competi- tive car maker in Europe by 2015’. This overall aim is supported by more specifi c and measurable objectives. The profi t margin of each car sold is targeted to increase from 2% to 7% by 2015. The overall sales objective is to reach 4 million car sales a year by 2010. One million car sales are aimed for in the emerging markets by 2015. In Europe, one of H Organisational objectives03 38 CORPORATE AND SOCIAL RESPONSIBILITY AT NIKE, INC. The Nike ‘Swoosh’ logo is one of the most famous corporate symbols in the world. Nike, Inc. is an organisation that people look to as a leading sports brand and a business that encapsulates US corporate power and globalisation. Nike, Inc.’s mission statement has two elements: ● To bring inspiration and innovation to every athlete in the world. ● If you have a body you are an athlete. Much of Nike, Inc.’s success is based on the way it focuses on consumers in a sporting context and provides products which strongly support this. In recent years it has, like many multi- national companies, suffered from adverse publicity on issues such as working conditions in its factories. It has tried to answer its critics by becoming a socially responsible organisation and communicating this to its stakeholders. Below is a short extract from Nike, Inc.’s website (www.nikebiz.com) on its corporate social responsibility: Nike, Inc. shares the widely held view that climate change is a serious issue requiring immediate and mean- ingful action across government, industry, consumers and society. Nike, Inc. has made cutting greenhouse gas emissions across our operations, incorporating sustain- ability into the design of our products and reducing the overall environmental footprint a cornerstone of our environmental efforts. Source: www.nike.com (adapted) 25 marks, 45 minutes 1 Explain the reason for Nike, Inc. having a mission statement. [4] 2 Analyse two strategic objectives that Nike, Inc. might try to achieve. [6] 3 Using Nike, Inc. as an example, outline the main components you might expect to see in its environmental audit. [6] 4 Evaluate the advantages and disadvantages to Nike, Inc. of aiming to be a socially responsible organisation. [9] EXAM PRACTICE QUESTION Read the case study below and then answer the questions that follow. Stakeholders 1 BUSINESS ORGANISATION AND ENVIRONMENT 04 This chapter covers syllabus section 1.4 SETTING THE SCENE On completing this chapter you should be able to: Tata Nano divides opinions It is three metres long, seats four, does 100 kilometres an hour and aims to revo- lutionise travel for millions. The ‘People’s Car’ is also the cheapest in the world at 100 000 rupees (US$2600) – about the same price as a DVD player in a Lexus. Rattan Tata, the company chairman, unveiled the cute, snub-nosed car that will allow millions of Asia’s emerging middle classes to buy a car for the fi rst time. ‘This will change the way people travel in India and Asia. Most people are denied mobility due to the high prices of cars. This is a car that will be affordable to millions of consumers for the fi rst time,’ he said when the car was launched. The car will be built in a factory in West Bengal. This will offer relatively well-paid factory employment to thousands of workers for the fi rst time. The country will gain export revenue when the car is sold abroad. The steel and other materials used in the car will be purchased from Asian suppliers, which will help to boost local economies and suppliers. The idea of millions of Nanos on the road alarms environmental groups. Rajendra Pachauri, the UN’s chief climate scientist, said that he was ‘having nightmares’ about it. Delhi, where air pollution levels are more than twice the safe limit, is registering 1000 new cars a day, and this could double when the Nano is in production. Average speed of traffi c at rush hour is 10 kilometres an hour and the government might be forced to spend much more on building new roads if Nano ownership became widespread. Bus operators also fear increased competition from private car users. Source: www.timesonline.co.uk, 11 January 2008 (adapted) ● explain what is meant by ‘stakeholder’ and differentiate between internal and external stakeholders ● analyse and comment on business responsibilities to stakeholders ● discuss possible areas of confl ict between stakeholders ● evaluate ways in which confl icting stakeholder objectives might be recognised and responded to by business. Points to think about: ● List the groups of people who might benefi t from Nano car production. ● List the groups who might be badly affected by the use of large numbers of Nano cars. ● Do you think Tata, the manufacturer, has a responsibility to all of these groups? What makes the Nano so cheap? 39 H Stakeholders04 42 H HIGHER LEVEL Evaluating stakeholder confl ict One way of reducing confl ict is to compromise. For example, a business aiming to reduce costs may close one of its factories in stages rather than immediately to allow workers time to fi nd other jobs but, as a result, business costs will fall more slowly. Plans to build a new chemical plant may have to be adapted to move the main site away from a housing estate to protect the local community, but the new site might be more expensive. The introduc- tion of 24-hour fl ights at an airport – to the benefi t of the airlines and passengers – may only be accepted if local residents are offered sound insulation in their homes, thereby increasing costs for the airport and airlines. Clearly, senior management must establish its priori- ties in these situations. They need to decide who the most important stakeholders are in each case, what the extra cost of meeting the needs of each stakeholder group will be, and whether bad publicity resulting from failure to meet the interests of one group will lead to lost revenue – perhaps this will be greater than the cost savings of not satisfying this group. Table 4.3 considers methods available to businesses to reduce stakeholder confl ict, and the potential advan- tages and disadvantages of each. Business decision/ activity Impact on: Employees Local community Customers Expansion of the business More job and career opportunities. More complex lines of communication after expansion. More jobs for local residents and increased spending in other local businesses. External costs caused by increased traffi c and loss of green fi elds for amenity use. Better service provided by bigger business with more staff. Larger business could be less personal and therefore offer inferior customer service. Takeover of a competing fi rm (horizontal integration) The larger business may be more secure and offer career promotion opportunities. Rationalisation may occur to avoid waste and cut costs – jobs might be lost. If the business expands on the existing site, local job vacancies and incomes might increase. Rationalisation of duplicated offi ces or factories might lead to closures and job losses. The larger business may benefi t from economies of scale, which could lead to lower prices. Reduced competition could have the opposite effect – less customer choice and higher prices. New IT introduced into production methods Training and promotion opportunities might be offered. Fewer untrained staff will be required and those unable to learn new skills may be made redundant. Local businesses providing IT services could benefi t from increased orders. Specialist workers may not be available locally, so more staff may need to commute. More effi cient and fl exible production methods might improve quality and offer more product variety. IT reliability problems could cause supply delays. Table 4.2 Potential confl icts of interest between stakeholder groups THEORY OF KNOWLEDGE LLOYDS TO CUT ANOTHER 2100 JOBS Lloyds Banking Group has announced it is to cut a further 2100 jobs over the next three years. The Unite union was ‘astonished’ by the scale of the cuts, which it said brought total job losses at the group since January to 7000. The banking giant, which is 43% owned by UK taxpayers, was formed by the merger of Halifax Bank of Scotland and Lloyds TSB late last year. Rob MacGregor of the Unite union said morale at the banking group was ‘now truly low. Employees across Lloyds are in a permanent state of anxiety as they see their employer announce hundreds of job losses every week,’ he said. Lloyds share price rose 4.2 per cent today on news of the job cuts. Source: www.bbc.co.uk/news (adapted) 1 Comment on the confl ict in stakeholder interests that arises from the article. 2 Discuss the ethical questions businesses face when they make job cuts. 1 BUSINESS ORGANISATION AND ENVIRONMENT Method of confl ict resolution Advantages Disadvantages Arbitration – to resolve industrial disputes between workers and managers An independent arbitrator will hear the arguments from both sides and decide on what they consider to be a fair solution. Both sides can agree beforehand whether this settlement is binding, that is they have to accept it. Neither stakeholder group will be likely to receive exactly what they wanted. The costs of the business might rise if the arbitrator proposes higher wages or better work conditions than the employer was originally offering. Worker participation – to improve communication, decision-making and reduce potential confl icts between workers and managers, e.g. works councils, employee directors Workers have a real contribution to make to many business decisions. Participation can motivate staff to work more effectively. Some managers believe that participation wastes time and resources, e.g. in meetings that are just ‘talking shops’, and that the role of the manager is to manage, not the workers. Some information cannot be disclosed to staff other than senior managers, e.g. sensitive details about future product launches. Profi t sharing schemes – to reduce confl ict between workers and shareholders over the allocation of profi ts and to share the benefi ts of company success. The workforce is allocated a share of annual profi ts before these are paid out in dividends to shareholders. Sharing business profi ts can encourage workers to work in ways that will increase long-term profi tability. Paying workers a share of the profi ts can reduce retained profi ts (used for expansion of the business) and/or profi ts paid out to shareholders, unless the scheme results in higher profi ts due to increased employee motivation. Share ownership schemes – to reduce confl ict between workers, managers and shareholders These schemes, including share options (the right to buy shares at a specifi ed price in the future) aim to allow employees (at all levels including directors) to benefi t from the success of the business as well as shareholders. Share ownership should help to align the interests of employees with those of shareholders. Administration costs, negative impact on employee motivation if the share price falls, dilution of ownership – the issue of additional shares means that each owns a smaller share of the company. Employees may have to stay with the company for a certain number of years before they qualify, so the motivation effect on new staff may be limited. Table 4.3 Methods to reduce stakeholder confl ict – advantages and disadvantages OVER TO YOU REVISION CHECKLIST 1 Distinguish between the shareholder concept and the stakeholder concept. 2 Explain why a business might experience lower profi ts by meeting its stakeholders’ objectives. 3 Explain why a business might experience higher profi ts by meeting its stakeholders’ objectives. 4 Outline the responsibilities a business in the oil industry might have to two stakeholder groups. 5 Outline the responsibilities a tertiary sector business might have to two stakeholder groups. 6 What do you understand by the term ‘confl icts between stakeholder interests’? 7 Explain an example, from your own country, of a business decision that involves a confl ict of stakeholder interests. 8 Explain three examples of potential stakeholder confl ict of interests. 9 Evaluate how each of the confl icts you identifi ed in question 8 might be resolved. REVISION ACTIVITY Read the case study below and then answer the questions that follow. Daily Record: ‘Merger results in job losses’ The merger of two of the largest airlines in the country will lead to job losses, reports the Daily Record. Special Air and Flights4U have announced a huge merger which will result in a business worth over $2 billion. The long- term plans are to offer more routes and cheaper prices to passengers. The merger has the support of the H 43 H Stakeholders04 FURY AT BANGLADESH MINE SCHEME A huge open-cast coal-mining project by a British fi rm, that would involve moving the homes of up to 130 000 workers in Bangladesh, is at the centre of an international row. The company, GCM, plans to dig up to 570 million tonnes of coal in a project that will displace people from Phulbari, in north-west Bangladesh. A river will also have to be diverted and the mangrove forest, which is a world heritage site, would be destroyed too. The project has attracted widespread hostility. In protests against the scheme 18 months ago, three people were killed in an area now said to be controlled by the armed forces. Many international campaign groups have written to the Asian Development Bank demanding that it turns down a $200 million loan for the project. The World Development Movement is claiming that the social and environmental damage can never be repaired if the scheme receives government approval. A spokesman for GCM, on the other hand, stressed the importance to one of the world’s poorest countries of jobs, incomes and exports. Source: Observer, 9 March 2008 (adapted) EXAM PRACTICE QUESTION Read the case study and then answer the questions that follow. Protests in Dhaka over the mine project government as it is expected to keep infl ation down and boost tourist numbers into the country. Non-profi table routes to small regional airports are to be closed, together with Special Air’s headquarters in New City. More than 500 staff are expected to lose their jobs, resulting in annual savings of over $10 million. Trade union leaders are threatening to take industrial action to support workers who will lose their jobs. The local governments in the towns which are losing routes are very worried about the impact on local suppliers of fuel and food to the airlines. The chief executive of Flights4U said: ‘Sure, there will be losers from this merger, but there will be many more winners as we expand our operations from the major cities.’ 22 marks, 45 minutes 1 Are the two airlines focused on shareholder interests or other stakeholder interests? Explain your answer. [10] 2 Why is it diffi cult in this case for the two merging companies to meet their responsibilities to all stakeholder groups? [6] 3 Why might the negative impact on some stakeholders mean that the merger will not turn out to be as profi table as expected? [6] 10 marks, 18 minutes 4 Discuss how the newly merged business could attempt to meet some of its responsibilities to the stakeholder groups worst affected by this decision. [10] 25 marks, 45 minutes 1 Using examples from the case study, explain the differences between internal and external stakeholders. [4] 2 Explain the benefi ts of any two stakeholder groups resulting from this mine project. [6] 3 Explain the disadvantages to any two stakeholder groups resulting from this mine project. [6] 4 Discuss the ways in which GCM could reduce the impact of the disadvantages it has created for stakeholder groups negatively affected by the mine. [9] 44 H H 47 1 BUSINESS ORGANISATION AND ENVIRONMENT External opportunities and threats POLITICAL AND LEGAL CONSTRAINTS In most countries, political and legal constraints on a business fall into the following main categories: ● employment laws ● consumer protection laws ● business competition laws ● political changes resulting from a new government, e.g. policies towards foreign direct investment by multinationals ● major policy changes such as nationalising some UK banks after the 2008–9 crisis. Table 5.2 shows the possible impact of some political and legal factors on business objectives and strategies. ACTIVITY 5.1 10 marks, 18 minutes (plus research time) Prepare a PEST analysis for a foreign fashion retailer planning to set up a chain of shops for the fi rst time in your country. [10] Examples of political/legal factors Impact on business objectives and strategies Improved employee legal protection, e.g. better health and safety at work, redundancy pay, protection from discrimination, minimum pay levels, maternity pay ● Increases cost of employing staff – may be reluctant to expand in this country by taking on extra staff. ● Encourages business to increase labour productivity to pay for the cost of these legal improvements. For example, Germany has some of the most rigorous laws protecting workers rights, but labour productivity is one of the highest in the world. ● If employers are seen to be positive about these legal changes and accept them fully, they will appear to be a caring business that will encourage well-motivated staff to work for them. Some businesses offer benefi ts above the legal minimum for this reason (see ‘Setting the scene’ case study on page 45). Consumer protection laws that constrain businesses from advertising inaccurately or inappropriately, selling faulty goods or those described incorrectly, high-pressure selling tactics, not allowing consumers to change their minds after signing credit agreements ● Sales staff will need training in the legal rights of consumers – breaking consumer laws will lead to expensive legal claims. ● Design and production of new products will have to put customers’ safety and product quality as priorities. ● Full disclosure of any safety problems to minimise risks to customers. ● All of these strategies will add to costs. However, if a business is seen to put customers and customer service fi rst, it may benefi t from good publicity, word-of-mouth promotion and customer loyalty. Competition laws can restrict unfair competition or restrictive practices by businesses, monopoly exploitation of consumers, mergers and takeovers (external growth) that could lead to a monopoly ● No collusive agreements with competitors. ● Internal growth is less likely to lead to reports and action by the competition regulators. ● Expand into other countries rather than growing in existing country which can lead to monopoly market share. Table 5.2 Political and legal factors and their impact on business ACTIVITY 5.2 Read the case study below and then answer the questions that follow. Employment rights in your country In China, current employment rights are governed by the PRC Employment Law of 1995. There are 13 sections to this law which cover almost all aspects of employment rela- tionships. These include working hours, holidays, health and safety, training, social welfare, disputes and discrimi- nation on the grounds of race, sex, disability or age. 24 marks, 45 minutes (plus research time) 1 Why do you think the Chinese government introduced such a wide-ranging law as this, covering all aspects of employer–employee relationships? [4] 2 Do these laws help or damage business interests? Explain your answer. [10] 3 Research task: Find out about the main employment laws in your country and the main rights they offer to workers. Do you think that these laws need changing in any way? If so, how and why? [10] External environment05 48 EXAM TIP You will not be asked to give details on laws in any specifi c country, but you may be asked how a business is affected by laws in general. ECONOMIC INFLUENCES Changes in the economic environment can have a very significant impact on business objectives and strat- egies. The global downturn of 2009–10 forced many international businesses to revise their growth and profit targets and adapt their product and marketing strategies to a world in which credit was in short supply and consumers became much less willing to spend, especially on luxury goods. Other economic factors present businesses with opportunities rather than constraints such as the opening up of China’s consumer market following its membership of the World Trade Organization in 2001. Other changes in the economic environment result from changes in government economic policies. These ACTIVITY 5.3 Read the case study below and then answer the questions that follow. Consumer rights in your country In Malaysia, the 1999 Consumer Protection Act is an important law protecting the interests of consumers. It has 14 main sections which include outlawing all misleading and deceptive conduct by fi rms, false advertising claims, guarantees in respect of supply of goods and strict liability for defective and potentially dangerous products. In India, the 1986 Consumer Protection Act provides for the regulation of all trade and competitive practices, creates national- and state-level consumer protection councils and lists unfair and uncompetitive trade practices. 24 marks, 45 minutes (plus research time) 1 Why do you think governments, as in Malaysia and India, pass laws to protect consumer rights? [4] 2 Do you think that such laws help or damage business interests? [10] 3 Research task: Find out the main consumer protection laws in your country (Malaysia and India have others). Give examples of how fi rms try to break these laws. Are the laws strict enough? If not, why not? [10] ACTIVITY 5.4 Read the case study below and then answer the questions that follow. Ryanair – adverts are ‘misleading’ Ryanair is one of Europe’s most successful low-cost airlines. It risks prosecution and a substantial fi ne for repeatedly misleading customers about the availability of its cheapest fares. Some customers claim that they are not told when the fares include taxes and charges and when they do not. Also, the cheapest fares have many restrictions placed on them and these are not clear, it is suggested, when a booking is being made. The airline has broken the Advertising Code seven times in recent years. It has failed to heed warnings by the Advertising Stand- ards Authority (ASA). The company is being referred to the Offi ce of Fair Trading, which has the power to prosecute advertisers who make misleading claims about products or prices. Ryanair could face substantial fi nes. In January 2010, Ryanair refused to withdraw an advert of a woman dressed as a young schoogirl, despite the ASA’s ruling that it breached advertising rules on social responsibility and ethics. Ryanair accused the ASA of censorship, saying it was run by ‘unelected, self-appointed dimwits’. Source: www.timesonline.co.uk (adapted) 18 marks, 28 minutes 1 In what ways might Ryanair gain from ‘misleading’ customers in the ways described? [6] 2 Do you think that advertisers should be controlled over the claims they make and the way they promote their products? Explain your answer. [6] 3 If you were the chief executive offi cer of Ryanair, how would you respond to this bad publicity and the threat of legal action? Justify your answer. [6] 1 BUSINESS ORGANISATION AND ENVIRONMENT 49 policies – mainly fi scal and monetary – aim to help govern- ments achieve four main macro-economic objectives: ● economic growth and rising living standards ● low levels of infl ation ● low levels of unemployment ● balance of payments equilibrium, over time, between the value of imports and exports. The important economic factors that businesses should monitor and respond to are explained in Table 5.3. KEY TERMS fi scal policy changes in government spending levels and tax rates monetary policy changes in the level of interest rates which make loan capital more or less expensive economic growth increases in the level of a country’s Gross Domestic Product (total value of output) infl ation the rate of change in the average level of prices unemployment the numbers of people in an economy willing and able to work who cannot fi nd employment SOCIAL AND CULTURAL INFLUENCES The structure of society is constantly evolving. The changes occurring in many countries include: ● an ageing population with reduced birth rates and longer life expectancy, although in some nations the average age is falling due to high birth rates ● changing role of women – increasingly seeking employ- ment and posts of responsibility in industry ● improved education facilities – resulting in increasing literacy and more skilled and adaptable workforces ● early retirement in many high-income countries – leading to more leisure time for a growing number of relatively wealthy pensioners ● in some countries, rising divorce rates – creating increasing numbers of single-person households ● job insecurity, often created by the forces of global- isation – forcing more employees to accept temporary and part-time employment (some workers prefer this option) ● increased levels of immigration – resulting in changing and widening consumer tastes. This list is by no means complete. You could add to it from your knowledge of the changes occurring in your own society. How do these changes impact on business object- ives and strategy? We will look at two of these changes – an ageing population and patterns of employment – but the analysis used can be adapted when considering the impact of the many other social changes. An ageing population The main effects associated with an ageing population are: ● a larger proportion of the population over the age of retirement ● a smaller proportion of the population in lower age ranges, e.g. 0–16 years old ● a smaller number of workers in the economy but a larger number of dependants, that is below working age or retired – this puts a higher tax burden on the working population. Business objectives and strategy will need to adapt to: ● changing patterns of demand. There will be more ‘grey’ consumers than teenagers and they buy different products. Therefore, a construction company might switch from building large apartments for families to smaller units with special facilities for the elderly. Market research will be important for a business that believes the demand for its portfolio of products could change as the population ages. ● a change in the age structure of the workforce. There may be reduced numbers of youthful employees avail- able, and businesses may need to adapt their work- force planning to enable the employment of older workers, or to keep existing workers beyond retire- ment age. Although younger employees are said to be more adaptable and easier to train in new technolo- gies, older workers may show more loyalty to a busi- ness and will have years of experience that could improve customer service. Changing patterns of employment The main features of changing patterns of employment include: ● an increase in the number of women in employment and in the range of occupations in which they are employed ● an increase in student employment on a part-time basis – some industries are substantially staffed by students and part-timers, e.g. McDonald’s; most other fast-food shops and supermarkets are largely staffed in this way ● an increase in temporary, part-time and fl exible employment contracts – these are introduced by employers to reduce the fi xed costs of full-time and salaried posts and to allow for fl exibility when faced with seasonal demand or uncertainties caused by increasing globalisation ● more women taking maternity leave and then returning to work. External environment05 52 Impact of technology In its simplest form, technology means the use of tools, machines and science in industry. This section assesses the impact on businesses of the relatively recent intro- duction of high-technology machines and processes that are based on information technology (IT). KEY TERM information technology the use of electronic technology to gather, store, process and communicate information Technological change is affecting all businesses and all departments within business. Table 5.5 explains some of the most common business applications of IT, the depart- ments likely to benefi t most from them and the potential advantages to be gained. KEY TERMS computer-aided design using computers and IT when designing products computer-aided manufacturing the use of computers and computer-controlled machinery to speed up the production process and make it more fl exible internet the worldwide web of communication links between computers In addition to these uses of technology, advances in tech- nical knowledge are opening up new product markets, such as hydrogen-powered cars and ‘fl exible’ mobile phones. The use of technology to develop new products is part of the research and development function of busi- nesses (see Chapter 35, page 365). EXAM TIP It is wrong to assume that a business must always use the latest technology in all circumstances. There are substantial costs to be paid and some businesses thrive on using old-fashioned methods. For example, hand-made designer furniture will sell because each piece is unique and computer-controlled robots might be completely impractical. 22 marks, 42 minutes 1 Calculate the forecasted percentage increase in the labour force between 2000 and 2020. [2] 2 Identify two changes to the structure of the labour workforce forecast over this period. Explain how these changes might have an impact on the human resources strategy of a business. [10] 3 Evaluate whether a business should provide more than the basic legal minimum in terms of conditions of employment and health and safety at work. [10] The use of computer-controlled robots has increased productivity in this Mini factory IMPACT ON OBJECTIVES AND STRATEGIES Costs Capital costs can be substantial, labour training costs will be necessary and will recur regularly with further technological development. Redundancy costs will be incurred – existing staff may be replaced by the tech- nology. However, the use of technology may achieve higher profi ts in the future. Labour relations These can be damaged if technological change is not explained and presented to workers in a positive way with the reasons for it fully justifi ed. If many jobs are being lost during the process of change, then remaining workers may suffer from reduced job security, and this 1 BUSINESS ORGANISATION AND ENVIRONMENT 53 Information technology application Common business applications Impact on business Spreadsheet programs ● Financial and management accounting records can be updated and amended. ● Cash-fl ow forecasts and budgets can be updated in the light of new information. ● Changes in expected performance can be inputted to the spreadsheet and changes in total fi gures made automatically. ● Income statements and balance sheets can be drawn up frequently. ● Flexibility and speed – changes to accounting records can be made quickly and the impact of these on total fi gures can be demonstrated instantly. ● ‘What if’ scenarios in budgeting and sales forecasting can be demonstrated, e.g. what would happen to forecasted profi ts if sales rose by 10% following a 5% cut in price? Computer-aided design (CAD) ● Nearly all design and architectural fi rms now use these programs for making and displaying designs, e.g. cars, house plans, furniture, garden designs. ● Designs can be shown in 3-D and ‘turned around’ to show effect from all angles. ● Saves on expensive designer salaries as work can be done more quickly. ● More fl exibility of design as each customer’s special requirements can be easily added. Can be linked to other programs to obtain product costings and to prepare for ordering of required supplies. Computer-aided manufacturing (CAM) ● Programs are used to operate robotic equipment that replaces many labour- intensive production systems. ● Used in operations management in manufacturing businesses. ● Labour costs are reduced as machines replace many workers. ● Productivity is increased and variable costs per unit are lower than in non-computerised processes. ● Accuracy is improved – less scope for human error. ● Flexibility of production is increased – modern computer-controlled machinery can usually be adapted to make a number of different variations of a standard product, and this helps to meet consumers’ needs for some individual features. ● All of these benefi ts can add to a fi rm’s competitive advantage. Internet/intranet ● Marketing department – for promoting to a large market and taking orders online (see Chapter 29, page 311, for discussion of e-commerce). ● Operations management – business-to- business (B2B) communication via the internet is used to search the market for the cheapest suppliers. ● Human resources uses these systems for communicating within the organisation. ● Intranets allow all staff to be internally connected via computers. ● Cost savings from cheap internal and external communications. ● Access to a much larger potential market than could be gained through non-IT methods. ● Web pages project a worldwide image of the business. ● Online ordering cheaper than paper-based systems. ● B2B communications can obtain supplies at lower costs. ● Internal communication is quicker than traditional methods. Table 5.5 Impact of applications of technology on business could damage their motivation levels. Trade unions can oppose technological change if it puts members’ jobs at risk. However, if the issue is handled sensitively, including effective communication with and participa- tion of staff, introducing technology in the right way can improve industrial relations. Management Some managers fear change as much as their workforce, especially if they are not very computer literate them- selves. In addition, recognising the need for change and managing the technological change process require a great deal of management skill. However, IT can improve External environment05 54 productivity greatly and lead to improved company effi - ciency: for example, the use of database programs to control stock ordering to achieve just-in-time advan- tages. Technology has other benefi ts too: ● Managers can obtain data frequently from all depart- ments and regional divisions of the business. ● Computers can be used to analyse and process the data rapidly so that managers can interpret them and take decisions quickly on the basis of them. ● It accelerates the process of communicating decisions to other managers and staff. Information gives managers the opportunity to review and control the operations of the business. IT-based management information systems provide substantial power to centralised managers. Although this could be used for improving the performance of a business, there are potential drawbacks: ● The ease of transferring data electronically can lead to so many messages and communications that ‘informa- tion overload’ occurs. This is when the sheer volume of information prevents decision-makers from identi- fying the most important information and decisions. ● The power which information brings to central managers could be abused and could lead to a reduc- tion in the authority and empowerment extended to work teams and middle managers. Information used for central control in an oppressive way could reduce job enrichment and hence motivation levels. Effective managers will apply the information provided by the modern IT systems to improve and speed up decision- making. They should not allow it to change their style of leadership to a centralised or authoritarian one, using data to control all aspects of the organisation. THEORY OF KNOWLEDGE ‘The last two years have seen seismic shifts in the environment within which businesses have to trade. The growth of the internet, mobile communications, globalisation and social responsibility have confronted CEOs and shareholders with new challenges that have given rise to innovative, exciting corporations like Apple and Microsoft but have seen old giants like General Motors teeter on the edge of collapse. Organisations that don’t react to changes in their environment will eventually fail.’ Prepare a presentation with the title ‘Organisations that don’t react to changes in their environment will eventually fail’. ACTIVITY 5.6 Read the following case study and then answer the questions that follow. cing compatible IT systems to take orders from the huge retailers have been dropped. The latest development is causing further controversy. RFID or radio frequency ID tagging involves putting a small chip and coiled antenna, at the initial point of production, into every item sold through the supermarkets. Unlike bar codes that are manually scanned, the RFID simply broadcasts its presence and data, such as sell-by date, to electronic receivers or readers. German supermarket chain Metro already uses RFID and claims that food can be easily traced back to the farm where it is produced, queues at tills no longer exist as customer’s bills are calculated instantly as they pass by a receiver and all products are tracked at each stage of the supply chain – ‘We know where everything is!’ Consumer groups are concerned that shoppers will be tracked and traceable too – not just the goods they have bought. Is this an invasion of privacy? Unions are opposed to it as it could lead to many redundancies due to its non- manual operation. Some supermarket managers fear yet another IT initiative that will mean even more central control over them and they fear breakdowns in the system and lack of training in dealing with problems. More chips please? The major European supermarkets have been putting IT at the front of their drive for lower costs, improved customer service and more information about their customers. Bar codes, check-out scanners, automatic product re-ordering systems, automated stock control programs, robot-con- trolled transport systems in warehouses, chip and pin machines for payment, loyalty cards that record each indi- vidual shopper’s purchases and internet shopping for customers – the list of IT applications employed by the large supermarkets is almost endless. Some of these systems have been controversial. For example, centralised ordering and delivery of products reduced the independence and control of individual store managers. The rapid growth of internet shopping left some companies with a shortage of stock and delivery vehicles, which led to poor service. Some smaller suppliers who have been unable to cope with the cost of introdu- Organisational planning tools 1 BUSINESS ORGANISATION AND ENVIRONMENT 06 This chapter covers syllabus section 1.6 SETTING THE SCENE On completing this chapter you should be able to: SanaSana business plan gives business healthy start Setting up a new business with no clear plan is like sailing across an ocean with no charts or compass. The business plan of SanaSana is an excellent example of how new business entrepreneurs can increase their chances of success, and gain acceptance from stakeholders, with a clear explanation of: ● who the business owners are, their strengths and experiences ● the central purpose of the business and the intended market ● benefi ts to consumers of using the business ● the market research undertaken ● fi nancial forecasts and the borrowings required ● the main risks likely to be faced by the business. SanaSana was set up by fi ve friends, ‘who share one another’s dreams and passions’, to provide a health care information service for Hispanic (Spanish) speakers in the USA. Three of the partners are Hispanic and the other two are qualifi ed doctors. Collectively, they have 50 years’ experience in manage- ment, e-commerce, fi nance and medicine. The fi nancial projections forecast a net profi t of over $18 million by the fi fth year of operation. Source: MOOT CORP® Competition sample business plan ● analyse the importance of business plans to stakeholders ● apply a formal decision- making framework to a business situation ● prepare a SWOT analysis for a business situation ● analyse an organisation’s position using a SWOT analysis ● analyse and interpret business plans ● apply decision-making processes and planning tools ● compare and contrast scientifi c and intuitive decision-making processes ● construct and interpret decision trees and evaluate this technique. Points to think about: ● Why would you advise new entrepreneurs to write a detailed business plan? ● Which stakeholders would fi nd such a plan useful, and why? ● Do you think SanaSana stands a good chance of being successful? Explain your reasons, referring to the details of the business plan given above. H H H H 57 Organisational planning tools 58 06 Introduction Planning for the future and taking effective decisions are two very important management functions that are linked. Planning means establishing the future direc- tion the business should take and setting overall objec- tives and targets. Strategic decision-making focuses on making choices between different strategies so that the objectives of the business are more likely to be achieved. Business plans KEY TERM business plan a written document that describes a business, its objectives and its strategies, the market it is in and its fi nancial forecasts The contents of a typical business plan are: ● the executive summary − an overview of the new busi- ness and its strategies ● description of the business opportunity − details of the entrepreneur; what is going to be sold, why and to whom ● marketing and sales strategy − details of why the entrepreneur thinks customers will buy what the busi- ness plans to sell and how the business plans to sell to them ● management team and personnel − the skills and experience of the entrepreneur and the staff he/she intends to recruit ● operations − premises to be used, production facilities, IT systems ● fi nancial forecasts − the future projections of sales, profi t and cash fl ow – for at least one year ahead. IMPORTANCE OF BUSINESS PLANS ● Business plans are most important when setting up a new business, but they should be referred to and updated when important strategic choices are being made too. The main purpose of a business plan for a new business is to obtain fi nance for the start-up. Potential investors or creditors will not provide fi nance unless clear details about the business proposal have been written down clearly. ● The planning process is very important too. If an entrepreneur went into a new business – even if no external fi nance was required – without a clear sense of purpose, direction, marketing strategies and what employees to recruit, the chances of success would be much reduced. ● The fi nancial and other forecasts contained in the plan can be used as the targets that the business should aim for. The benefi ts of SMART objectives were explained in Chapter 3, page 23. STAKEHOLDERS AS USERS OF BUSINESS PLANS Business plans may be of real benefi t to the stakeholders of both new and existing businesses. All organisations must plan for the future – this is often referred to as ‘corporate planning’. ● Corporate planning for existing organisations can involve adapting the original business plan to accom- modate new or revised strategies, such as expansion projects. If a major expansion is being considered, bankers and other creditors will almost certainly ask to see a business’s corporate plan before agreeing to fi nance the expansion. This will help these stake- holders to assess the risk and rewards from investing in the expansion. ● The fi nancial forecasts in a business plan can act as budgets and control benchmarks for the internal stakeholders such as business managers. ● Updated versions of the plan can be used to apply for additional funding, to attract additional partners or to supply data for the experts if a stock market fl otation becomes an option. Potential shareholders will not invest without seeing a plan fi rst. ● Employees will fi nd that planning helps identify specifi c objectives and targets and gives focus to their work, which aids motivation. ● Suppliers may be able to tell from the parts of the busi- ness plan that are communicated externally whether it is worthwhile establishing a long-term trading rela- tionship with the business. Decision-making framework Effective decision-making is one of the key roles of management at all levels of seniority within an organisa- tion. Making choices between different options is poten- tially risky as the future success of a course of action can never be assessed with great accuracy. Managers have a range of techniques and tools available to reduce the element of risk and increase the chances of them taking effective decisions. DIFFERENT APPROACHES TO DECISION-MAKING There are two distinct ways in which managers can take decisions: through the use of intuition or by the scientifi c analysis of data. KEY TERMS intuitive decision-making involves making decisions based on instinct or ‘gut feeling’ (perhaps based on the manager’s experience) for a situation and the options available 59 1 BUSINESS ORGANISATION AND ENVIRONMENT scientifi c decision-making involves basing decisions on a formal framework and a data analysis of both the problem and the options available In reality, the two extremes often become blurred and most decisions will be taken by managers after some consideration using both their instinct and analysis of the data available (see also ‘Decision-making approaches and techniques’, page 60.) THE FRAMEWORK Figure 6.1 shows a formal decision-making framework that could be used by managers who adopt a scientifi c approach to decision taking. successful than using options that have been decided on previously. 5 Decide between the alternative ideas or options using decision-making tools such as decision trees (see page 61) and investment appraisal methods (see page 185). 6 Plan and implement the decision. Making the deci- sion is just one step; putting it into effect is just as important. Resources must be prepared, staff trained, budgets set and managers given authority to carry out the decision successfully. 7 Control and review. Progress of the strategy must be monitored against targets and budgets and at the end of the time period set for the decision to take effect, the achievements of the option chosen should be checked against the original objectives set for it. INTERNAL AND EXTERNAL CONSTRAINTS Other issues to be taken into account include internal and external constraints. KEY TERMS internal constraints limiting factors in decision-making that can be controlled by the organisation external constraints limiting factors in decision-making that are beyond the organisation’s control Internal constraints include: ● organisational structure – this might limit the authority given to managers to put decisions into effect ● fi nancial constraints – these might prevent ‘expensive’ decisions from being taken ● labour and other resource constraints – more of these may need to be acquired ● attitude of the workforce to change – will they be likely to accept or resist change? External constraints would be identifi ed through PEST analysis and include: ● changes in the business cycle that may make raising fi nance diffi cult or expensive, e.g. higher interest rates during an economic boom ● changes in legal constraints that could infl uence demand for new products manufactured as a result of a strategic business decision, e.g. controls on the use of polluting cars in cities. Decision-making in most organisations is a continuous process, not a series of discrete steps. This means that experience gained from taking a recent decision will assist in the next decision-making cycle and could mean that intuition becomes more important than the scien- tifi c data-based decision-making framework. External constraints (law, economy, competitors) Internal constraints e.g. finance5 Use appropriate tools to decide between opions 4 Consider ideas and options 3 Gather data to analyse problem 2 Assess and clarify problem 7 Control and review against objectives 6 Plan and implement decision – action! 1 Set objectives (SMART) Figure 6.1 The decision-making framework Stages in the decision-making framework include: 1 Set objectives. These will defi ne what the organisation is trying to achieve and will be used to assess the fi nal success of the decision. 2 Assess the problem or situation. Why does a decision have to be taken? Are sales or profi ts declining? Is there an opportunity to take over a rival business? The problem or situation that requires a decision to be made must be analysed carefully using, for example, the fi shbone diagram (see Figure 6.2, page 60). 3 Gather data to analyse both the extent of the ‘problem’ and the information needed to assess the options available. This data could be primary and secondary market research data or cost data. 4 Consider all the options available – perhaps by brain- storming or using past experience of similar situations. However, original or innovative ideas might be more Organisational planning tools06 62 Using the tree diagram in Figure 6.3, which option would give the highest expected value – holding the event indoors or outdoors? The answer is gained by calculating the expected value at each of the chance nodes. This is done by multiplying the probability by the economic return of both outcomes and adding the results. The cost of each option is then subtracted from this expected value to fi nd the net return. This is done by working through the tree from right to left, as follows (see Figure 6.4): ● The expected value at node 1 is $5800. ● The expected value at node 2 is $7600. ● Subtract the cost of holding the event either indoors or outdoors. ● Indoors = $5800 – $2000 = $3800 ● Outdoors = $7600 – $3000 = $4600 Therefore, the events manager would be advised to hold the event outdoors as, on average, this will give the highest expected value. The other option is ‘blocked off’ with a double line in the fi gure to indicate that this deci- sion will not be taken. Decision trees – an evaluation The primary limitation concerns the accuracy of the data used. Estimated economic returns may be quite accurate when they concern projects where experience has been gained from similar decisions. In other cases, they may be based on forecasts of market demand or ‘guestimates’ of the most likely fi nancial outcome. In these cases, the scope for inaccuracy of the data makes the results of decision-tree analysis a useful guide, but no more. In addition, the probabilities of events occurring may be based on past data, but circumstances may change. What Figure 6.3 Decision tree for the fund-raising auction Indoors ($2000) 0.6 Fine 0.4 Poor 0.6 Fine 0.4 Poor Outdoors ($3000) $5000 $7000 $10 000 $4000 ACTIVITY 6.1 Read the case study below and then answer the questions that follow. Expansion decision The owner of a service station is planning to expand the business. The two options are to build a forecourt to sell petrol or to construct a showroom to sell cars. The esti- mated building costs are: petrol forecourt – $100 000; car showroom – $150 000. The forecast economic conse- quences or pay-offs during the expected lives of these investments will depend on the level of demand in the economy, as shown in the table below. The probability of demand being low during the life span of these invest- ments is 0.2 and the probability of high demand is 0.8. 15 marks, 28 minutes 1 Show these options on a decision tree, adding the pay-offs and probabilities. [6] 2 Calculate the expected value of both investments and recommend which option should be taken. [6] 3 State three other factors that you consider might infl uence the business owner’s fi nal decision. [3] Demand Petrol forecourt Car showroom High $500 000 $800 000 Low $400 000 $200 000 The economic returns from the two options 1 BUSINESS ORGANISATION AND ENVIRONMENT 63 was a successful launch of a new store last year may not be repeated in another location if the competition has opened a shop there fi rst. The conclusion is that decision trees aid the deci- sion-making process, but they cannot replace either the consideration of risk or the impact of qualitative factors on a decision. The latter could include the impact on the environment, the attitude of the workforce and the approach to risk taken by the managers and owners of the business. There may well be a preference for fairly certain but low returns, rather than taking risks to earn much greater rewards. Finally, remember that the expected values are average returns, assuming that the outcomes occur more than once. With any single, one-off decision, the average will not, in fact, be the fi nal result. Decision trees allow a quan- titative consideration of future risks to be made – they do not eliminate those risks. $5800Indoors ($2000) $4600 $3800 0.6 × $5000Fine Poor 0.4 × $7000 0.6 × $10 000Fine Poor 0.4 × $4000 $7600Outdoors ($3000) 1 2 $2800 $6000 $1600 $3000 Figure 6.4 Calculating expected values – working from right to left ACTIVITY 6.2 Read the case study below and then answer the questions that follow. Which market? Joe Keenan had an important decision to take. He operated a mobile market stall selling cooking pans and kitchen equip- ment. He has to decide which market to visit next Saturday. There are four options but, of course, he can only go to one town. He has estimated the revenues he could earn from each location by using past records and by consulting with other stall-holders. His estimates in dollars ($), together with the chances of earning them, are given below: Town A Town B Town C Town D Probability Revenue ($) Probability Revenue ($) Probability Revenue ($) Probability Revenue ($) 0.4 5 000 0.3 3 000 0.4 3 000 0.3 5 000 0.6 8 000 0.5 4 000 0.5 6 000 0.3 6 000 0.2 8 000 0.1 10 000 0.4 9 000 22 marks, 35 minutes 1 Using the data above draw a decision tree of the options Joe has and add the probabilities and forecasted economic returns. [6] 2 Calculate the expected values of the four options that Joe has. Which town market should Joe visit on Saturday on the basis of quantitative data alone? [10] 3 Explain three factors that could infl uence the accuracy of Joe’s forecasts. [6] Organisational planning tools06 64 THEORY OF KNOWLEDGE ‘Chance favours only the prepared mind.’ Louis Pasteur 1 Explain what you understand by this statement. 2 To what extent does the use of the decision tree business technique support Louis Pasteur’s statement? H SWOT analysis KEY TERM SWOT analysis a form of strategic analysis that identifi es and analyses the main internal strengths and weaknesses and external opportunities and threats that will infl uence the future direction and success of a business A SWOT analysis provides information that can be helpful in matching the fi rm’s resources and strengths to the competitive environment in which it operates. It is, therefore, useful in strategy formulation and selection. It comprises: S = strengths These are the internal factors about a business that can be looked upon as real advan- tages. They could be used as a basis for developing a competitive advantage. They might include experi- enced management, product patents, loyal workforce and good product range. These factors are identifi ed by undertaking an internal audit of the fi rm. This is often carried out by specialist management consult- ants who analyse the effectiveness of the business and the effectiveness of each of its departments and major product ranges. W = weaknesses These are the internal factors about a business that can be seen as negative factors. In some cases, they can be the fl ip side of a strength. For example, whereas a large amount of spare manufac- turing capacity might be a strength in times of a rapid economic upturn, if it continues to be unused it could add substantially to a fi rm’s average costs of produc- tion. Weaknesses might include poorly trained work- force, limited production capacity and ageing equip- ment. This information would also have been obtained from an internal audit. O = opportunities These are the potential areas for expan- sion of the business and future profi ts. These factors are obtained by an external audit of the market the fi rm operates in and its major competitors. Examples include new technologies, export markets expanding faster than domestic markets and lower rates of interest increasing consumer demand. T = threats These are also external factors, gained from an external audit. This audit analyses the business and economic environment, market conditions and the strength of competitors. Examples of threats are new competitors entering the market, globalisation driving down prices, changes in the law regarding the sale of the fi rm’s product and changes in government economic policy. This information is usually presented in the form of a four-box grid as shown in Table 6.3. Strengths Weaknesses Internal ● Specialist marketing expertise. ● A new, innovative product. ● Location of the business. ● Quality processes and processes. ● Any other aspect of the business that adds value to the product or service. ● Lack of marketing expertise. ● Undifferentiated products or services (i.e. in relation to competitors). ● Location of the business. ● Poor-quality goods or services. ● Damaged reputation. Opportunities Threats External ● A developing market such as the internet. ● Mergers, joint ventures or strategic alliances. ● Moving into new market segments that offer improved profi ts. ● A new international market. ● A market vacated by an ineffective competitor. ● A new competitor in the home market. ● Price wars with competitors. ● A competitor has a new, innovative product or service. ● Competitors have superior access to channels of distribution. ● Taxation is increased on the product or service. Table 6.3 SWOT analysis – possible factors to consider 1 BUSINESS ORGANISATION AND ENVIRONMENT FOUR SEASONS LEISURE After a period of consolidation in 2008–9, when the Four Seasons leisure group saw a big contraction in demand due to the world economic slow- down, the company is looking to increase its share of the upmarket, all-inclusive holiday resort market. Thirty years of providing holidays to high-income European and North American consumers make Four Seasons Leisure one of the most prestigious brands in the Caribbean. Despite the recession, the company performed fairly well in 2009. Profi ts fell 5%, but this compared favourably with an industry average profi t decline of 9%. Four Seasons has attributed the group’s relative success to effective management from a team of people that have considerable knowledge and expertise in the market. The management team is not complacent, however. The chief exec- utive offi cer, Austin Walsh, thinks the company’s concentration in the Caribbean is a weakness because of competition from new holiday destinations such as Dubai. Austin believes the company needs to expand into some of the new destinations that its customers are inter- ested in visiting. The directors are considering three options for 2013: Projected profi ts based on economic conditions ($m) Initial cost ($m) Fast growth Normal growth Recession Option 1 Open new resort in Dubai 120 400 200 −100 Option 2 Open new resort in Thailand 150 500 300 −50 Option3 Upgrade existing resorts in Caribbean 80 150 120 100 EXAM PRACTICE QUESTION Read the case study below and then answer the questions that follow. The consultancy that produced the projected costs and profi t data believe that there is a 20% chance of fast economic growth, 50% chance of normal economic growth and a 30% chance of a recession. 25 marks, 45 minutes 1 Produce a SWOT analysis for Four Seasons Leisure’s current position. [8] 2 a Construct a fully labelled decision tree showing Four Seasons’ options. [5] b Calculate the expected values for each option. [6] c On fi nancial grounds state which option Four Seasons should choose. [2] d Analyse one weakness for Four Seasons of using decision tress as a basis for making this business decisions. [4] 67 H Growth and evolution 1 BUSINESS ORGANISATION AND ENVIRONMENT 07 This chapter covers syllabus section 1.7 SETTING THE SCENE On completing this chapter you should be able to: Tale of two industries The size of the average Indian steel plant compared to the size of the average Indian retail shop could not be more different.Steel plants employ thousands of workers, have millions of dollars of capital invested in advanced equipment and produce annual output valued in the millions too. Tata, one of the largest steel makers in the world, has recently grown by taking over European steel giant Corus. Contrast this with typical Indian retail outlets. The small shop- keepers and street hawkers that presently account for over 95% of Indian retail sales often employ just a few workers with little investment in modern technology. But all this could be about to change. There is a growing trend of mergers and takeovers in the retail sector. Large retail groups, such as Reliance and Walmart, are becoming established. It is claimed that the market share of this organised sector will be 25% by 2015. A pressure group of small retailers, the National Movement for Retail Democracy, is organising demonstrations to demand that big corporations leave the retail industry. ● analyse the main types of economies and diseconomies of scale and apply these concepts to business decisions ● evaluate the relative merits of small versus large organisations ● recommend an appropriate scale of operation ● explain the difference between internal and external growth ● evaluate joint ventures, strategic alliances, mergers and takeovers ● analyse the advantages and disadvantages of franchising and evaluate it as a growth strategy ● explain and apply Ansoff’s matrix as a decision-making tool ● evaluate internal and external growth strategies as methods of expansion ● examine how Porter’s generic strategies provide a framework for building competitive advantage. H H Points to think about: ● Why is the average steel plant so much larger than the average shop? ● Would Indian consumers benefi t from more small shops or more shops owned by large corporations? ● How might consumers of steel, such as car makers, benefi t from a takeover of Corus by Tata? ● Why might average costs of production fall as a business increases its scale of operations? 68 Tata steel plant, India 1 BUSINESS ORGANISATION AND ENVIRONMENT 69 Introduction There is a huge difference between the scale of opera- tions of a small business – perhaps operated by just one person – and the largest companies in the world. Some of the latter have total annual sales exceeding the GDP of small countries! In 2009, ExxonMobil recorded sales of over $375 billion, yet the GDP of Thailand, for example, was $260 billion. KEY TERM scale of operation the maximum output that can be achieved using the available inputs (resources) – this scale can only be increased in the long term by employing more of all inputs Increasing the scale of operations There are risks and costs involved in increasing the scale of production – purchasing land, buildings, equipment, employing more staff – and the capital used for this will always have alternative uses. Firms expand capacity by increasing the scale of production to avoid turning busi- ness away and to increase market share, but they also benefi t from the advantages of large-scale production – these are called economies of scale. EXAM TIP Do not confuse ‘producing more’ with increasing the scale of operation. More can be produced from existing resources by increasing capacity utilisation. Changing the scale of operation means using more (or less) of all resources, for example opening a new factory with additional machines and workers. ECONOMIES OF SCALE KEY TERM economies of scale reductions in a fi rm’s unit (average) costs of production that result from an increase in the scale of operations These cost benefi ts can be so substantial in some indus- tries that smaller fi rms will be unlikely to survive due to lack of competitiveness, such as in oil refi ning or soft drink production. The cost benefi ts arise for fi ve main reasons. 1 Purchasing economies These economies are often known as bulk-buying econ- omies. Suppliers 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. 2 Technical economies There are two main sources of technical economies. Large fi rms are more likely to be able to justify the cost of fl ow 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 tech- nical equipment – such as computer systems – is often expensive and can usually only be afforded by big fi rms. Such expense can only be justifi ed by larger fi rms with high output levels – so that average fi xed costs can be reduced. 3 Financial economies Large organisations have two cost advantages when it comes to raising fi nance. First, banks often show preference for lending to a big business with a proven track record and ACTIVITY 7.1 Read the case study below and then answer the questions that follow. Operating at full capacity Ben Rishi is operations manager for a factory making saucepans. The weekly maximum capacity of the factory is 3000 units. The main limit on capacity is the old- fashioned machine for stamping out the metal pans from sheet metal. Purchasing another machine would be expen- sive – and would require an extension to the building. Workers are working very long shifts. Ben has also been working long days to ensure that all the factory works at full capacity. For the last three months, demand has been high and last week there were orders for 3100 pots. Ben is under pressure from his managing director to see that this number is produced. Ben is unsure whether to recommend purchasing the new machine or to buy in components from another fi rm in the city that has spare capacity. 20 marks, 42 minutes 1 Outline the problems facing Ben because his factory is operating at full capacity. [6] 2 Analyse the advantages and disadvantages of the two methods suggested for solving the problem. [8] 3 Outline three cost advantages Ben’s business might gain if it expands the scale of production. [6] Growth and evolution07 72 ● size of the market the fi rm operates in – very small markets do not need large-scale production ● number of competitors – the market share of each fi rm may be small if there are many rivals ● scope for scale economies – if these are substantial, as in water supply, each business is likely to operate on a large scale. EXAM TIP If an examination question asks you to consider the most appro- priate scale of production in a given situation, you will need to assess these fi ve factors. THEORY OF KNOWLEDGE Some people have the erroneous idea that a small busi- ness cannot effectively compete against larger competi- tors. This concept is quite far from the truth. For example, if someone were to ask you, ‘What is a major source of job formations in America today?’ what would you answer? If you said small business, you would be right. How about this question: ‘What is the major source of newly formed individual wealth in this country today?’ Again, the small business is the answer. Why, then, is there such misin- formation about the strength, versatility and wealth of small businesses? The answer is that usually large corpo- rations get the lion’s share of publicity. Source: e-commerce times In the light of this article, discuss the view that in the corporate world bigger is always better. Business growth The owners of many businesses do not want the fi rm to remain small – although some do for reasons of remaining in control, avoiding taking too many risks and preventing workloads from becoming too heavy. Why do other busi- ness owners and directors of companies seek growth for their business? There are a number of possible reasons including: ● increased profi ts ● increased market share ● increased economies of scale ● increased power and status of the owners and directors ● reduced risk of being a takeover target. INTERNAL GROWTH Business growth can be achieved in a number of ways and these forms of growth can lead to differing effects on stake- holder groups, such as customers, workers and competi- tors. The different forms of growth can be grouped into internal and external growth, as shown in Figure 7.2. Small businesses Large businesses ● May have limited access to sources of fi nance. ● May fi nd the owner(s) has to carry a large burden of responsibility if unable to afford to employ specialist managers. ● May not be diversifi ed, so there are greater risks of negative impact of external change. ● Unlikely to benefi t from economies of scale. ● May be diffi cult to manage, especially if geographically spread. ● May have potential cost increases associated with large-scale production. ● May suffer from slow decision-making and poor communication due to the structure of the large organisation. ● May often suffer from a divorce between ownership and control that can lead to confl icting objectives. Table 7.3 Potential disadvantages of small and large businesses Business expansion External growth through integration Internal growth TakeoversMergers Figure 7.2 Different forms of growth Small businesses Large businesses ● Can be managed and controlled by the owner(s). ● Often able to adapt quickly to meet changing customer needs. ● Offer personal service to customers. ● Find it easier to know each worker, and many staff prefer to work for a smaller, more ‘human’ business. ● Average costs may be low due to no diseconomies of scale and low overheads. ● Easier communication with workers and customers. ● Can afford to employ specialist professional managers. ● Benefi t from cost reductions associated with large-scale production. ● May be able to set prices that other fi rms have to follow. ● Have access to several different sources of fi nance. ● May be diversifi ed in several markets and products, so risks are spread. ● More likely to be able to afford research and development into new products and processes. Table 7.2 Potential advantages of small and large businesses 1 BUSINESS ORGANISATION AND ENVIRONMENT KEY TERM internal growth expansion of a business by means of opening new branches, shops or factories (also known as organic growth) An example of internal growth would be a retailing busi- ness opening more shops in towns and cities where it previously had none. EXTERNAL GROWTH KEY TERM external growth business expansion achieved by means of merging with or taking over another business, from either the same or a different industry The different forms of external growth are shown in Figure 7.3. ACTIVITY 7.2 Starbucks confi rms rapid growth strategy Howard Schultz, the chairman of Starbucks, confi rmed growth plans for the world’s largest chain of coffee shops. The business will open at least 10 000 new cafes over the next four years by using internal growth. Schultz said that he planned to double the size of the business in fi ve years. At the end of 2009, there were over 16 600 stores worldwide. China will be the main focus of this growth strategy. The US giant opened its fi rst Chinese branch in 1999 and now has over 200 branches. ‘No market potentially has the opportu- nities for us as China hopefully will,’ said Schultz. Like many western retailers, Starbucks sees China as its key growth area due to its fast-growing economy, lack of strong local competitors and sheer size of population. The business is also expanding its network of branches in Russia and Brazil. There are plans to increase sales of non-coffee products to reduce reliance on hot drinks. It has expanded its sale of audio books and music, and Sir Paul McCartney will be the fi rst artist to release an album on Starbucks’ ‘Hear Music’ label. This rapid internal expansion has not been without problems. Consumer Reports magazine recently ranked McDonald’s coffee ahead of Starbucks saying it tasted better and costs less. This could be due to the time-saving equipment that has been added to new Starbucks branches that use automatic espresso machines instead of extracting espresso shots in the traditional way. The chairman has also criticised the time-saving policy of designing stores uniformly rather than with some local decoration. Source: www.iht.com and www.bbc.co.uk Conglomerate diversification – different industry Forward vertical integration – same industry, towards customer Horizontal integration – same industry and same stage of production Backward vertical integration – same industry, towards supplier Figure 7.3 Forms of external growth 30 marks, 52 minutes 1 Why would you describe Starbuck’s growth strategy as being an example of ‘internal growth’? [2] 2 Suggest two reasons why Starbucks has adopted a rapid expansion strategy. [6] 3 Analyse the possible advantages of focusing growth in China. [8] 4 Explain why Starbucks is planning to reduce its reliance on just selling coffee. [4] 5 Discuss the potential economies and diseconomies of scale that Starbucks might experience from further expansion. [10] 73 Growth and evolution07 74 KEY TERMS horizontal integration integration with fi rm in the same industry and at same stage of production forward vertical integration integration with a business in the same industry but a customer of the existing business backward vertical integration integration with a business in the same industry but a supplier of the existing business conglomerate integration merger with or takeover of a business in a different industry External growth is often referred to as integration as it involves bringing together two or more fi rms. Table 7.4 provides a guide to the different types of integration, their common advantages and disadvantages and the impact they often have on stakeholder groups. KEY TERMS merger an agreement by shareholders and managers of two businesses to bring both fi rms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business takeover when a company buys over 50% of the shares of another company and becomes the controlling owner – often referred to as ‘acquisition’ EXAM TIP If an examination question refers to a merger or takeover, you should start by identifying what type it is. Do not forget that mergers and takeovers often cause businesses as many prob- lems as they solve. Type of integration Advantages Disadvantages Impact on stakeholders Horizontal integration ● Eliminates one competitor. ● Possible economies of scale. ● Scope for rationalising production, e.g. concentrating output on one site instead of two. ● Increased power over suppliers. ● Rationalisation may bring bad publicity. ● May lead to monopoly investigation if the combined business exceeds certain size limits. ● Consumers have less choice. ● Workers may lose job security as a result of rationalisation. Forward vertical integration ● Business is able to control the promotion and pricing of its own products. ● Secures an outlet for the fi rm’s products – may now exclude competitors’ products. ● Consumers may suspect uncompetitive activity and react negatively. ● Lack of experience in this sector of the industry – a successful manufacturer does not 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 lack of competition in the retail outlet because of the withdrawal of competitor products. Backward vertical integration ● Gives control over quality, price and delivery times of supplies. ● Encourages joint research and development into improved quality of supplies of components. ● Business may control supplies of materials to competitors. ● May lack experience of managing a supplying company – a successful steel producer will not necessarily make a good manager of a coal mine. ● Supplying business may become complacent having a guaranteed customer. ● 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 ● Diversifi es the business away from its original industry and markets. ● This should spread risk and may take the business into a faster-growing market. ● Lack of management experience in the acquired business 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 risks are spread across more than one industry. Table 7.4 Types of business integration 1 BUSINESS ORGANISATION AND ENVIRONMENT 77 options open to a marketing manager when considering new opportunities for sales growth. He considered that the two main variables in a stra- tegic marketing decision were: ● the market in which the fi rm was going to operate ● the product(s) intended for sale. In terms of the market, managers have two options: ● to remain in the existing market ● to enter new ones. In terms of the product, the two options are: ● selling existing products ● developing new ones. When put on a matrix, these options can be presented as shown in Figure 7.4. As there are two options each for markets and for products, this gives a total of four distinct strategies that businesses can adopt when planning to increase sales. These are shown on the matrix and can be summarised as follows. Market penetration KEY TERM market penetration the objective of achieving higher market shares in existing markets with existing products In 2009, Aer Lingus reduced some of the fares on its Euro- pean air routes – some even to as little as $15. The directors of the company were attempting to aggressively increase market share by taking passengers away from other low- cost airlines. This is the least risky of all the four possible strategies in that there are fewer ‘unknowns’ – the market and product parameters remain the same. However, it is ACTIVITY 7.4 Read the case study below and then answer the questions that follow. Harry goes it alone Harry no longer enjoyed his job as second chef in a famous hotel. He never liked taking orders from the head chef and always hoped to use his talents preparing food for customers in his own restaurant. The main problem was his lack of business experience. Harry had just been to a business conference and had been interested in the franchising exhibition there. One of the businesses offering to sell franchises was Pizza Delight. This fi rm sold a new type of pizza recipe to franchisees and provided all ingredients, marketing support and help with staff training. They had already opened 100 restaurants in other countries and offered to sell new franchises for a one-off payment of $100 000. If Harry signed one of these franchising contracts, then he would have to agree to: ● only buying materials from Pizza Delight ● fi tting out the restaurant in exactly the way the franchisor wanted ● making an annual payment to Pizza Delight of a percentage of total turnover. In addition, he would have to fi nd and pay for suitable premises and recruit and motivate staff. Pizza Delight claimed that its brand and products were so well known that ‘success was guaranteed’. Since the product had already been tested, there should be little consumer resistance, and Pizza Delight would pay for national advertising campaigns. Harry was promised that no other Pizza Delight restaurant would be permitted to open within fi ve kilometres of his. Harry was almost convinced that this was the business for him. He had inherited money from a relative. However, several things still bothered him – for example,would it give him the independence he so wanted? 24 marks, 45 minutes 1 What is meant by a ‘franchise agreement’? [4] 2 Explain three potential drawbacks to Harry of agreeing to the terms of the franchise contract. [6] 3 If he decided to open his own restaurant but under his own name, why might the risks of failure be greater than for a Pizza Delight franchise? [4] 4 Using all of the evidence, would you advise Harry to take out a franchise with Pizza Delight? Justify your answer. [10] Growth and evolution07 78 not risk free as if low prices are the method used to pene- trate the market, it could lead to a potentially damaging price war that reduces the profi t margins of all fi rms in the industry. Product development KEY TERM product development the development and sale of new prod- ucts or new developments of existing products in existing markets The launch of Diet Pepsi took an existing product, devel- oped it into a slightly different version and sold it in the soft drinks market where Pepsi was already available. Product development often involves innovation – as with 4G mobile phones – and these brand new products can offer a distinctive identity to the business. Market development KEY TERM market development the strategy of selling existing products in new markets This could include exporting goods to overseas markets or selling to a new market segment. Lucozade used to be promoted as a health tonic for people with colds and fl u. It was successfully repositioned into the sports drink market, appealing to a new, younger range of consumers. Dell or HP can use existing business computer systems and re-package them for sale to consumer markets. Diversifi cation KEY TERM diversifi cation the process of selling different, unrelated goods or services in new markets The Virgin Group is constantly seeking new areas for growth. Its expansion from a media empire to an airline and then a train operator, then into fi nance, is a classic example of diversifi cation. Tata Industries in India is another good example of a very diversifi ed business, making a huge range of products – from steel to tea bags. As the diversifi cation strategy involves new challenges in both markets and products, it is the most risky of the four strategies. It may also be a strategy that is outside the core competencies of the fi rm. However, diversifi ca- tion may be a possible option if the high risk is balanced out by the chance of a high profi t. Other advantages of diversifi cation include the potential to gain a foothold in an expanding industry and the reduction of overall busi- ness portfolio risk. EVALUATION OF ANSOFF’S MATRIX The risks involved in these four strategies differ substan- tially. By opening up these options, Ansoff’s matrix does not Market penetration Sell more in existing markets Market development Sell existing products in new markets PRODUCTS NewExisting Product development Sell new products in existing markets Diversification Sell new products in new markets Increasing risk Existing Markets New Increasing risk Figure 7.4 Ansoff’s matrix 1 BUSINESS ORGANISATION AND ENVIRONMENT 79 direct a business towards one particular future strategy. However, by identifying the different ways in which a business could expand, the matrix allows managers to analyse the degree of risk associated with each strategy. Managers can then apply decision-making techniques to assess the costs, potential gains and risks associated with all options. In practice, in today’s fi ercely competitive world, it is common for large businesses to adopt multiple strategies for growth at the same time. While Ansoff’s analysis helps to map the strategic business options, it has limitations too. It only considers two main factors in the strategic analysis of a business’s options – it is important to consider SWOT and PEST analysis too in order to give a more complete picture. Recommendations based purely on Ansoff would tend to lack depth and hard environmental evidence. Management judgement, especially based on experi- ence of the risks and returns from the four options, may be just as important as any one analytical tool for making the fi nal choice. The matrix does not suggest 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. H HIGHER LEVEL Evaluation of growth strategies Internal growth can be quite slow with, perhaps, only a few branches or shops opening each year. However, it can avoid problems of external growth such as the need to fi nance expensive takeovers, offer new share issues or expensive additional loans. Also, management problems associated with bringing together very different busi- nesses with their own attitudes and cultures are avoided. External growth can lead to rapid expansion, which might be vital in a competitive and expanding market. However, takeovers can be very expensive and may result in management problems caused by the need for different management systems to deal with a bigger organisa- tion. There can also be confl ict between the two teams of managers – who will get the top jobs? – and confl icts of culture and business ethics. Porter’s generic strategies FRAMEWORK FOR BUILDING COMPETITIVE ADVANTAGE Michael Porter, a famous management researcher, argues that a fi rm’s strengths ultimately fall under one of two headings: cost advantage or differentiation (or product uniqueness). By applying these strengths in either a broad way (industry wide) or in a narrow way (a market segment) three generic strategies result. Cost leadership strategy Being the lowest-cost producer in the industry for a certain level of product quality will allow the fi rm to make higher profi ts than rivals or, if it lowers its prices below the average of competitors, to increase market share. Ryanair, one of Europe’s largest and most prof- itable airlines, is also the lowest average cost airline. Businesses adopting this strategy either sell products at average industry prices to earn higher profi t than rivals or below industry average prices to gain market share. Ryanair adopts the second of these pricing strategies. The cost leadership strategy usually targets a broad rather than a niche market. Cost leadership often stems from the following internal strengths: ● high levels of investment in advanced production methods, requiring access to much capital ● effi cient production methods, e.g. low stock levels and low numbers of components used to shorten the production process ● effi cient distribution channels, e.g. Ryanair only uses the internet for selling tickets and communicating with customers. Differentiation strategy This strategy involves developing a product or service that offers unique features valued by customers. The value added to the product or service by these features may allow the fi rm to charge a premium price for it. Apple’s constant research into innovative products allows it to charge high prices for its differentiated products. A differentiation strategy often results from the following internal strengths: ● excellent research and development facilities and a track record in developing unique products ● corporate reputation for innovation and quality ● strong sales team able to promote the perceived strengths of the brand and the products. Focus strategy This concentrates on a narrow market segment, aiming to achieve either a cost advantage or differentiation. This can lead to a high degree of customer loyalty within the market segment. For example, Princess Boats has a loyal consumer following for its uniquely designed luxury motor boats – some models costing millions of dollars. Discount retailers, on the other hand, focus on low-income market Change and the management of change 1 BUSINESS ORGANISATION & ENVIRONMENT 08 This chapter covers syllabus section 1.8 (Higher level only) SETTING THE SCENE On completing this chapter you should be able to: IT drives business change at Volkswagen (VW) Radical changes to the way the IT department supports departments within VW have led to signifi cant cost reductions and quality improvements. VW operates in the world’s most competitive car markets. It faces twin threats of changing consumer tastes and Asian rivals who operate with much lower labour costs. Constant change is needed to maintain competitiveness. VW has a clear vision for all major changes it introduces – to reduce costs, improve quality and reduce product development times. These will combine to increase sales. The number of different IT programs has been reduced from 4000 to just 300 and the company is to cut thousands of jobs across all departments over the next two years. Following the complete redesign of the IT division, it now has a ‘horizontal’ IT team that connects different parts of the business together into proc- esses rather than departments. For example, the IT team will bridge the gap between market research, designers who know how to design a new car and the production team who know best the process of building it. Chief tech- nology offi cer Stefan Ostrowski explained that ‘we want to design quality cars that are easy to build – IT acts as the link between the different departments that are involved in this process’. VW trained 400 IT staff in business processes and in how to mediate between different departments. IT staff are rotated to different business areas every four years to give staff new skills. ‘Communication was also a key part of this change as if IT does not explain its new role in clear business language you will not change anything,’ said Ostrowski. Source: www.computerworlduk.com/management ● explain the causes of change and the factors causing resistance to change ● examine the use of Lewin’s force-fi eld analysis and the relative importance of driving and restraining forces ● evaluate different strategies for reducing the impact of change and the resistance to change. 82 Points to think about: ● Why did VW realise that constant change is necessary? ● Why do you think a ‘clear vision’ or objective is important before making changes? ● Explain why improved communication and training were key features of the successful changes to the work of VW’s IT department. ● Do you think important business changes could take place without the support of staff? H H H 1 BUSINESS ORGANISATION & ENVIRONMENT 83 Introduction Change is the continuous adoption of business strate- gies and structures in response to internal pressures or external forces. Change happens whether we encourage and welcome it or not. To take control of change and to ensure it is a positive process, businesses must have a vision, a strategy and a proven and adaptable process for managing change. KEY TERM change management planning, implementing, controlling and reviewing the movement of an organisation from its current state to a new one Causes of change EXTERNAL CAUSES Today, change in business is not the exception but the rule – it has become an accelerating and ongoing process. ‘Business as usual’ will become increasingly rare as global, economic and technological upheavals necessi- tate a business response. Change management requires fi rms to be able to cope with dramatic one-off changes as well as more gradual evolutionary change. Table 8.1 iden- tifi es some common external causes of change and strat- egies for managing them. Incremental change Evolutionary or incremental change occurs slowly over time. The trend towards more fuel-effi cient cars has been gradually taking place over the last few years. Such change can be either anticipated or unexpected. The decision to increase the London congestion charge was announced months in advance, but a sudden oil price increase may not have been expected. Incremental changes that are expected tend to be the easiest to manage. Dramatic change Dramatic or revolutionary change, especially if unantici- pated, causes many more problems. Civil confl ict in Kenya in 2008 forced many safari holiday companies to re-establish themselves in other countries or markets. In extreme cases, dramatic change might lead to a total rethink of the operation of an organisation – this is called business process re-engineering. KEY TERM business process re-engineering fundamentally rethinking and redesigning the processes of a business to achieve a dramatic improvement in performance EXAM TIP When discussing how change will affect a business and its strategies, try to analyse whether the change was incremental or dramatic, anticipated or unanticipated. INTERNAL CAUSES Table 8.2 identifi es some common internal causes of change and strategies for managing them. Factors causing resistance to change This is one of the biggest problems faced by organisations when they attempt to introduce change. The managers and workforce of a business may resent and resist change for any of the following reasons: Fear of the unknown – change means uncertainty, ● which worries some people. Not knowing what may happen to your job or the future of the business leads to increased anxiety – this results in resistance. Fear of failure – change may require new skills and ● abilities that, despite training, may be beyond a work- er’s capabilities. People know how the current system works, but will they be able to cope with the new one? Losing something of value – workers could lose ● income, status or job security as a result of change and they will want to know precisely how the change will affect them. False beliefs about the need for change – to allay their ● fears and to avoid the risks of change, some people fool themselves into believing that the existing system will continue to work without the need for radical change. ACTIVITY 8.1 8 marks, 12 minutes 1 Identify some recent changes in the external business environment that have an incremental impact on business. [4] 2 Identify other recent changes that have had a dramatic impact on business. [4] ACTIVITY 8.2 Demographic, social and cultural changes can have an impact on business decisions. Research the most signifi - cant social or cultural factors that have occurred in your country in recent years, for example migration, employ- ment of women or population changes such as an ageing population. Analyse how any one business in your country has responded to the changes you have identifi ed. Change and the management of change08 84 Nature of change Examples Strategies for management Globalisation – increasing interdependence of countries’ economies through free trade and multinational company investment ● New opportunities to sell products in other countries. ● Increased competition from products made more cheaply in other countries – often by multinationals. ● Use either pan-global marketing or localisation strategies. ● Achieve and try to maintain a competitive advantage. Technological advances – leading to new products and new processes ● Products: new computer games, iPods and iPhones, hybrid-powered cars. ● Processes: robots in production; computer- assisted design (CAD) in design offi ces and computer systems for stock control. ● Staff retraining. ● Purchase of new equipment. ● Additions to product portfolio – other products may be dropped. ● Need for quicker product development which may require new organisational structures and teams. Macro-economic changes – fi scal policy, interest rates, business cycle ● Changes in consumers’ disposable incomes – and demand patterns that result from this. ● Boom or recession conditions – need for extra capacity or rationalisation. ● Need for fl exible production systems – including staff fl exibility – to cope with demand changes. ● Explain need for extra capacity or the need to rationalise. ● Deal with staff cutbacks in a way that encourages staff who remain to accept change. Legal changes ● Changes to what can be sold (e.g. raising age of buying cigarettes). ● Changes to working hours and conditions. ● Staff training on company policy (e.g. on sale of cigarettes). ● Flexible working hours and practices. Competitors’ actions ● New products. ● Lower prices – based on higher competitiveness/lower costs. ● Higher promotional budgets. ● Encourage new ideas from staff. ● Increase effi ciency by staff accepting the need to change production methods. ● Ensure resources are available to meet the challenge. Environmental factors ● Increasing ‘green consumerism’. ● Growing concern about climate change and industry’s contribution to it. ● Social and environmental audits supported by strategic changes, e.g. Marks and Spencer’s ‘Plan A’, which includes the aim to recycle all packaging. Table 8.1 Major external causes of change and possible strategies for managing them Nature of change Examples Strategies for management Organisational changes ● Delayering. ● Hierarchical structure replaced by matrix structure (see Chapter 11, page 114). ● Retraining of less senior staff to accept more responsibility. ● Reassurances on job security. ● Retraining of staff in teamwork and project management. Relocation ● Moving operations to another region or country. ● Redundancy schemes for workers who lose their job. ● Relocation grants for those willing to move. Cost cutting to improve competitiveness ● Capital-intensive rather than labour-intensive methods. ● Rationalisation of operations, e.g. closing some operations. ● Retraining of staff to operate advanced equipment. ● Redundancy schemes for workers who lose their jobs. ● Flexible employment contracts and working practices. Table 8.2 Major internal causes of change and possible strategies for managing them 1 BUSINESS ORGANISATION & ENVIRONMENT enable its implementation, but they will not necessarily be involved in day-to-day planning. PROJECT GROUPS OR TEAMS Problem solving through team building is a structured way to make a breakthrough in a diffi cult change situa- tion. It uses the power of a team. KEY TERM project groups created by an organisation to address a problem that requires input from different specialists When a diffi cult problem arises during implementation of a major change in a business’s strategy or structure, a project group may be set up to analyse it and recom- mend solutions. Project groups work with the manager responsible for introducing the change. A team meeting of experts should involve a rigorous exchange of views leading to the development of an appropriate action. The responsibility for carrying out the plan lies with the original manager, but he or she will be better equipped to solve the problem that was preventing change from being implemented effectively. PROMOTING CHANGE Promoting change is an important function of manage- ment. Acceptance of change – both by the workforce and other stakeholders – is more likely to lead to a posi- tive outcome rather than imposing change on unwilling groups, which could increase resistance to change and ultimately lead to failure. According to John Kotter, a leading writer on organisational change, the best way to promote change is to follow an eight-stage process: 1 Establish a sense of urgency. 2 Create an effective project team to lead the change. 3 Develop a vision and a strategy for change. 4 Communicate this change vision. 5 Empower people to take action. 6 Generate short-term gains from change that benefi t as many people as possible. 7 Consolidate these gains and produce even more change. 8 Build change into the culture of the organisation so that it becomes a natural process. EXAM TIP When discussing effective management of change, focus on the positive benefi ts of change to the stakeholders most affected by it. It is very easy to be too negative about change. THEORY OF KNOWLEDGE Organisations are constantly facing change, whether because of developments in the external environment or new managers taking the organisation in a different direction. How would a manager know whether change taking place within an organisation was having a positive effect? ● OVER TO YOU REVISION CHECKLIST 1 Explain the difference between incremental and revo- lutionary business change, using recent examples. 2 Outline two likely causes of change for a business making cameras. 3 Why is communication an important part of the change process? 4 Explain the role of a project champion to a team of people who are worried about technological change affecting their work practices. 5 Explain how a project group could help a manager with the task of introducing important changes to the business. 6 a Explain any two causes of resistance to change that might occur in your school or college after the head teacher or principal has announced a major reorgan- isation of the departmental/faculty structure. b For each of these causes of resistance, explain how staff might be reassured. 7 Land Rover has been sold to the Indian company Tata. If the new management plan involves opening a Land Rover factory in India making the current models, but keeping the existing Solihull plant in the UK open, how might any resistance to this change among existing UK workers be reduced? 87 Change and the management of change08 REVISION ACTIVITY Read the case study below and then answer the questions that follow. Constant change a feature of modern industry Britax has undergone many changes in recent years. The business grew out of a diverse group of companies. The Britax name and brand were adopted at the end of the 1990s when the business decided to concentrate its efforts and sold off some of its activities. It now focuses on child safety seats and designing and building aircraft interiors. Sales of child safety seats have been boosted by recent changes in the law, while aircraft interiors are a niche market with four international competitors. Overall, turnover of Britax’s aerospace division has grown from £20 million to £150 million in six years despite intense competition and an aircraft building industry that fears a fall in aircraft orders. Britax has just introduced a complex and expensive computer system to manage its production resource plan- ning. Stock levels have fallen dramatically and productivity has improved. But the change involved changes in many people’s work practices and skills. As with all changes of this nature the crucial key to success lies not with the product but with those who have to use it. ‘People react in different ways to change,’ said the company’s business systems manager. ‘How people approach change is a critical factor. A big factor in managing this is to build a strong project team. The right people need to be involved from the start. The next step is training and communicating the need for change. We spent a great deal of time and effort in this area and it was well worth it.’ 32 marks, 55 minutes 1 Why is almost constant change likely to occur within businesses such as Britax? [6] 2 Outline two ways in which Britax reduced resistance to change. [6] 3 Analyse how force-fi eld analysis and project champions could have helped during this change. [10] 4 Evaluate the most important stages in the process of implementing and managing large-scale changes within a business. [10] 88 HMV BUYS MAMA GROUP IN LIVE MUSIC TAKEOVER DEAL Entertainment fi rm HMV is expanding its presence in the live music market by buying venue owner MAMA Group for £46 million. HMV’s move comes nearly a year after it took a 9.9% stake in MAMA, which runs 11 concert venues including the Hammersmith Apollo in London. MAMA also owns other interests including an artist management business repre- senting bands such as Franz Ferdinand and the Kaiser Chiefs. The deal marks the latest stage in a three-year ‘transformation plan’ unveiled by the company in March 2007 in response to falling sales of CDs and the growth of illegal music downloads. Other moves have included introducing the Pure HMV loyalty card scheme, taking a 50% stake in online music store 7digital and even opening a pilot HMV Curzon-branded, three-screen digital cinema in Wimbledon. HMV’s takeover offer for MAMA is subject to approval from shareholders, who are concerned about HMV moving into the market where it has limited direct experience, along with the prospects of raising the fi nance to fund the takeover. This contrasts with the enthusiastic view of HMV’s manage- ment who are keen to explore the prospects of live music as a new market. The takeover of MAMA Group by HMV represents a signifi cant change in direction for the organisation and it is important this change is managed effectively. Source: http://news.bbc.co.uk (adapted) EXAM PRACTICE QUESTION Read the case study and then answer the questions that follow. 20 marks, 35 minutes 1 Defi ne the term ‘change management’. [2] 2 Explain the role a project team might have in changing the direction of HMV. [4] 3 Analyse two driving forces and two restraining forces which are infl uencing HMV’s ‘transformation plan’ as it tries to change the direction of the organisation. [8] 4 Using an appropriate business model, analyse how HMV’s proposed takeover of the MAMA Group will give it a competitive advantage in the music industry. [6] Globalisation 1 BUSINESS ORGANISATION AND ENVIRONMENT 09 This chapter covers syllabus section 1.9 SETTING THE SCENE On completing this chapter you should be able to: Coca-Cola’s globalised marketing – India doesn’t buy it Coca-Cola employs nearly 100 000 people producing and selling over 300 brands in over 200 countries. It is a classic example of a large multinational business. It creates jobs and contributes output to many economies across the globe. However, its multinational operations do not always meet with success and they often face serious criticism. Despite spending $1 billion on promotion in India, Coca-Cola sales in this country account for under 1% of its total global sales. The world’s most valuable multinational brand – according to Brand Republic – has failed to make any inroads into the Indian market. Per capita consumption of soft drinks is among the lowest in the world, even though both of the USA’s giant cola groups – Pepsi and Coca-Cola – have invested millions of dollars in breaking into this market. What is wrong? Coca-Cola has a serious image problem in many parts of the country. It was thrown out of India in the 1970s for failing to release details of its secret formula and it has been fi ghting court cases recently against claims that it is causing droughts in some regions due to heavy water use and that its soft drinks contain 25 times the permitted level of pesticides. But perhaps the real problem is cultural. Traditionalists in India fear the erosion of long-standing culture by the importation of western products, advertisements and methods of selling. In addition, tea is still widely drunk in India and Coca-Cola’s failure to adapt its global products to local tastes is another major factor. Finally, most Indian retailing is still through informal street and market traders – and Coca-Cola is reluctant to see its products sold in this way. Perhaps this is one reason why it has recently set up a branded university in India to teach modern retailing techniques to millions of small shop and stall owners. Even this has met with opposition from traditional sellers, who fear the growing dominance of foreign products and retailers in India. Source: www.timesonline.co.uk (adapted) ● understand the meaning of globalisation and the factors contributing to it ● analyse the role played by multinationals in the global business environment ● evaluate the impact of multinational companies on the host country ● explain what regional trading blocs are and their impact on a business of a country that is a member of a regional economic group/bloc. 89