Business Unit 3 Notes

Pearson Edexcel IAL Business Unit 3
Complete Revision Notes(WBS13)
written by
notesbymargo
www.stuvia.com
Downloaded by: ashiwani19 | [email protected] Want to earn $1.236

Distribution of this document is illegal extra per year?
Stuvia.com - The Marketplace to Buy and Sell your Study Material
Pearson Edexcel Business

International Advanced Level (IA2)
Complete Revision Notes
Unit 3: Business decisions & strategy
(Paper/Unit code: WBS13/01)
© 2023 notesbymargo
(This document is created by notesbymargo. Reproduction & Reselling of this is prohibited and illegal.)
Course Structure
CHAPTER:
44-Corporate objectives……………………………………………………………………………..3
45-Theories of corporate strategy…………………………………………………………………..5
46-SWOT analysis…………………………………………………………………………...………...10
47-Impact of external influences………………………………………………………………….12
48-Growth……………………………………………………………………………………………...15
49-Organic growth…………………………………………………………………………………...18
50-Inorganic growth………………………………………………………………………………....20
51-Problems arising from growth…………………………………………………………………..23
52-Quantitative sales forecasting…………………………………………………………………25
53-Investment appraisal…………………………………………………………………………….27
54-Decision Trees……………………………………………………………………………………..30
55-Critical path analysis……………………………………………………………………………..33
56-Contribution……………………………………………………………………………………….38
57-Corporate culture……………………………………………………………………………...…39
58-Stakeholder model vs shareholder model………………………………………………..…41
59-Business ethics………………………………….………………………………………………….45
60-Interpretaion of financial statements…………………………………………………………47
61-Ratio analysis……………………………………………………………………………………...51
62-Human resources………………………………………………………………………………....54
63-Key factors in change…………………………………………………………………………...58
64-Contingency planning…………………………………………………………………………..60
Business Terminologies…………………………………….…………………………………………62
(These boxes may be seen throughout the revision notes.)
This means important key This means Additional

points which can be definitions of information/explanation.
helpful for the exams. terms.
CHAPTER 44: CORPORATE OBJECTIVES

I. Hierarchy of business objectives
→ Business should achieve first the lower
(most important) part of the hierarchy
which is the departmental/ functional
objective in order to move to the next
level/step.
→ There can be a trade-off between

mission statement & corporate
objectives. For example, if the corporate
objective of the business is to maximise
its profits whereas its mission statement is
to is to provide quality products, then
they may not be able to maximise profit because if they produce quality
products, they will have to use high quality raw materials which will increase their
costs and lower profit.
1. Business aims
→ Things the business intends to do in the long term-its Objectives/Goals-
purpose. ways/ measure
→ Are what the business is striving to achieve.
taken by the business
→ Will be less specific than its objectives & could be
to achieve its aims.
expressed as a vision. A business will often
communicate its aim through a mission statement.
2. Mission statement
→ A brief statement, written by the business describing its purpose & objectives,
designed to encapsulate its present operations.
→ Running a business can be extremely complicated & it is very easy to get lost in
the finer details of decision making. When all else fails, a good mission
statement can clarify the direction of a business should take by reminding the
owners & directors of the reason why the business exists.
→ Some mission statements are short while others are lengthy & detailed. E.g., R&B
furniture maker: ‘To help create practical & beautiful homes for our customers’.
→ Reasons why a business may form & share a mission statement:

 To make a commitment to its customers-A mission statement forms a promise
to customers on what they can expect the business to strive for.
 To bring a company’s workforce together with a shared purpose-Many

successful businesses have a mission statement that their employees believe
in.

3. Development of corporate objectives
Corporate objectives-combination of all departmental

objectives; total/complete objectives; the objectives of
a medium to large-sized business as a whole.
→ Corporate objectives must be SMART:

i. (S)Specific- means that the objective sets out clearly what the business is
aiming to achieve.
ii. (M)Measurable- corporate objectives should have financial or quantifiable

element (physical amount) because this makes it easier to measure the
success of the that objective. E.g., If the business objective is to maximise
profit, then they can set $1 million dollars to achieve.
iii. (A)Agreed- implies that everyone responsible for achieving the objective
has agreed with the objective & understands what it means for them.
Without an objective being agreed by all those involved, there will be no
motivation or commitment to achieve it.
iv. (R)Realistic- ensures that the objective can be met within the resources
available. If an objective is unrealistic, people will soon ignore it & failing to
achieve the objective is likely to have a negative impact on the business.
-If it is achievable then it is realistic.
v. (T)Time specific- gives the stated time frame within which the objectives
are to be achieved.
4. Departmental & functional objectives

→ Partial objectives
→ The objectives of each department within a business.
II. Critical appraisal of mission statements

→ Critical appraisal basically means reviewing/revising whether the business is able
to achieve its mission statement or not.
→ Mission statements must be constantly assessed to ensure they have continued
relevance for the business. e.g., A company with a mission statement that
includes respect & integrity would not align if fraud were to be reported.
→ Many organisations may put in place a mission statement that is appealing to its
customers, but if it is not believed & followed by employees then the customers
may soon lose faith in the business.
→ If the business is not able to achieve its mission statement, then it will have to ask
itself, list of questions for critical re-assessment:
 What is their purpose (the mission statement)?
 Who is the intended audience?
 How does the corporate strategy followed by the business fit with its stated
mission in reality?
CHAPTER 45: THEORIES OF CORPORATE STRATEGY

I. Development of corporate strategy
Corporate strategy-the action plans & policies developed to meet
a company’s objectives. It is concerned with what range of
activities the business needs to undertake in order to achieve its
goals. It is also concerned with whether the size of the business
organisations makes it capable of achieving the objectives set.
→ Developing an effective corporate strategy requires a significant amount of time

& research. However, there are numerous tools to help managers during the
planning process:
 Ansoff’s’ Matrix
 Porter’s strategic matrix
 Portfolio analysis
A. Ansoff’s’ Matrix
→ Igor Ansoff developed Ansoff’s
Matrix as a strategic tool to help a
business achieve growth.
→ Is a useful decision-making tool

because it allows the owners of a
business to consider a number of
factors that will determine its
corporate strategy:
 The level of investment in
existing & new products
 The exploitation of different
markets
 The growth strategy for the business
 The level of risk the business is willing to accept.
1. Market penetration
→ As suggested by Ansoff’s matrix, the purpose of market penetration is to
achieve growth in existing markets with existing products.
→ Ways a business can achieve this:

 Increased brand loyalty of customers so that they use substitute brands
less frequently. E.g., Loyalty scheme such as Costa coffee’s reward card
 Encourage customers to use the product more regularly. E.g., encourage
people to eat breakfast cereal as a night-time snack.
 Encourage consumers to use more of the product. E.g., Crisp
manufacturers producing maxi-sized crisp packets rather than standard-
sized crisp packets.
→ If it has a successful product & believers that it can generate more revenue
from it, a business might adopt a market penetration strategy.
→ This is the strategy with the lowest risk because it involves the lowest level of
investment. In addition, the business will have a good understanding of the
product & how the market might respond.
2. Product development
→ Is concerned with marketing new or modified products in existing markets.
This might be an appropriate strategy to adopt where the product life cycle
is short or were trends/technology change quickly.
→ Is associated with product innovation & continuous development. The
confectionery market is famous for product development. E.g., Cadbury’s
dairy milk has been around for 100 years, but new extensions of the product
are continuously launched like Dairy milk marvelous creations, etc.
→ Some businesses have gained a reputation for continuous product
development & used this strategy to stay ahead of the competition.
→ Requires significant investment in research & development & there may be
high level of risk in developing new products-it may be that only one in five
product launches succeed. For those that succeed, heavy investment in
promotion may be required.
3. Market development
→ Involves the marketing of existing products in new markets. The most basic
form of strategy is entering geographically new markets. This is not always
simple as customers from different regions of the same country, let alone a
different country, may have different tastes & preferences.
→ Even where the market is successful, it is often necessary to make slight

modifications to suit the new market, either changing the name to be more
acceptable in a different language or labelling the product differently.
4. Diversification
→ Occurs when new products are developed for new markets. It enables a
business to move away from reliance upon existing markets & products, thus
allowing the company to spread risk and increase safety. If one product
faces difficulties/ fails, a successful product in another market may prevent
the business overall facing problems.
→ Disadvantage: If the business chose a new market & it doesn’t have the
expertise or skilled workers required then it would mean that its performance
in new markets will be relatively poor.
B. Porter’s Strategic Matrix

→ Was developed by Michael Porter to
identify the sources of competitive
advantage that a business might
achieve in a market.
1. Cost leadership
→ When the business aims to be the first
business in the market to have lower
costs.
→ Striving to be the lowest-cost provider does that mean that the business will offer
the lowest price, although this may be an option.
→ Lowest-cost provider firm will compete in 2 ways:
 Increase profits, while still charging market level prices.
 Increase market share, while charging lower prices (still making a profit
since costs are reduced).
→ Generally held by one business as it requires having a significant market share in
order to achieve the lowest costs.
→ Firms will lower/reduce costs by:
 Operating on a larger scale /economies of scale
 Negotiating with suppliers
2. Differentiation
→ When the business aims to be the first in the mass market to differentiate the
product.
→ Involves a business operating in a mass market but adopting a unique position
instead of the lowest-cost position.
→ Is when a business will add value to their products in a unique way like quality,
design, brand identity/customer service.
→ Advantage: Business may be able to charge premium price if customers value
their USP.
→ Disadvantage: It is difficult to guarantee that the rewards of differentiation will
justify the additional cost. E.g., Differentiation will require good research &
development as well as effective marketing to highlight the uniqueness to the
customer.
3. Focus
→ Applies only in niche markets where the firms will only be targeting narrow
range of customers by providing both at the same time cost focus and
differentiation focus (but they will not be the leader).
→ Firms will only be producing a specific product as per the customers’ needs.
Hence, it will be able to gain an advantage by understanding its customers
very well & delivering products & services that are very specific to their needs.
→ Will result in less competition since there will not be many competitors in niche
market & that business is the only one producing that specific product. This will
lead to higher profits.
The business can achieve cost leadership or differentiation separately. In

addition, they can achieve both (focus) but they will not be the leader.
II. Aim of Portfolio Analysis

→ A method of categorising all the products &
services of a firm (its ‘portfolio’) so as to decide
where each fit within the Boston Matrix before
forming strategic plans. The products are then
evaluated according to their competitive
position & potential growth rates.
→ Boston matrix may be used to assist a business in

identifying which strategy to adopt. E.g., If a firm
believes that it has a ‘star’ it may decide to
adopt a market penetration strategy to increase
sales revenue & maximise market share while the product is competitive.
1. Stars
→ Are products that are profitable both at present & will be in the future.
→ The business will invest on these products since they will be profitable in the
future. E.g., sport shoes
→ Strategic plan: Business will be cash neutral which means they will hold the cash
at present for further investment in the future.
2. Cash cows
→ Profitable products at present.
→ At present, no need to invest since the product is already profitable. But the
business will no longer invest on it in the future because the future demand for
the product may fall due to low growth.
→ E.g., Demand for laptop-After 5 years, the demand for a specific laptop may fall
because there are new models arriving, so the business will limit the production.
→ Strategic plan: cash generating; business will continue production; increase
outlets/promotion/advertising
3. Question marks
→ They require neutral investment form the business. This is because the business is
not sure whether they will invest or not.
→ Strategic plan: cash absorbing-it will only take the cash, no return at present or
future. Even if the business plans to invest, then it will have to take risks.
4. Dogs
→ Non-profitable products. Business aims these dogs’ products to at least break-
even so that there will be no loss no profit.
→ Strategic plan: cash neutral- no investment since no return in the future.
→ E.g., When a firm produces analogue phones at present, since the demand is
low, business will produce less. Then, in the future, they will no longer produce it.
III. Effect of strategic & tactical decisions on human, physical & financial resources
 Strategy
-set out the long-term direction that a firm will take to achieve its objectives.
 Tactics
-short-term actions that help to achieve the strategy.
-short-term responses to an opportunity or threat in the market. Most day-to-
day decisions in business are tactical & involve decision making responding
to the current business conditions.
-tactical decisions have to be made quickly & without significant research &
planning.
e.g., The business plans to invest on its cash cows (strategic plan) & how it
will invest is the (tactics).
1. Human (workers/employees/managers)
→ This deals with recruitment, training, & redundancy.
→ If the business plans to invest on its product, then they will have to invest &
increase production so they will have to recruit more workers. However, if it
doesn’t plan to recruit workers, then it will have to train its existing workers.
2. Physical
→ Involves investment in fixed assets, location, etc.
→ If the business plans to invest on its products, it will have to buy/invest in

additional fixed assets to increase production & vice versa.
3. Financial
→ If the business plans to invest on its products, then it will have to identify its
sources of finance.
10
CHAPTER 46: SWOT ANALYSIS

I. Gathering information to help develop a strategy
→ When making plans/developing a business strategy it is important to gather
appropriate information. A business can use:
Audit-means
 Internal audit investigating the
-an analysis of the business itself & how it operates. performance of the
-attempts to identify the strengths & weaknesses of business internal &
its operations. external.
 External audit
-an analysis of the environment in which the business operates & over
which it has little or no control.
II. SWOT Analysis

→ An analysis of the internal strengths & weaknesses of the business & the
opportunities & threats presented by its external environment.
→ Strengths & weaknesses-internal part of the business which it can control.
→ Opportunities & threats-external part of the business which it cannot control.
1. (S)Strengths
→ Positive aspects of a business that may be identified from the internal audit.
→ Are what the business is good at-they are what help make the business a
success.
→ Examples:
 A respected, intelligent & visionary leader
 Highly motivated & loyal workforce
 A loyal customer base
 An innovative marketing department
2. (W)Weaknesses
→ Negative aspects of a business that may be identified from the internal audit.
→ Are what business lacks/does poorly & the characteristics that prevents it from
growing.
→ Examples:
 Poorly motivated workforce
 Product range that is getting out of date
 Poor cash flow & growing debt
 Organisational structure that has too many layers of management
11
3. (O)Opportunities
→ External audit should show up what opportunities are available to the business.
→ Options/openings that the business might be able to exploit, resulting in
improvement such as increase in revenue or decrease in costs.
→ Examples:
 Lower interest rate, which provide cheap finance for investment.
 Fall in exchange rate which will make export cheaper
 Collapse of a major rival in the market
4. (T)Threats
→ External audit should show up what threats face the business.
→ Possible hazards/perils that have the potential to damage the performance of
the business.
→ Examples:
 Mounting pressure from environmentalists
 New entrant in the market
 A looming recession
 New legislation aimed at improving the right of employees
To sum up: SWOT Analysis will be a useful tool when developing a corporate
strategy. By identifying the strengths, weaknesses, opportunities & threats, it may be
possible to improve the performance of a business. However, this will depend on
the actions it takes after carrying out the analysis.
e.g., Only if a business takes measures to eliminate weaknesses will performance

improve.
12
CHAPTER 47: IMPACT OF EXTERNAL INFLUENCES

I. PESTLE Analysis
→ The impact of external influences on business can be enormous and can be
both positive & negative.
→ It will be helpful to businesses if they can monitor & analyse the likely impact of
external influences in some way. One approach is to use PESTLE analysis.
1. (P)Political
→ Changes in the government-If a new government is elected, they will usually
govern as per what they believe (political ideology). Their decisions will have
impact on business.
→ For instance, if the government decided to be a command/planned
economy. Then, businesses may suffer since everything will be dictated by the
government like what prices to be charged.
2. (E)Economic
→ The general state of the economy can have a huge impact on business
activity.
→ Includes unemployment, inflation, interest rates & exchange rates.
→ Examples:
 Falling unemployment might help to increase demand for many
businesses.
 Stable prices would create more certainty which should encourage
businesses to invest for the future.
 Lower interest rates would make borrowing cheaper & encourage more
investment.
3. (S)Social
→ Changes in the behaviour of the people.
→ Over time there are likely to be changes in the way society operates.
Although social & cultural changes tend to be gradual, they can still have an
impact.
 In the UK, greater numbers of people are going to university. This could
increase the quality of human resources, which would benefit businesses.
 People appear to be becoming more health conscious. This might create
opportunities for certain businesses such as those selling healthy foods/
running fitness centres.
4. (T)Technological
→ Businesses usually welcome technological developments because they often
provide new product opportunities / help to improve efficiency.
13
 Changes in technology can shorten product life cycles. This is because

new products are quickly developed to replace ones that use older
technology.
 Developments in technology often mean that businesses can replace
labour with capital. This is welcomed because human resources are often
said to be the most expensive & difficult to manage. New technology also
lower unit costs.
5. (L)Legal
→ If the government impose rules/regulations which are favourable for the
business, then it will increase business activity.
→ If the government impose regulations that are favourable for the consumer, so
it is unfavourable for the business. Hence, business activity may slow down.
→ Examples:
 There have been calls to ban the advertising of alcohol on television. If
introduced, such legislation might have a negative impact on the
beverages industry.
 Businesses in the food industry are currently under pressure to reduce the
amount of sugar & salt they add to products.
6. (E)Environmental
→ People are increasingly protective of the environment, for instance, because
of the threats posed by global warming.
 People are more inclined to buy ‘green’ goods. This provides opportunities
for businesses that specialise in such products.
 The trend towards recycling is gathering pace in the UK. By using recycled
resources, businesses can cut their costs.
II. The changing competitive environment

→ Over time, the structure of markets is likely to change. In some markets,
competition intensifies as new businesses enter the market.
→ In contrast, in some markets there has been some consolidation. This means
that there are now fewer businesses in the market. This might result from
takeover/merger activity when 2 or more firms join together.
III. Porter’s Five Forces

→ Michael Porter- he outlines five forces/factors which determine the
profitability of an industry.
1. The bargaining power of suppliers Bargaining power relates

→ Suppliers, like any business, want to maximise to bargaining price.
the profit they make from their customers. The
more power a supplier has over its customers, the higher the prices it can
charge.
14
→ If there is only one / limited number of suppliers in the market. Then they can
bargain high prices with businesses & the business will not have any choice
regarding the high price since there is only one supplier so it will be a
disadvantage for the business. Limiting the power of its suppliers therefore will
improve the competitive position of a business since they will not be charged
with high price for raw materials.
2. Bargaining power of buyers Buyers refers to other

business/ customers
→ Just as suppliers want to charge max prices to customers, so buyers want to

obtain supplies for the lowest price.
→ If buyers/ customers have considerable market power, they will be able to
beat down prices offered by suppliers.
→ If the buyer purchase raw materials & will want to obtain it at lower price but
the supplier offers a high price & doesn’t want to negotiate for low price, then
the buyer can switch to other suppliers which offers lower price.
3. Threat of new entrants

→ If businesses can easily come into an industry & leave it again if profits are low,
it becomes difficult for existing businesses in the industry to charge high prices
& make high profits.
→ Existing businesses are constantly under threat that if their profits rise too much,
this will attract new suppliers into the market who will undercut their prices.
Businesses can counter this by raining barriers to entry in the industry.
4. Substitutes
→ The more substitutes there are for a particular product, the fiercer the
competitive pressure on a business making the product.
→ Equally, the business making a product with few, or no substitutes is likely to be
able to charge high prices & make high profits.
5. Rivalry among existing firms

→ The degree of rivalry among existing firms in an industry will also determine
prices & profits for any single firm.
→ If the rivalry is fierce/ high, businesses can reduce that rivalry by forming cartels
(firms will come to an agreement of what products to sell, at what price, etc.)
to avoid competition.
→ They can also engage in anti-competitive practices to avoid rivalry.
15
CHAPTER 48: GROWTH

I. Objectives of Growth
Growth
-Most businesses start small & then grow.
-Businesses like to grow because the benefits can be very
attractive. E.g., higher revenue, lower unit costs, etc.
1. Economies of scale
→ The size of a business has a major impact on average costs of production.
Typically, there is a range of output over which average costs fall as output
rises. Over this range, larger businesses have a competitive advantage over
smaller businesses.
→ To achieve economies of scale, firms have to grow in order for its average
costs to fall.
In the exam, just focus

on the long-run
average cost curve
→ If the firm produces in the economies of scale range, then as output increases,
average costs fall. If it produces on the diseconomies of scale range, as output
increases, average costs rise.
→ At the point of minimum efficient scale, the business is said to be ‘productively
efficient’ because their costs are lowest.
a) Internal economies of scale

→ The cost reductions enjoyed by a single business as it grows.
→ Benefits of growth that arise within the firm. They occur for a number of
reasons:
 Purchasing economies
-If a business is huge, they would usually buy raw materials/ components in
bulk. Thus, average cost per unit fall since firms will be receiving discount.
 Specialisation & Managerial economies
-As the firm grows, it can afford to employ specialist managers. If a
business employs specialists in these fields, efficiency may improve &
average costs fall.
 Financial economies
-Large firms have advantages when they try to raise finance. They will
have a wider variety of sources from which to choose.
16
-Very large firms will often find it easier to persuade institutions to lend
them money since they will have large assets to offer as security.
b) External economies of scale

→ Are the reductions in cost which any business in an industry might enjoy as the
industry grows.
→ Are more likely to arise if the industry is concentrated in a particular region.
 Labour
-The concentration of firms (in one area) may lead to the build-up of
labour force equipped with the skills required by the industry. Training costs
may be reduced if workers have gained skills at another firm in the same
industry.
 Ancillary & commercial services

-An established industry, particularly if it is growing, tends to attract smaller
firms trying to serve its needs. A wide range of commercial & support
services can be offered.
e.g., specialist banking, insurance, waste disposal, etc.
-This will be an advantage for the firms in the industry since the services are
already nearby.
2. Increased market power over customers & suppliers

→ As businesses get bigger, they become more dominant. As a result, rivals are
left with a smaller market share & some weaker businesses may be forced to
close down. If a business is large enough, it may be able to dominate:
a) Customers
→ A dominant business may be able to charge higher prices if competition in the
market is limited. In the absence of choice, customers are forced to pay higher
prices.
→ If there is lack of competitive pressure in the market, there is less needed to
develop new products. This means that a dominant firm will not have to meet
the costs of expensive & risky innovation. Thus, product choice is limited.
b) Suppliers
→ Sometimes a business can dominate by forcing the cost of raw materials &
commercial services down if it buys large quantities from small suppliers.
→ Dominant businesses will be in a good position if their suppliers rely heavily
upon them. E.g., If a small supplier sells all of its output to just one large
business, it is in a vulnerable position & may have to accept the prices
charged by the business.
However, if a business becomes too dominant, it might attract the attention of the
authorities. If it is felt that the dominant business is exploiting consumers/suppliers,
there may be an investigation into the industry.
17
3. Increased market share & Brand recognition

→ As businesses grow, their share of the market will also grow. This will give them
more market power & they may be able to enjoy the benefits of economies of
scale.
→ Huge businesses will also benefit from having a greater brand recognition. As a
business gets a larger share of the market, customers become more aware of
the brand name because they see the brand advertised in stories/online.
→ As the brand becomes stronger, a business may be able to:

 Charge higher prices
 Differentiate the product
 Develop an image
 Create customer loyalty from those of rivals
 Launch new products more easily
4. Increased profitability
→ One of the main objectives of growth is to make more profit. Larger businesses
tend to make bigger profits than smaller ones. As profits grow, returns to the
owners will also grow.
→ If a business grows & increases its profitability, it will have more profit for
investment & innovation. This will allow the business to develop & launch new
products. If these investments are successful, the business is likely to grow
further.
II. Distinction between organic & inorganic growth

a) Organic/internal growth
-occurs when a business grows naturally by selling more of its output using its own
resources.
b) Inorganic/external growth
-uses mergers/takeovers
-involves businesses joining together so that theoretically they might double in
size overnight.
→ In the early stages of business development, after the initial launch & ‘settling
down’ period, most owners pursue organic growth strategies. Entrepreneurs are
likely to be cautious & grow their businesses gradually, perhaps by selling more
products to existing customers or attracting new customers. On the contrary,
once business owners have built up their confidence & generated some cash,
they may be tempted to speed up growth by making acquisitions.
18
CHAPTER 49: ORGANIC GROWTH

I. Methods of Growing Organically (same business)
1. New customers
→ Through advertising/ promotional techniques, customers may get to know more
of the product. This is likely to attract new customers, so demand will rise. Thus,
firms will have to increase its production & so sales will rise due to increase in
demand. As a result, business will grow due to increase in sales.
2. New products
→ Some businesses grow by developing new products. They may be very
innovative & committed to research & development.
3. New markets
→ Some businesses grow organically by finding new markets for their products. For
example, a hairdresser could open another salon in a different location. The
assets, systems & working practices used in the original salon can be duplicated
in another location.
→ Some businesses may look to overseas to grow. However, this approach carries
more risk because of the unfamiliarity of markets abroad.
4. Franchising
→ To speed up organic growth, a business might set up a franchising operation.
This approach allows other entrepreneurs to trade under the name of the
original business.
→ If the sales & customers increases due to franchising, it will lead to the growth
of the overall business.
Even if it involves other business, still it’s the same business but it’s
the branch/ the franchise. Thus, its organic growth.
II. Advantages & Disadvantages of Organic growth

A. Advantages
1. Organic growth might be less risky than other growth Norms-usual
strategies. Growth can be achieved by extending practice or
practices that are well know & understood. This can procedures
prevent errors as the culture, norms & practices of the
business are already established & effective. Organic growth can also avoid
the complications that might arise when integrating with another
organisation.
19
2. Growing organically might be relatively cheaper than using other methods.

Organic growth can be financed from retained profit, which is likely to be the
cheapest of all sources of finance. Organic growth also avoids the premium
prices that can be paid when buying other businesses.
B. Disadvantages
1. Growing slowly may mean that a business gets left behind in the market. If
competitors are growing through mergers & acquisitions, the business may
end up feeling small in comparison. As a result, it may lose its ability to
compete effectively.
2. Usually, as business grows it will be able to exploit economies of scale. But if

the business is growing organically which means its growing at a slower pace.
So even if it increases its output, it will only be a small increase in output.
Business will not be able to buy raw materials in bulk. Hence, their average
costs may not fall. This may make the business less competitive.
20
CHAPTER 50: INORGANIC GROWTH

I. Reasons for Mergers/Takeovers Inorganic growth-involvement
1. Buying a business is often cheaper than with other/ different businesses
growing internally. A business may calculate
that the costs of internal growth is £80 million. However, it might be possible to
buy another company for £55 million.
2. Mergers take place for defensive reasons. A business Consolidate-to

might buy another to consolidate its position in the join together into
market. Also, if a firm can increase its size through one whole.
merging, it may avoid being the victim of takeover itself.
3. A business may want to gain economies of scale. Firms can often lower their
costs by joining with another firm.
4. Merging with a business in a different country is one way in which a business can
gain entry into foreign markets. It may also avoid restrictions that prevent it from
locating in a country/ avoid paying tariffs on goods sold in that country.
II. Distinction between mergers & takeovers

1. Merger/Integration
-is where two (or more) businesses join together & operate as one. Mergers are
usually conducted with the agreement of both businesses. They are generally
‘friendly’ in nature.
-the name of the new business is often formed out of the names of the two
original businesses.
e.g., Holcim Ltd. Merged with Lafarge SA, forming LafargeHolcim
2. Takeovers
-also known as ‘acquisition’
-occurs when one business buys another. Takeovers among PLCs can occur
because their shares are traded openly & anyone can buy them. One business
can acquire another by buying 51% of the shares.
III. Horizontal & Vertical Integration

1. Horizontal integration
→ Occurs when two firms that are in exactly the same line of business & the
same stage of production join together.
→ Benefits:
 A common knowledge of the markets in which they operate
 Less likelihood of failure than merging two different areas of business
 Similar skills of employees
21
2. Vertical integration
→ Occurs when firms in different stages of production join together.
a) Forward vertical integration-where a business joins with another that is in the
next stage of production. For example, a mountain bike manufacturer might
merge with a retail outlet selling bikes. This gives the manufacturer
guaranteed outlets for their output.
b) Backward vertical integration-where a business joins with another in the

previous stage of production. For example, when a mountain bike
manufacturer bought a supplier of tyres for the bikes. The main motive for
this merger is to guarantee & control the supply of components & raw
materials.
IV. Conglomerate (Integration)

→ Is where two businesses in different industries merge.
→ Merging of two firms with no common interest.
→ For example, a tobacco company buying an insurance company.
V. Advantages & Disadvantages of Inorganic growth

A. Advantages
1. Speedy growth
→ Businesses can grow far more quickly through mergers & takeovers than
growing internally. This means that the benefits of growth, such as larger
market share, lower costs resulting from economies of scale, more market
power & higher profitability, can be enjoyed more immediately. This might
benefit a range of stakeholders.
2. Increased profitability
→ If a merger/takeover is successful, future revenues will be higher because
market share will be higher. In addition, costs will be lower if economies of
scale can be exploited. If the merger/takeover results in a significantly large
business, it might be able to dominate the market & generate bigger profits.
3. High remuneration for senior staff

→ After a merger/takeover, it is likely that executives’ salaries will rise because
they are now responsible for running a much bigger business.
B. Disadvantages
1. Integration costs
→ After a merger/takeover has been agreed, the next step is to physically
integrate the two organisations. This can be a very complex, expensive &
time-consuming process, the effects of which may be felt for many years.
Some of the costs incurred result from the organisational & personnel
changes, severance pay for dismissed workers, systems changes, training,
etc.
22
2. Loss of control
→ If growth is too rapid, the company might get too big too fast. This can result
in a loss of control by the senior executives. With a bigger organisation come
extra layers of management. This may lengthen communication channels &
impact negatively on the chain of command. As a result, costs may start to
rise as diseconomies of scale set in.
3. The alienation of customers

→ Companies that are growing too fast might Alienation-a separation of
lose touch with their customers. Too much a person from a position of
attention & resources get focused on the former attachment.
process of growth. As a consequence, the
needs of customers can be overlooked. This could damage the image of
the company & result in the loss of customers.
23
CHAPTER 51: PROBLEMS ARISING FROM GROWTH

Introduction: It is possible for a business to encounter problems if it grows too big or too
fast.
1. Diseconomies of scale
→ If a business expands the scale of its operations beyond the minimum efficient
scale, diseconomies of scale may result. This is where average costs rise as
output rises.
a) Internal diseconomies of scale-most internal diseconomies of scale are caused

by the problem of managing large businesses.
 Communication becomes more complicated & co-ordination more
difficult because a large firm is divided into departments.
 The control & co-ordination of large businesses is also demanding.

Thousands of employees, billions of pounds & dozens of plants all mean
added responsibility & more supervision.
 Motivation may suffer as individual workers become a minor part of the

total workforce. This can cause poor relations between management &
workforce.
b) External diseconomies of scale-These may occur form overcrowding in

industrial areas. The price of land, labour, services & materials might rise as firms
compete for a limited amount. Congestion might lead to inefficiency, as
travelling workers & deliveries are delayed.
2. Internal communication
→ Is the exchange of messages & the flow of information inside a business-
between individual workers or between departments, for example.
→ If a business grows too big, there could be a problem with internal

communication. The number of layers in the management structure is likely to
grow & as a result, channels of communication get longer & the scope for error
in the transmission of messages increases. Distortions to information may occur if
it is passed through the managerial hierarchy. At worst, this could lead to
misunderstandings & disputes between workers & managers.
→ With the rapid development in ICT some of these problems may have been
reduced. For instance, the use of video conferencing might also help internal
communication, where members of staff in different geographical locations can
communicate face to face.
24
→ However, it might also be argued that IT has also brought a whole new set of
communication problems. To give an example, communications can be
seriously hampered when IT system fails.
3. Overtrading
→ Means producing, selling & buying beyond the capacity.
→ If a business grows too fast, there is a danger that it might suffer from
overtrading. This is more likely to happen to young, rapidly growing businesses.
Overtrading occurs when a business tries to fund a large volume of new business
with insufficient resources. As a result, it runs out of cash, & at worst, it can
collapse.
→ Overtrading is most likely to occur if a business:

 Does not have enough capital. It is not rare for a new business to be
undercapitalized. This means that it has started trading with insufficient
capital. It does not have enough cash to buy the resources to meet growing
orders.
 Offers too much trade credit to customers, where it will allow its customers of
90/120 days of trade credit. But this means that the business has to wait that
length of time or more to be paid. During this time, it will be short of cash to
buy the resources needed to meet new orders.
25
CHAPTER 52: QUANTITAIVE SALES FORECASTING

I. Calculation of time series analysis: moving averages (three period/four quarter)
Three period-
means 3 years
Four quarter-12
months/1 year
Calculations:
125+130+130
i. = 128.3 Not all the time, the calculation is 3
3
ii.
130+130+150
= 136.7 years, it depends on the question.
3
130+150+140
iii. = 140
3
→ To calculate the moving average, the first years’ sales drop out (e.g. 2006) &
the next year sales (e.g. 2009) are added.
→ By calculating the moving average, business will be able to identify the trend of
future sales. This can be positive if it is rising (the moving average), negative if it
is falling & constant if the moving average remains the same.
→ In the above example, since the moving average is increasing which means its
positive. Thus, the business can predict that its future sales will also be high.
The average/moving average will always be

placed (in the box) in the middle of the total years.
II. Interpretations of Scatter Graphs & Line of Best Fit

A. Line of Best Fit
→ Is the best line that can be drawn that matches the general slope of all points
in the trend. The line is an average, where points in the trend on one side of the
line are balanced with those on the other. In other words, it is a line that ‘best
fits’ all points in the trend.
B. Interpretations of Scatter Graphs
Advertising (the independent

variable) is shown on the
horizontal (x) axis. Sales (the
dependent variable) are
shown on the vertical (y) axis.
26
→ Looking at the graph, there appears to be a positive correlation between the

two variables. The more that is spent on advertising, the higher the level of
sales. The line of best fit is drawn through the data to show this relationship
better. It is also possible to calculate the extent of the relationship by means of
a correlation coefficient, using the formula:
Σ𝑋𝑌
𝑟= Σ𝑋𝑌 -sum of the product of XY
√(Σ𝑋 2 )(Σ𝑌 2 )
Σ𝑋 2 -sum of all 𝑋 2
Σ𝑌 2 -sum of all 𝑌 2
→ Interpretations:
 A correlation coefficient close to 1 means there is a positive relationship
between the two variables. All points in the scatter graph fall on the line of
best fit & the line slopes upwards from left to right. As the values of the
independent variable increases, so do the dependent variable values.
 A correlation coefficient of 0 means that there is no relationship between
the variables.
 A correlation coefficient of close to -1 means that there is a negative
relationship between the two variables. All points in the scatter graph fall on
the line of best fit & the line slopes downwards from left to right. As the
values of the independent variable increase, the values of the dependent
variable fall & vice versa.
III. Limitations of Quantitative Sales Forecasting

1. The forecast is for a short period of time in the future, such as 6 months, rather
than a long time such as 5 years. -If the business makes sales forecast for many
years, it may be unreliable due to changes in the external factors/ government
policies.
2. Sales forecasts might become unreliable if they are not revised frequently-If the
business does not take into account any new data/ information about the
market. Then, it may lead to sales forecasts to be inaccurate.
3. Sales forecasts are likely to be more inconsistent if the market is fast changing-If
the market is fast changing, which means sales may also fluctuate e.g., due to
changes in consumer tastes. This will make the sales data unreliable.
4. Sales forecasts are likely to be more uncertain of those preparing the forecast
does not have a good understanding of the preparation of the forecasts. -If
those preparing the sales forecasts does not have good knowledge/
understanding of how to use data to produce a forecast. Hence, sales forecast
may become unreliable.
27
CHAPTER 53: INVESTMENT APPRAISAL

 Investment
-refers to the purchase of capital goods (used in the production of other goods).
For example, A building contractor who buys a cement mixer has invested.
These goods will be used repeatedly by the business over a period of time.
-also refers to expenditure by a business that is likely to yield a return in the
future. For instance, a business might spend £20 million on research &
development into a new product.
 Investment appraisal
-analysing the potential investment (its costs & returns)
-describes how a business might objectively evaluate an investment project to
determine whether or not it is likely to be profitable. It also allows businesses to
make comparisons between different investment projects.
-Methods: Simple Payback, Average (Accounting) rate of return & Discounted
cash flow (net present value only)
I. Simple Payback
→ The payback period refers to the amount of time it takes for a project to
recover/pay back the initial outlay (expenditure).
→ Amount of time for the business to get its cash back.
→ Example: An engineer may invest £500,000 in a new cutting machinery &
estimate that it will lead to a net cash flow over the next 5 years.
Explanation:
-From year 0, the business invested 500, so it is negative. At year 1, the
business received cash of 100, so the remaining investment is 400. At year 2,
the business received cash of 125, so the remaining investment is 275. At
year 3, the business received cash of 125 so the remaining investment is 150.
From year 1 to year 3, there is no profit the business will make.
-At year 4, finally the business received its last return of investment which is
150. That is why its 0. Thus, the payback period is 4 years. After the 4th year,
the business will start generating any amount of profit because of its
investment.
28
A. Advantages of Simple Payback

1. This method is useful when technology changes rapidly, as it is important for
the business to know when to recover the cost of investment of the old
machine before a new model is designed which they will have to purchase
later on.
2. It is simple to use.
3. Firms might adapt this method if they have cash flow problems. This is because
the project chosen will ‘payback’ the investment more quickly than others.
B. Disadvantages of Simple Payback

1. Cash earned after the payback period is ignored.
→ Usually, simple payback method only shows & stops at the payback period.
So after this period, if the business receives cash on its investment, it will not
be able to identify it.
2. The profitability of the method is overlooked.

→ Since this method only shows up until the payback period, what will happen
after that, whether its profit/ loss, the business will not be able to know.
II. Average (Accounting) Rate of Return (ARR)

→ This method only shows the amount of return of investment every year. But it
will not indicate the specific time when the business will get its full amount on
the rate of its investment.
𝑁𝑒𝑡 𝑅𝑒𝑡𝑢𝑟𝑛 (𝑝𝑟𝑜𝑓𝑖𝑡)𝑝𝑒𝑟𝑎𝑛𝑛𝑢𝑚
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 (𝐴𝑅𝑅)% = × 100
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑜𝑢𝑡𝑙𝑎𝑦(𝑐𝑜𝑠𝑡)
Capital outlay (cost) refers

to the amount invested
ARR Calculation
A. Advantage of ARR
→ Through this method, business will be able to identify its specific profit
percentage in the future & it shows clearly the profitability of an investment
project. In the above example, the business can identify/compare a range of
projects of which are more profitable to invest on.
29
B. Disadvantage of ARR: The effect of time on the value of money are ignored.
→ Since this method will only show the future value of the profit, then it means it
will not show the present value of profit. Also, due to other factors such as
inflation e.g., in 5 years’ time, the profit that is calculated for the future may
be the same monetary value, but the value may fall due to inflation.
III. Discounted cash flow (net present value only)

→ A method of investment appraisal that takes interest rates into account by
calculating the present value of future income.
→ Example: Value of £100 invested over 5 years at 10% per annum compound
interest.
→ Calculation: Year:
1 = 100 × 10% = 10 + 100 = 110
2 = 110 × 10% = 11 + 110 = 121
3 = 121 × 10% = 12.1 + 121 = 133.1
4 = 133 × 10% = 13.3 + 133 = 146.3
5 = 146 × 10% = 14.6 + 146 = 160.6
Explanation:
-The business has initially invested £100. Through this method, the present
value of future income can be calculated but even if the monetary value is
increasing, still the value is same due to inflation.
-However, if the business income for the future e.g., in the 5th year became
£170 instead of £161 which means the value is increasing. Thus, they can
invest on this particular project.
A. Advantages of Discounted Cash Flow

1. The discounted cash flow method, unlike the two methods, correctly
accounts for the value of future earnings by calculating present values.
2. This method is very easy to use. If interest rate changes, business will just have
to easily calculate the new present value of future earnings.
B. Disadvantages of Discounted Cash Flow

1. The calculation is more complex than other methods. -It is complex in a way
that if interest rate changes, then, the business will have to calculate the
present value for each year which takes time.
2. Rate of discount is critical-Here, the concept is, if the discount rate/interest

rate is high, fewer projects will be profitable. But of the discount rate is low
e.g., 10% to 5%, then projects are likely to be more profitable.
30
CHAPTER 54: DECISION TREES

I. Decision Trees
→ When the outcome of a decision is uncertain, decision trees can be used to
help a business reach a decision which could minimise risk & gain the
greatest return.
→ Decision Trees-a method of tracing the alternative outcomes of any decision.

The likely results can then be compared so that the business can find the
most profitable alternative.
→ Example: A business may be faced with 2 alternatives-to launch a new

production Europe or in the USA. A decision tree may show that launching a
new product in Europe is likely to be more successful than launching in the
USA.
II. Features of Decision Trees

→ Example of a decision tree for a business that has to decide whether to
launch a new advertising campaign or retain an old one.
1. Decision points
→ Points where decisions have
to be made in a decision
tree & is represented by
squares. The decision maker
has to choose between
certain courses of action. In
this example, the decision is
whether to launch a new
campaign or retain the old
one.
2. Outcomes
→ Points where there are different possible outcomes in a decision tree are
represented by circles called chance nodes. At these chance nodes, it can
be shown that a particular course of action might result in a number of
outcomes. In this example, at ‘B’ there is a chance of failure or success of
the new campaign.
3. Profitability/chance
→ The likelihood of possible outcomes happening is represented by
probabilities in decision trees.
31
→ 2 sources of information which can be used to estimate probabilities:

i. Back data
-Example, if a business has opened 10 new stores in recent years & 9 of
them have been successful, it might be reasonable to assume that the
chances of another new store being successful are 9/10 or 0.9.
ii. Research data

-Example, a business might carry out market research to find out how
customers would react to a new product design. 80% of people
surveyed may like the product & 20% may dislike it.
4. Expected monetary values

→ Is the financial outcome of a decision. It is based on the predicted profit or
loss of an outcome & the profitability of that outcome occurring.
III. Calculating Expected Monetary Values (EMV)

→ What should the firm decide?
OR
→ From these figures, the firm should continue with the existing campaign
because the expected value is higher.
It is possible to have more than two outcomes at a chance

node. Thus, this will lead to a different expected value.
IV. Advantages & Disadvantages of Decision Trees

A. Advantages
1. Constructing the tree diagram may show possible course of action not
previously considered.
→ Since this method shows different possibilities, it will help the business to
identify different outcomes compare to other methods which only shows
limited possibilities.
2. They involve placing numerical values on decisions. This tends to improve

results.
B. Disadvantages
1. The information which the technique ‘throws out’ is not exact. Much of it is
based on probabilities which are often estimated.
→ Since the probability figures are only estimated which means it may be
inaccurate.
32
2. Decisions are not always concerned with quantities & probabilities. They
often involve people & are influence by legal constraints or peoples’
opinions.
→ Even if the business thinks that a particular option is more profitable, it
doesn’t mean it will be able to take that as the final decision. This is
because the main decision is influenced by the higher authority &
government regulations.
Qualitative data may also be important:

3. Time lags often occur in decision making. By the time a decision is finally
made, some of the numerical information maybe out of date.
4. Decision trees are not able to take into account the dynamic nature of a
business.
→ Example: A sudden change in the economic climate might represent a
decision based on an outdated decision tree.
33
CHAPTER 55: CRITICAL PATH ANALYSIS
Critical path analysis (CPA)/ Network Analysis

-a method of calculating the minimum time required to complete a
project, identifying delays which could be critical to its completion.
-done before investment.
I. Nature & purpose of Critical Path Analysis

1. Efficiency
→ Producing a network diagram can help a business to operate efficiently.
Example, a network shows those tasks that can be carried out at the same
time. This can help save production/ installation time & the use of
resources.
Network diagram-a chart showing yeh order of the

tasks involved in completing a project, containing
information about the time taken to complete the tasks.
2. Decision making
→ It is suggested that estimating the length of time a project will take based
on past information & an analysis of the tasks involved should lead to
deadlines being met more effectively, as the implications of delays can
be assessed, identified & prevented.
3. Time-based management
→ Some businesses operate time-based management systems. These are
techniques to minimise the length of time spent in business processes.
→ Example, for mega projects like constructions. If the business received the
length of time it must complete a project, then CPA comes. Through CPA,
business should allocate time as per the difficulty for each phase of
production in order to complete the whole project as per the given time.
4. Working capital control

→ Identifying when resources will be required in projects can help a business
to manage its working capital cycle. Network diagrams allow a business to
identify exactly when materials & equipment will be used in a project.
→ Example, material can be purchased when required, rather than holding

costly stocks. This is especially important if a business operates a JIT system
of stock control.
34
II. Interpretation of Simple Networks

→ Many of the operations carried out by the businesses are made up of a
number of tasks. The operation is only complete when all of the tasks have
taken place.
→ Example 1, a simple network for an instrument repairer changing a set of

strings on a guitar:
→ Each task will take a certain amount of time. The operation tales 20 minutes
to carry out 1+1+5+10+3 (allocation of time).
→ Example 2, a more complex network for cake preparation.
 Minimum time-when
the business decides
its own time to
complete the project.
 Maximum time-when
the time is given by
the other party.
→ In this network, if the business calculate its minimum time to finish the cake,
among the preparations of the ingredients A,B, & C which can be carried out
at the same time, A has the longest time. Thus, as the business anticipates its
minimum time to finish the cake, it will get the longest time which is 10. So
5+10+15=30.
→ When tasks are carried out at the same time, usually it involves many workers.
III. Calculation of:

 Earliest start time (EST)
 Latest Finish Time (LFT)
 Total Float
A. Calculating the Earliest start times

→ Earliest Start Time (EST)-shown in the top right of the nodes; at which each of
the tasks/activities can start.
35
Nodes
-circles on the diagram that shows the start & finish of a task/activity;
there is always a node at the start & end of the project.
-contain information about the timing involved in the project.
→ Explanation:
 Node 1: Task A can begin immediately. So 0 is placed on the EST in node 1.
 Node 2: Task A takes 1 day to complete. Tasks B&C, which can be carried
out at the same time, can only begin after Task A is completed(after 1
day). This is placed in EST in node 2.
 Node 3: Task B takes 4 days to complete. Together with 1 day to complete

Task A, this mean tasks D & E can’t start until 5 days(4+1). This is placed in
the EST in node 3.
 Node 4: Task C takes 8 days to complete, together with the 1 day to

complete task A. This means that task F cant start until after 9 days (8+1).
This is placed in the EST in node 4.
 Node 5: What will be the EST for Task G Important rule when
which begins at node 5? calculating EST -Always
Among the 3: A, B,D (7 days to choose the longest amount
complete) or A,C,F(17 days to of time when placing EST in
complete) or A,B,E (19 days to nodes.
complete). So the EST in node 5 is 19
days (longest time) & Task G can’t start until after 19 days.
 Node 8: Tasks up to node 6 have taken 22 days to complete. So tasks H&J

can only begin after 22 days. Between Task J(6 days) & Tasks H&I(3
days). Task J is the longest. So the EST placed in node 8 is 22+6=28 days.
36
As node 8 is the final node, to complete the entire project it takes 28

days.
B. Calculating the Latest Finish Times (backward calculation, which starts from the
last node)
→ Latest Finish Times (LFT)-involves calculating the latest times that each task
can finish without causing the project to be delayed; appear at the bottom
right of the nodes.
FORMULA: LFT at node - time taken to complete previous task
→ So the LFT at node 7, for task H, is 28-2=26 days. While the LFT at node 6 is
28-6(longest time)=22 days.
For each task:

For LFT, the same rule
-the EST will be placed on the node before that applies: use task J which
task. takes the longest time.
-the LFT will be placed on the node after that task.
→ For the calculation of LFT for nodes 2&3, they took the path of task E-task B-
task A since it shows the longest time (19 days).
C. Calculating the Float Total Float-amount of time

by which a task can be
𝑇𝐹 = 𝐿𝐹𝑇 𝑜𝑓 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 − 𝐸𝑆𝑇 𝑜𝑓 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 − 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 delayed without affecting
the project.
→ Example: For task B=5 days-1 day-4 days=0
days (this means no effect on LFT)
Activities which lie on the critical path will always have a zero total float value.
37
IV. Identifying Critical Path
→ In the above network, the red dotted lines indicate the critical path & the
tasks which can’t be delayed if the project is to be completed on time. These
are tasks A,B,E,G & J.
→ If ever, for example, task B got delayed then EST of task E which was 5 will
become 6. Thus, they have to readjust their production days instead of 14, it
will be 13 so that the LFT (28) will not be affected.
V. Limitations of Critical Path Analysis

1. Information used to estimate times in the network may be incorrect. For
instance, management might have estimated times based on past
performance, but a new project could have special requirements that take
longer.
2. Changes sometimes occur during the life of the project. Example,

construction companies may need contingency plans to deal with
unforeseen events, such as bad weather which could delay operations.
These need to be taken into account when producing a network. However, if
there are no contingency plans, business’s LFT is more likely to be delayed.
38
CHAPTER 56: CONTRIBUTION

I. Nature of Contribution
Contribution
→ Is the amount of money left over after variable costs have been subtracted
from revenue. The money contributes towards fixed costs & profit.
→ The difference which is the ‘contribution’ will contribute to fixed costs &
profit. This means the business will be able to cover its fixed costs & find out its
profit.
II. Calculation of Contribution

→ There are 3 formulas:
1. Contribution per unit=selling price – variable cost
2. Total Contribution=Total Revenue – Total Variable costs
3. Total Contribution=Unit contribution(sp-vc) x number of units sold
Example: Total revenue=100, Variable cost=50, Fixed costs=30

Contribution=100-50=50
50-30=20(profit)
Fixed costs are covered.
39
CHAPTER 57: CORPORATE CULTURE

I. Strong & Weak Corporate Culture
Corporate culture- also known as organisational/business

culture; the values, attitudes, beliefs, meanings & norms that
are shared by people & groups within an organisation.
 Strong culture
-a culture where the values, beliefs & ways of working are deeply embedded
with the business & its employees.
-culture is accepted by all employees & they are motivated so they do not
leave the organisation.
 Weak culture
-is when the employees do not accept the working practices. Thus, they will
be demotivated so turnover will be high which means workers are likely to
leave the organisation.
II. Classification of Company Culture Usually, one organisation

1. Power culture only has one culture.
→ Is one where there is a central source of
power responsible for decision making.
→ Is when the person on top of the hierarchy(owner) has all the

authority/control of the organisation.
2. Role culture
→ Power is associated with a role/position such as marketing director/
supervisor, rather than the individual.
→ Influence & control lies with the roles that individuals play rather than with
the individuals themselves.
3. Task culture
→ Power is given to those who can accomplish tasks. Power then lies with
those with expertise rather than a particular role.
→ Teamworking is common, with teams made up of the experts needed to

get a job done & everyone has the same responsibilities. Teams are
created & then dissolved as the work changes.
40
4. Person culture
→ Power is given to the person itself so each of them have power & can
make their own (small) decisions. Example, accountants, lawyers, doctors,
etc.
III. How corporate culture is formed

→ Factors that are likely to have a significant impact on the formation of a firm’s
culture:
1. The role of the founding members of the organisation, their personalities &
beliefs. Often a strong leader’s attitudes will permeate the organisation.
2. Environmental factors that the business was born into. To give an example,
history of the business may determine its values & norms.
3. Type of product-It depends on the type of product/ service the business

has to decide on creating which culture. Example, if the business has a
very complex product, then it may contribute to task/role culture.
IV. Difficulties in changing an established culture

→ From time to time, it might be desirable for a business to change its culture to
one that is stronger & productive to have a competitive advantage over its
rivals. However, when the workers are used to the old culture, introduction of
new culture may be difficult for the business. This is because workers may just
forcefully follow it but the business will not be able to identify what the
workers truly feel/ think towards the new culture because it is intangible
(invisible). Also, changing culture is not easy & can be a long process.
41
CHAPTER 58: SHAREHOLDERS VS STAKEHOLDERS

I. Internal & External Stakeholders
Stakeholders-a person, group or organisation who can affect/ be

affected by the organisation’s actions, objectives & policies.
A. Internal Stakeholders
→ Groups inside a business with an interest in its activities.
1. Business owners
→ A business is the property of the owners. Owners are stakeholders because
they stand to gain or lose financially from the performance of the business.
If the business does well, they will enjoy a share of profit, but if it fails,
owners may lose the money invested in the business.
2. Employees
→ Employees work for the business & depends on businesses for their
livelihood. Most employees have no other sources of income & rely on
wages to live on.
3. Managers & Directors Directors are also the

→ In a large business, the key decisions owners/shareholders who
relating to the company policy & have greater shares than
strategy are made by the Board of external shareholders.
Directors.
Board of Directors-comprise of directors responsible for the

shareholders; directors will not be involved in the daily operations.
→ On behalf of them, it is then the responsibility of the managers to ensure

that the policies & strategies are implemented. Managers are responsible
for the work carried out in their departments & for the people employed
to do the work.
B. External Stakeholders
→ Groups outside a business with an interest in its activities.
1. Shareholders
→ Most shareholders in large companies are not involved in the day-to-day
running of the business. They are investors & have a purely financial
interest.
42
2. Customers
→ Customers buy the goods & services that businesses sell. Through their
purchases, they provide the revenue & profit that businesses need to
survive.
3. Creditors
→ Creditors lend money to a business & they may be banks, family member,
etc.
→ Creditors have a financial interest in a business & will expect their interest
payments to be met & their money returned at the end of the loan period.
4. Suppliers
→ Suppliers provide raw materials, components, commercial services &
utilities to other businesses.
→ Businesses want good quality resources at reasonable prices & prompt

delivery. In return, suppliers require prompt payment & regular orders.
5. Local community
→ Business has an impact on the local community:
 Positive impact-A business may employ people locally. Thus, there may
be job creation & possibly higher pay.
 Negative impact-A business may be criticised by the local community.

For example, if a factory is noisy/polluting.
6. Government
→ Government will want businesses to be successful as they provide
employment, generate wealth & pay taxes. If businesses fail, the
government loses tax revenue & has to pay benefits to the unemployed.
7. The Environment
→ Business activity can have an impact on the environment. For example, if
a business releases toxic waste into the waterway system, wildlife & its
habitats could be destroyed. Thus, representatives of the environment
have an interest in business activity.
II. Stakeholder Objectives

1. Shareholders
→ Majority of the shareholders will want the business to maximise
‘shareholder value’. This is a measure of company performance that takes
into account the size of dividends (share in profits) & the share price (value
of ownership).
43
2. Employee objectives
→ Employees want the business to grow & become more profitable as they
are likely to get higher wages & more perks like bonus & job security.
3. Managerial objectives
→ Many managers have part of their remuneration linked to the
performance of the business & will therefore want the business to perform
well. Managers may also press for other benefits like bonus if they perform
well.
4. Customer objectives
→ Customers want good-quality products at a fair price. They also want
clear & accurate information about products, high-quality customer
service & innovative products.
5. Supplier objectives
→ Suppliers want to be treated fairly by businesses. They would prefer to
have long-term contracts, regular orders, fair price for their goods & to be
paid on time.
6. Government objectives
→ Government will want businesses to grow, make more profit, comply with
laws & not exploit vulnerable groups.
7. Environmental objectives
→ Environmental groups will want businesses to avoid having any negative
impact on the environment. For example, they will demand that business
activity does not pollute the atmosphere or waste resources.
8. Local community objectives

→ Local communities will want businesses to contribute to the prosperity of
the community, create employment & avoid or minimise congestion &
pollution in the area.
III. Stakeholder & Shareholder Influences

A. Stakeholder Influences-Stakeholder Approach
→ Some corporation take into account the objectives of a wider group of
stakeholders in addition to shareholders when making business decision. This
means that corporation should:
 Recognize the interests of other stakeholders & take the views into
account when running the business & making decisions.
 Maintain open communication channels with other stakeholders.
 Minimise/eliminate the adverse effects of business activity.
44
B. Stakeholder Influences-Shareholder Approach

→ Some businesses still adopt this approach where they aim to maximise
shareholder returns by raising both dividends & the share price.
IV. Conflicts between Shareholders & other Stakeholders

1. Shareholders & Employees
→ Meeting the objectives of employees in terms of higher wages, better
conditions, more perks & improve employee welfare comes at a cost. If
the needs of the employees are met in full, there is likely to be a negative
impact on profit & dividends. Thus, conflicts may arise between employee
objectives & the dividends of the shareholders.
2. Shareholders & Customers

→ Conflict between shareholders & customers is most likely to arise if a
business charges prices that are too high. Higher prices will help to boost
shareholder returns but reduce the purchasing power of customers.
3. Shareholders & Directors & Managers

→ Conflict may arise if the managers & directors start to prioritise their own
objectives such as maximising remuneration, perks, & other benefits. If
these are too high, profit & dividends may suffer. This is most likely to
happen if shareholders lose some of their control over the business. There
may be a ‘divorce of ownership & control’.
4. Shareholders & the environment

→ In an effort to maximise profit, a business might neglect its responsibilities
towards the environment. Because of this, they may attract the attention
of the media & environmental groups resulting in conflict between the
company & environmentalists.
45
CHAPTER 59: BUSINESS ETHICS

I. Ethics
→ Ethics considers the moral ‘rights & wrongs’ of a decision.
→ When the business makes the decision for the overall business without
considering each worker.
→ Trade-offs between ethics & profit: There can exist a conflict between ethical
objectives & profitability. A trade-off exists when the selection of one choice
results in the loss of another.
→ For businesses, acting ethically when not required to do so by the law can
have a negative impact on profit in a number of ways. The result can be a
trade-off.
1. It can raise costs

→ Example: Paying higher wages than is necessary to overseas workers
increases costs. Having to find other ways than animal experiments to
test a new drug might add to costs.
2. It can reduce revenues.

 A business might lose a contract if it refuses to give a bribe (this is in the
case of construction companies)- This means that the business can only
acquire contract for example, from the government that offers
profitable project if they bribe the government officers. However, if
they act ethically which means they will not give bribes then they will
not be able to get the contract. Thus, they will have no work, this will
reduce revenues.
 Selling medicines at emerging economies Emerging economies is

at lower prices- This means that if the where most of the
business acts ethically & are more people are poor.
concerned about the health of the
people, they will lower prices. Therefore, quantity of sales might
increase but revenue will fall.
→ Overall, there is a trade-off between profit & ethics. If the business acts
ethically buy not giving bribes or by charging lower prices as they care more
about the health of the people. Thus, this will lead to fall in revenue &
eventually lower profits.
→ However, adopting an ethical stance can Ethical Stance- a position

produce benefits: Some companies have assumed that a person
used their ethical stance for marketing believes to be right & true.
purposes. For example, the Body Shop have
increased sales by having a strong ethical stance & drawing in customers
who are attracted by this.
46
II. Pay & Rewards
Remuneration-is the reward from work, in form of pay, wages

of salary. Businesses use pay & rewards for different purposes.
→ To attract employees with the right skills, experience & knowledge, the
business will have no choice but to give them high salaries otherwise the
business will not be able to attract them. (Here, there is no ethical /unethical
actions). Where jobs are less skilled & the available number of workers is very
high. The business will then take advantage of this by paying lower wages.
This is unethical.
→ If the business aims to make a profit. Then, they will have to give rewards to
their employees so that they will be more motivated & productive. As a result,
output will increase as well as profit. However, if the business gives reward to
its employees but still, they are not productive. Therefore, this may increase
the business’s costs & lower their profit.
III. Corporate Social Responsibility (CSR)

→ A business assessing & taking responsibility for its effects on the environment &
its impact on social welfare. Example of a business taking responsibility for its
effects is when it indicates the side effects with the packaging of the
medicine it produces.
→ Large businesses may feel responsible towards the society. In general, they
may provide help to charities, give free food, help elderly people, etc. This
seems free but its actually use to increase their goodwill & reputation.
→ Contributing to the social development, financially/non-financially.
→ More examples:
 Employment indicator-include indicators about pensions, healthcare
benefits, training & education, equal opportunities & the level of women in
higher management or director positions.
 The communities in which the business operates. -What impact does the
business have on the life of the communities in which it operates?
Example, how much does it give to charities? How much is spent on local
schools, hospitals & housing.
47
CHAPTER 60: INTERPRETATION OF FINANCIAL STATEMENTS

Financial Statements
Statement of
Statement of Financial
Comprehensive Income
Position (Balance Sheet)
(Profit & Loss Account)
I. Statement of Comprehensive Income (Profit & Loss Account)

→ For most PLCs, the Statement of Comprehensive Income is used to show the
income & expenditure of the business for a period of time (usually one year)
& calculate the profit made by the business.
A. Key Information
1. Revenue(/turnover)
→ money the business receives
from selling goods & services.
2. Cost of sales
→ production costs of a business
which relates to direct costs such
as raw materials & labour.
3. Gross profit
→ is the cost of sales subtracted from the revenue.
4. Selling expenses
→ Range of expenses related to the selling of business’s products. Example,
advertising.
5. Administrative expenses
→ Are general overheads/indirect costs of the business. Example, office
salaries.
6. Operating profit
→ Is when the selling & admin costs are subtracted from gross profit.
7. Finance costs
→ If a business borrows money, it will have to pay interest to the lender. The
amount paid will be entered in Statement of Comprehensive Income as a
finance cost. However, a business may also receive interest if it has money
in deposit account. This will appear as finance income in the accounts.
48
8. Profit for the year (net profit)

→ Profit before taxation
→ Is when the cost of finance is subtracted from the operating profit.
9. Profit for the year (net profit) after tax

→ Also known as ‘bottom line’.
→ Money that is left over after all expenses, including taxation, has been
deducted from revenue.
B. Stakeholder Interest
1. Shareholders
→ Naturally the owners of a business will be interested in its performance.
Shareholders are likely to be interested in the profit made by the business
particularly the profit for the year after tax. Rising profits are an indication
of improving performance.
2. Managers & Directors

→ Since managers & directors are responsible for running the business, they
are likely to use key information from Statement of Comprehensive
Income to monitor progress. Example, changes in revenue will show how
fast a company has grown & whether targets have been met.
3. Employees
→ If employees are seeking a wage increase, it may be helpful to have
access to some of the information in the Statement of Comprehensive
Income when presenting a claim. For instance, if employees wanted a 5%
wage increase, they might point to the 92% increase in the profit for the
year.
4. Suppliers
→ Before a supplier accepts an order from a new customer on trade credit,
it is prudent to carry out a check on their creditworthiness. If the Statement
of Comprehensive Income show that a customer is consistently profitable,
this might be enough proof for the supplier.
5. Government
→ Companies have to produce a Statement of Comprehensive Income by
law. It is needed by the tax authorities to help assess how much tax a
business has to pay.
II. Statement of Financial Position (Balance Sheet)

→ Provides a summary of a firm’s assets, liabilities & capital.
𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
 Assets-resources that a business owns & uses.
49
 Liabilities-debts of the business, that is, what it owes to other businesses,

individuals & institutions.
 Capital-money introduced by the owners of the business; source of funds
& can be used to purchase assets.
A. Key Information
1. Non-current assets
→ Long term resources of the
business which are not
expected to be sold within
12 months.
 Goodwill-intangible
/invisible/ non-physical
asset; exists if a
company has built up a
good reputation & its
customers are likely to
return.
 Other intangible assets-
example, brand names,
copyright, etc.
 Property, plant &
equipment-
tangible/visible assets
that the business owns.
(Physical assets)
2. Current Assets
→ Liquid assets that belong to
the business.
→ Are either cash or are
expected to be converted into cash within 12 months.
 Inventories- stocks of raw materials, finished goods & work in progress.
 Trade & other receivables-trade debtors, prepayments & any other
amounts owed to the business that are likely to be repaid within 12
months.
 Cash at bank & in hand-money held by a business on the premises or in
bank accounts.
3. Current liabilities
→ Money owed by the business that is expected to be repaid within 12
months.
 Borrowings-short term loans/bank overdrafts taken by the business.
 Trade & other payables-trade creditors & other amounts owed by the
business to suppliers of goods & services.
50
 Current tax liabilities-corporation tax, income tax & other tax owed by
the business that must be repaid within 12 months.
4. Non-current liabilities
→ Long-term liabilities of a business. Any amount of money owed for more
than one year.
 Other loans & borrowings-money owed by the company that does not
have to be repaid for at least 12 months. Example, long-term bank
loans, mortgages.
 Pensions
 Provisions
5. Net assets
→ Value of all assets minus the value of all liabilities. It will be the same value
as shareholder’s equity at the bottom of the balance sheet.
6. Equity
→ Shows the amount of money owed to the shareholders.
 Share capital
 Other reserves
 Retained earnings
B. Stakeholder Interest
1. Shareholders
→ Shareholders might use the balance sheet to see how the funds raised by
the business have been put to use. For example, shareholders may see
that more than 60% of the assets are tied up in property.
→ Balance sheet can also be used to assess the solvency of the business,
with the help of working capital. A business is solvent if it has enough
assets to pay its bills.
2. Managers & Directors

→ Balance sheet might be used by the management of a business.
→ Example: It is important for senior managers to be aware of the firm’s
financial position. Thus, it will need to monitor working capital levels to
ensure that the business does not overspend.
3. Suppliers & creditors

→ Suppliers will be most interested in the solvency of the business. Suppliers
are not likely to offer trade credit to a business that only has a limited
amount of working capital.
4. Others
→ It is possible that employees might use the balance sheet to assess
whether a business can afford a pay rise or whether their jobs are secure.
This is only if the assets are greater than the liabilities.
51
CHAPTER 61: RATIO ANALYSIS

I. Calculation
1. Profitability or Performance Ratios
→ Help to show how well a business is doing. They tend to focus on profit,
capital employed & revenue.
 Gross profit margin
-how much profit business will have to make in order to survive.
-Higher gross margins are usually preferable than lower ones as this
shows that the business is able to cover its costs.
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = × 100
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
-Gross profit margin may be increased by:

a. Raising revenue/turnover by increasing price.
b. Cutting the cost of sales by finding cheaper suppliers.
 Profit for the year margin
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥

𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑚𝑎𝑟𝑔𝑖𝑛 = × 100
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
 Return on capital employed (ROCE)

-Interpretation: The higher the ratio the better. But to decide whether
the business has performed well, it should be compared with another
business in the same industry.
-referred to as the ‘primary ratio’.
-it compares the profit, i.e., return, made by the business with the
amount of money invested, i.e., its capital.
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡
𝑅𝑂𝐶𝐸 = × 100%
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
(𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠)
2. Liquidity
→ How much liquid assets the business has, to meet its debts/borrowings.
 Current Ratio-assesses whether or not a business has enough resources
to meet any debts that arise in the next 12 months.
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
52
 Acid Test Ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠

𝐴𝑐𝑖𝑑 𝑇𝑒𝑠𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Interpretation of both Liquidity Ratios:

<1- liabilities > asset; business is insolvent/has cash shortages; business
does not have enough liquid assets to pay back short term loans/debts.
1 -assets = liabilities; there is cash flow problems; no cash in hand
1.5-2 - ‘best’ for the business; efficient working capital; business has
enough cash to meet short term loans/debts
>3 -business has invested too much money on liquid assets which is not
good so the business cannot use the money in the short term. They can
use it in the future if they sell the asset.
3. Financial Ratio
→ Gearing Ratio-can assess whether or not a business is burdened by its
loans.
𝑁𝑜𝑛 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐺𝑒𝑎𝑟𝑖𝑛𝑔 𝑅𝑎𝑡𝑖𝑜 = × 100%
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
Interpretation:
 50%
-means that a much larger proportion of business
finance is borrowed; high burden for the business.
-High gearing ratio would mean that creditors are
less likely to give loans to the business.
 25% - means that the business is not
overburdened with long-term debt.
Summary:
 High gearing ratio (50%)-means lower
profit/dividend for the shareholders.
 Low gearing ratio (25%)-means higher
profit/dividend for the shareholders.
53
II. Limitations of Ratio Analysis

1. Quality of final accounts
→ Ratios are based on financial accounts (Balance sheet & Income
Statement). Consequently, ratio analysis is only useful if the accounts are
accurate. One factor that can affect the quality of accounting
information is the change in monetary values caused by inflation. Rising
prices can distort comparisons made between different time periods.
2. Qualitative information is ignored.

→ Ratios only use quantitative information. On the contrary, some important
qualitative factors may affect the performance of a business that are
ignored by ratio analysis.
→ For example, in the service industry, the quality of customer service may
be an important performance indicator.
3. If 2 businesses in the same industry are compared using the ratio analysis.
Then, this is likely to result in a more valid/ accurate comparison. However, if
businesses in different industries are compared with each other using ratio
analysis. Hence, the result can be inaccurate.
54
CHAPTER 62: HUMAN RESOURCES

I. Calculation & interpretation of the ff. to help make business decision:
A. Labour productivity
→ Output per worker.
𝑇𝑜𝑡𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡(𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑡𝑖𝑚𝑒)
𝐿𝑎𝑏𝑜𝑢𝑟 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝐴𝑣𝑒𝑟𝑔𝑎𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠(𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑓 𝑡𝑖𝑚𝑒)
→ Is an important measure of the efficiency of a workforce.

→ For example, if there are 2 teams of workers in a factory, each with identical
equipment & the same number of workers, then the team with the highest
productivity could be identified as the most effective team.
→ Increasing labour productivity is generally assumed to increase the

competitiveness of a business. Higher labour productivity should drive down
costs, allowing a business either to lower its prices & so gain higher sales or to
keep its prices the same but increase its profit margins.
→ On the contrary, businesses sometimes find that they become less
competitive despite increasing their labour productivity.
→ Reasons:
 Rival businesses may increase their productivity at an even faster rate.
 A rival business may bring out a far better new product. So even if the
business has lower cost due to productive workforce, customers may
prefer to buy the new product rather than a cheaper old product.
B. Labour Turnover
→ Also known as staff turnover; is the proportion of staff leaving a business over
a period of time.
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑎𝑓𝑓 𝑙𝑒𝑎𝑣𝑖𝑛𝑔 𝑜𝑣𝑒𝑟 𝑡𝑖𝑚𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
𝐿𝑎𝑏𝑜𝑢𝑟 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = × 100%
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑎𝑓𝑓 𝑖𝑛 𝑝𝑜𝑠𝑡 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
→ Causes of high labour turnover:

 Low pay leads to higher labour turnover as workers leave to get better
paid jobs.
 Few training & promotion opportunities will encourage workers to leave
their current jobs.
 Poor working conditions, low job satisfaction, bullying & harassment in the
workplace.
→ Disadvantages of High Labour Turnover:

 Recruiting new staff can be costly.
 Large companies may put on induction programmes which further adds
to costs.
55
→ Advantages of Labour Turnover:

 Some workers may be ineffective & need to be encouraged to leave.
Getting rid of ineffective staff leads to labour turnover.
 Where a business pays low wages or where conditions of work are poor, it
may be profitable to have a constant turnover of staff rather than raise
wages or improve conditions of work.
C. Labour Retention
→ Looks at the rate at which employees stay with the business.
→ Opposite of labour turnover.
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑎𝑓𝑓 𝑠𝑡𝑎𝑦𝑖𝑛𝑔(𝑜𝑣𝑒𝑟 𝑎 𝑡𝑖𝑚𝑒 𝑝𝑒𝑟𝑖𝑜𝑑)

𝐿𝑎𝑏𝑜𝑢𝑟 𝑅𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 = × 100%
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑎𝑓𝑓 𝑖𝑛 𝑝𝑜𝑠𝑡 (𝑖𝑛 𝑡ℎ𝑒 𝑡𝑖𝑚 𝑒𝑝𝑒𝑟𝑖𝑜𝑑)
→ Advantages:
 High labour retention would mean that business will keep their skilled &
experienced workers. Thus, this will lead to lower recruitment & selection
costs.
 With the existing employees, since they are already familiar with the
working procedures & environment. Hence, the business no longer has to
provide training which may lower costs.
D. Absenteeism
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑎𝑓𝑓 𝑎𝑏𝑠𝑒𝑛𝑡 𝑜𝑛 𝑎 𝑑𝑎𝑦
𝐴𝑏𝑠𝑒𝑛𝑡𝑒𝑒𝑖𝑠𝑚 = × 100%
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑡𝑎𝑓𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
→ Disadvantages:
 Staff who are absent often aim to be ill. The business then in most cases,
has to pay sick pay.
 If temporary staff are brought in to cover for absent staff, this leads to
increased costs. Equally, costs will increase if permanent staff have to work
overtime & are paid at higher rates than their basic rate of pay.
→ Reasons for differences in rates of absenteeism:

 Small businesses tend to have lower rates of absenteeism because there is
much more feeling of teamwork. Whereas, workers in large businesses can
feel that no one will suffer if they take a day off work & so absenteeism is
acceptable.
 Nature of the tasks given to workers-Repetitive tasks will lead to job

dissatisfaction & will encourage workers to report sick. Interesting &
rewarding jobs tend to have lower absentee rates.
56
 Workers who feel that they are underpaid are more likely to take time off
work. They see it as compensation for the lack of monetary reward they
receive.
II. Strategies to increase productivity & retention & to reduce turnover &
absenteeism
1. Financial rewards
→ Theory of Scientific Management-According to Fredrick W. Taylor, people
are motivated mainly by money & would work harder to earn more.
Therefore, employees should be paid piece rates & the main benefit of
piece rates to business is that it rewards productive workers. Workers who
are lazy will not earn as much as those who are productive. This system
helps to motivate workers & businesses are likely to get more out of their
employees.
→ Performance related pay, bonus, profit related pay, etc. can also be used
to improve worker’s performance.
→ If financial rewards are profitable, it is unlikely that staff will want to leave a
business so staff turnover will be lower.
2. Employee share ownership

→ In large businesses, usually PLCs, they will give their employees (in high
positions) the opportunities to buy the shares of their business in the stock
market & they will be given a discounted rate. The employees will then
become the owner as well as the employee. In addition to their salary,
they will also be receiving profits. As a result, employers will benefit
because the workers are likely to be better motivated & more loyal to the
company if they own shares. They may work harder, take less time off sick
& are less likely to leave.
3. Consultation strategies
→ Employees are likely to be better motivated & more productive if they are
involved in decision making. Staff often complain when changes are
made & they are not consulted.
→ Types:
a. Pseudo Consultation
-no consultation/discussion
-management makes a decision & informs employee of that decision
through representatives.
-employees have no power to influence these decisions.
b. Classical Consultation
-employees have an influence on management decisions.
57
c. Integrative Consultation
-between management & trade union where they discuss matters
such as ways of increasing productivity or methods of changing work
practices.
→ If employees are consulted, changes are less likely to be resisted. Also,

employees may have ideas of their own which might benefit a business &
such idea can only be expressed of there is a proper consultation process.
→ However, consultation takes too long & slows down the process of
change. Also, some see consultation as a ‘cosmetic’ process where the
views of workers are heard but then ignored.
4. Empowerment strategies
→ Involves granting employees more authority in the workplace.
→ Strategies to help empower employees:

 Training-It is not possible to empower staff effectively without first
equipping them with the skills needed to take on more advanced tasks.
 Provide the necessary resources-There is a little point empowering staff if

they are not given the resources & information needed to undertake
more complex tasks.
 Hand over authority-Once employees have been empowered, they must

be confident that they have complete authority to make decisions. The
methods they choose & approaches they take must not be questioned.
→ Overall, giving people more control over their own work role should help
to improve their motivation & productivity. They will feel valued, more loyal
& less likely to leave an organisation. It may help to reduce absenteeism
because empowered staff may have a greater sense of responsibility.
58
CHAPTER 63: KEY FACTORS IN CHANGE

Main point of this chapter: How the business will respond to the changes in these
factors?
I. Key factors in change
1. Organisational structure
→ Example: Usually, the business does not give bonuses to its employees, but
if it does, then the culture of the business changes. Therefore, the business
will deal with this by achieving high profit in order to give bonuses to its
workers.
→ One of the most significant drivers for organisational change is external

growth as a result of a merger/acquisition. In such cases, two
organisational cultures will come together & their compatibility will often
be the key factor that leads to success or failure.
2. Size of the organisation

→ The larger the organisation the less adaptable & flexible it becomes. This
might simply be because there is more change to manage but also
because decision making takes longer in firms with a longer chain of
command.
→ In contrast, smaller businesses are far more flexible because decisions can
be taken quickly & implemented without the involvement of a large
number of stakeholders. Thus, smaller businesses are more likely to
respond quicky with changes.
3. Time/speed of change
→ If the speed of change is fast, the business has to respond fast or in
parallel with the changes otherwise they may fail & leave the market.
→ Example: Before, Nokia Company produces analogue phones. Due to

fast changes in technological advancement, they thought they can
cope with these changes but they fail to respond with this fast change.
As a result, they fail in the market & as of present, they can’t compete
with other businesses like Samsung, Apple, etc. who have responded
quickly with these changes.
59
II. Managing Resistance to change

→ Some shareholders may resist with the changes:
1. Workforce
→ Reasons:
 Employees & managers may fear that they will be unable to carry
out new tasks, may be made redundant or may face a fall in
earnings.
 Individual workers might be concerned that they will no longer work

with their preferred colleagues or may be moved to a job that they
dislike.
2. Owners
→ Owners may also be resistant as they might fear operating in unknown
markets & conditions. They might not want the cost of any changes.
They may also fear that they might not be able to adjust to new
situations & be forced out of business.
3. Customers & suppliers

→ If the business changes their way of dealing with its customers like for
example, how the customers will place their orders to the business. If
some customers are not prepared to place orders in this new way, then
the business may lose some of its customers.
Solution: To manage successful change in a business-create a sense of

urgency. This means getting people to actually see & feel the need for
change. Stakeholders must understand the need for change through
effective communication if anger and fear are to be overcome.
III. Transformative Leadership

→ Is a leadership style in which leaders encourage, inspire & motivate
employees to innovate & create change that will help grow & shape the
future success of the business.
60
CHAPTER 64: CONTINGENCY PLANNING
Contingency Planning
-is the process of anticipating possible changes in a
business’s situation & discussing ways of dealing with them.
-keeping up a back-up plan due to external factors.
I. Identifying key risks through risk assessment Risk assessment-the process

→ Possible scenarios: of identifying the risk/threats/
1. Natural disasters negative impacts.
→ The Earth is susceptible to natural
disasters. These are catastrophic
events that usually occur suddenly & are caused by environmental
factors. Examples include floods, hurricanes, volcanic eruptions,
tsunamis, earthquakes, epidemics, etc. Such events can have
devastating effects & may result in high levels of damage, death &
disruption.
→ Example: Since Japan is prone to earthquake, the businesses should

take contingency plan to have their other operations in other countries
where earthquake is uncommon so that their production will not be
disrupted.
2. IT systems failure
→ IT systems may fail anytime, to protect valuable information of the
business, they will have to keep ‘back-up’ in different devices/places
as part of contingency planning. This is so that they will not lose all the
important information if the IT system fails.
3. Loss of key staff (valuable/skilled staff)

→ If the skilled/experienced staff leaves the business, the business will
need to have back-up workers to replace the staff who left. Otherwise,
the business will cease production.
→ Example, if the skilled managers leave the business, the business should
prepare the assistant managers & give them training ahead of time so
that they can take this position. This is the contingency plan.
II. Planning for Risk Mitigation
Risk Mitigation-actions/process taken by the business to reduce the risks.
61
A. Business Continuity (Plan)

→ Shows how a business will operate after a serious incident & how it expects to
return to normal in the quickest time possible.
B. Succession Planning
→ Part of risk mitigation involves identifying & developing current employees
who have the potential to occupy key roles in the future. This is an important
process because it will help a business deal with the problem of losing key
staff.
→ Without succession planning, a business might end up promoting a person

who is not equipped to do the job or recruiting an unknown outsider at a far
greater risk & expense.
→ Overall, succession planning means that once key staff leaves the business,
some workers will fill the empty positions(temporarily) so it will not be a
problem for the business.
62
❖ BUSINESS TERMINOLOGIES IA2 (UNIT 3)

Annual revenue-the total value of Contribution-is defined as selling price
sales/price x quantity sold made within minus variable cost per unit; can be
a trading period of one year used to calculate break-even point; is a
financial factor taken into account
Ansoff’s matrix-is a decision-making tool
when making strategic and tactical
to help formulate business strategies
decisions
Assessing financial performance-
Corporate culture-is the ethos of a
analysing/ reviewing what the business
business and the way in which it
has achieved based on financial
conducts itself, it can differ on grounds
criteria.
of ethics, stakeholder inclusion,
Boston matrix-is a business tool used for management styles, CSR, treatment of
product portfolio analysis employees
Brand-A name, symbol or logo that Corporate objectives-the objectives of

identifies/differentiates the a medium to large-sized business as a
product/business in the eyes of the whole
consumer.
Corporate social responsibility (CSR)- a
Business continuity plan-shows how a policy that an organisation adopts for
business will operate after a serious image/PR/ethical/competitive reasons,
incident and how it expects to return to it also refers to the attitude of the
normal in the quickest time possible organisation towards employees/
customers/society/the environment
Company growth(inorganic)- the
development/expansion of the business Corporate strategy-refers to the action
by inorganic growth through mergers, plans & policies developed to meet a
takeovers, and acquisitions company’s objectives.
Company growth(organic)-the Critical path analysis-identifies the

expansion of a business through precise sequence of activities that need
increased sales/market share/ to be completed within a strict
distribution/product range/ customer timeframe and shows the best way to
base etc. avoid any unnecessary delay
Competitive advantage-a product offer Customer demand-The desire to buy a

which, by virtue of its price, quality, good or service from a business which
performance, etc. has demonstrable can be converted by the business into
advantages over its competitors sales
Conglomerate-A business that consists Customer loyalty-a positive attitude

of different types of businesses. They will held by a customer towards a business
be unrelated to each other but part of and/or its products which results in a
the whole group high level of repeat purchases rather
than switching to a competitor
Contingency planning-anticipates risks
before they happen and formulates a Customers-the persons or organisations
plan of action to cope with the risks. that actually make the purchase of
goods/services from a business
63
Decision trees- shows the possible Growth strategy-the development/

outcomes of a decision with the expansion of a business which may be
estimated probability and expected organic, by expanding from within its
monetary value of each of these own resources or inorganic, through
outcomes mergers, takeovers, and acquisitions
Directors-are individuals elected to Inorganic growth-is the expansion of a
oversee the running of the company on business by takeovers and mergers.
behalf of the owners.
Investment appraisal-These are business
Diseconomies of scale-rising long run tools/techniques that can be used to
average costs as a business expands help management make strategic
beyond its minimum efficient scale decisions such as whether a capital
investment project should be
Diversification-developing new
undertaken or not. Examples include
products in new markets
simple payback/average rate of
Economies of scale-the reductions in return/discounted cash flow
average costs enjoyed by a business as
Investment-spending by a business on
output increases
for example plant and machinery or
Employee share ownership-is when human resources in order to generate
interest in a company is held by the returns in the future
company's workforce.
Joint venture-when two or more
Employees-People/internal stakeholders businesses set up a new business which
whose time/labour is contracted to will be operated jointly.
carry out work for a business for which
Labour productivity-a measurement of
they are paid by the business
the efficiency achieved by the average
Ethics-in the context of business ethics, employee as calculated by labour
consideration of the moral ‘rights or productivity = output per time
wrongs’ of a decision at an often- period/number of employees
strategic level, in accordance with the
Labour turnover-the rate at which staff
law, and a business’s code of conduct
leave a business
in relationship to corporate social
responsibility Labour/employee retention-looks at the
rate at which employees stay with the
External influences-are events that
business. It is the opposite of labour
happen in the environment around the
turnover
business and have an impact on the
business. They include political, Long term strategy-is the direction or
economic, or social. They may be focus of the business projected into the
characterized as PESTLE future, it helps determine and guide the
business’ operations over a period of
External technological environment-is
time
the impact of technological change on
businesses through e-commerce and Long-term loans-are a method of
the use of mobile technology finance, usually from a bank. Interest
must be paid back
Financial statement-shows the
performance of the business over time, Market development-the marketing of
in terms of revenue and profit existing products in new markets
64
Market share-is the % of the total market Portfolio analysis-a method of

a business has in terms of volume or categorising all the products & services
value of a firm (its portfolio) to decide where
each fit within the strategic plans.
Mergers-A mutual agreement between
the managements and shareholders of Positioning-How a business uses its
two companies to bring both marketing mix to establish its relationship
organisations together to customers and in comparison, to
competitors
Mission statement-A statement of aims
or common purpose adopted by a Private limited company-is where shares
business designed to direct or stimulate are owned by friends/family that is not
the organisation listed/traded on the stock market
Opportunities-are options or openings Product development-marketing new/
that business might be able to exploit modified products in existing markets
resulting in improvement such as rise in
Rate of absenteeism-the number of staff
revenue.
who are absent as a percentage of the
Organic growth-involves expansion from total workforce. It can be calculated for
within a business by expanding the different periods of time. E.g.,
product range, or number of business daily/annually
units and location
Ratio analysis-involves using information
Organisational change-a process in from the financial statements and
which a large company/organisation turning it into numbers which are easy
changes its working methods or aims for to understand and can be used to
example in order to develop & deal compare the performance of a business
with new situations or markets over time or with similar businesses.
Penetration-using tactics such as the Recruitment-is finding suitable new
marketing mix to increase the growth of employees and can be done internally
existing products in an existing market. or externally
PESTLE analysis-analysis of the external Redundancies-employees that lose their
political, economic, social, jobs because the business no longer
technological, legal & environmental needs that job role
factors affecting a business
Remuneration-the reward for work in the
Physical resources- refer to the form of pay, salary/ wages including
operational factors concerned with allowances and benefits such as
premises, equipment and other company cars, health insurance,
resources needed to meet customer pensions, bonuses & non-cash
needs incentives
Porter’s strategic matrix-was developed Risk assessment-identifying and
by Michael Porter where he suggested evaluating the potential risks that may
four ‘generic business strategies’ that be involved in an activity that a business
could be adopted in order to gain proposes to undertake, ensuring
competitive advantage compliance with health and safety
legislation
65
Risk mitigation plans-identify, assess, Succession planning-is a process for

and prioritise risks and plan responses to identifying and developing new
deal with the impact of these risks on leaders, from existing employees who
the operation of the business can replace existing leaders when they
leave, retire, or die
Risk-A potential threat to the success of
an enterprise that could cause Summer bonus scheme-is a non-
problems/failure/loss of money financial human resource initiative
aimed at the office-based employees
Sales revenue-The total value of sales
income generated from sale of goods SWOT analysis-is an analytical tool that
or services. can help managers with complex
decisions.
Scenario planning-a strategic planning
method designed to explore Takeover-is when one business gains
uncertainties, learn how to protect the control over another, the business that
business from their worst consequences has been taken over ceases to exist
and prepare how to exploit any
Threats-are possible hazards that have
opportunities that might present
the potential to damage the
themselves
performance of the business.
Share price-is the value of a share on
Trade-off- arises where having more of
the stock exchange
one thing potentially results in having
Shareholders-are the owners of a less of another
company. Their interests may conflict
Transformative leadership-is a
with other stakeholder groups such as
leadership style that aims to change the
employees and, in this case, the board
way things are done within a business
of directors/senior executives.
Social responsibility-is a widening of
business objectives beyond self-interest NOTE: These list of business
to include a responsibility towards all terms are extremely important
stakeholder groups
for the final exam. They came
Statement of comprehensive income- from the recent past papers as
shows the performance of the business well as from the old ones but
over time, in terms of revenue/ consider to study, memorize &
profit/operating expenses understand everything to be
Strategic decision-a decision that will fully prepared. These terms will
have a long-term effect on the surely increase your
growth/direction of the organisation confidence when starting your
essays in the exams.
Strategy-An action or decision that is
designed to have a long-term effect
which supports the aims and the
objectives of the business/as part of
business planning
Powered by TCPDF (www.tcpdf.org)

Business Unit 3 Notes

Uploaded by

Copyright:

Available Formats

Business Unit 3 Notes

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Business Unit 3 Notes

Uploaded by

Copyright:

Available Formats

Pearson Edexcel IAL Business Unit 3

Complete Revision Notes(WBS13)

Downloaded by: ashiwani19 | [email protected] Want to earn $1.236

Pearson Edexcel Business

(These boxes may be seen throughout the revision notes.)

This means important key This means Additional

CHAPTER 44: CORPORATE OBJECTIVES

→ There can be a trade-off between

→ Reasons why a business may form & share a mission statement:

 To bring a company’s workforce together with a shared purpose-Many

Downloaded by: ashiwani19 | [email protected] Want to earn $1.236

3. Development of corporate objectives

Corporate objectives-combination of all departmental

→ Corporate objectives must be SMART:

ii. (M)Measurable- corporate objectives should have financial or quantifiable

4. Departmental & functional objectives

II. Critical appraisal of mission statements

CHAPTER 45: THEORIES OF CORPORATE STRATEGY

→ Developing an effective corporate strategy requires a significant amount of time

→ Is a useful decision-making tool

→ Ways a business can achieve this:

→ Even where the market is successful, it is often necessary to make slight

B. Porter’s Strategic Matrix

The business can achieve cost leadership or differentiation separately. In

II. Aim of Portfolio Analysis

→ Boston matrix may be used to assist a business in

→ If the business plans to invest on its products, it will have to buy/invest in

CHAPTER 46: SWOT ANALYSIS

II. SWOT Analysis

e.g., Only if a business takes measures to eliminate weaknesses will performance

CHAPTER 47: IMPACT OF EXTERNAL INFLUENCES

 Changes in technology can shorten product life cycles. This is because

II. The changing competitive environment

III. Porter’s Five Forces

1. The bargaining power of suppliers Bargaining power relates

2. Bargaining power of buyers Buyers refers to other

→ Just as suppliers want to charge max prices to customers, so buyers want to

3. Threat of new entrants

5. Rivalry among existing firms

CHAPTER 48: GROWTH

In the exam, just focus

a) Internal economies of scale

b) External economies of scale

 Ancillary & commercial services

2. Increased market power over customers & suppliers

3. Increased market share & Brand recognition

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

II. Distinction between organic & inorganic growth

CHAPTER 49: ORGANIC GROWTH

II. Advantages & Disadvantages of Organic growth

2. Growing organically might be relatively cheaper than using other methods.

2. Usually, as business grows it will be able to exploit economies of scale. But if

CHAPTER 50: INORGANIC GROWTH

2. Mergers take place for defensive reasons. A business Consolidate-to

II. Distinction between mergers & takeovers

III. Horizontal & Vertical Integration

b) Backward vertical integration-where a business joins with another in the

IV. Conglomerate (Integration)

V. Advantages & Disadvantages of Inorganic growth