ib bus mgt topic 1 business organization and environment

8/21/2019 IB Bus Mgt TOPIC 1 Business Organization and Environment

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IB Business and Management SL

Mr. Jackson

TOPIC I: BUSINESS ORGANIZATION AND ENVIRONMENT

This topic is about the structure of organizations, organizational objectives and the different environments inwhich organizations operate.

Core Content Learning Objectives

1.1 Nature ofbusiness activity

What is a business?

A business is a decision-making organization involved in the process of using inputs toproduce goods and/or services.

A product can refer to both goods or services. Goods are physical products, such ascars, computers, books, and food. Services are intangible products such as a haircut orbanking services.

Identify inputs, outputs and processes of a business

A business is a SYSTEM it has parts that work together to achieve an objective.! Business activity produces output a good or service.! Goods and services are consumed.! Resources are used up.! A number of business functions may be carried out.! Businesses can be affected by external factors.

A market is a place or process whereby buyers (customers) and sellers (businesses)meet to trade.

Customers are the people or organizations that buy a product whereas consumers are

the ones who actually use the product.

What does business activity produce?Consumer goods and Capital goods (producergoods) and services.

Businesses use resources (FACTORS OF PRODUCTION) in business activity. Theseare usually divided into 4 groups: 1) Land 2) Labour 3) Capital 4) Enterprise

The Factors of Production have a financial return for their part in the production proces1.Land = rent 2. Labour = wages/salaries 3. Capital = Interest 4. Enterprise = Prof

Specialization a business concentrates on the production of a particular good orservice or a small range of similar products. Occurs at different levels: individual,departmental, corporate, regional, and national.

Division of Labour refers to the specialization of people, rather than organizations.Involves defining different aspects of a job or task and assigning different people to eacparticular part of the work.

Opportunity Cost the best alternative that is forgone when making a decision.

INPUTS ADD VALUE OUTPUT


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Business functions

oProduction(Operations)

o Marketing

o Finance

o Human Resources

o

Research &Development(R&D)

Describe how business activity combines human, physical, and financial resources

to create goods and services

Production (Operations) changing natural resources into a product or the supply of aservice. Ex:building site where houses are constructed, in a dental surgery where dentatreatment is given, and in a coal mine where coal is extracted.

Marketing identifying consumer needs and satisfying them. Ex: market research,

advertising, packaging, promotion, distribution, and pricing. The 4 Ps: product, price,promotion, and place (distribution).

Finance responsible for the control of money in a business. Duties include: recordingtransactions, producing documents to illustrate the performance of the business and itsfinancial position and controlling the flow of money in the business.

Human resources the management of people. Looks after the welfare of theworkforce, and is responsible for recruitment, selection, training, appraisal, health andsafety, equal opportunities, payment systems, benefits, and worker disputes.

R&D technical research, for example, research into a new medicine or new productiotechnique. R&D can be very expensive.

Business activity is highly integrated. For example, production is heavily influenced bymarketing activities. If marketing is effective and more of the product is sold, then morwill have to be produced. Also, the finance dept will carefully watch the amount ofmoney used by other departments.

Classification ofbusiness activity:

o Primary

o Secondary

o Tertiary

Explain the nature of business activity in each sector

Business activity is often classed by the type of production that takes place.

PRIMARY PRODUCTION activity which takes the natural resources from the earth,i.e. the extraction of raw materials and the growing of food. Ex:Mining, fishing,farming and forestry.

SECONDARY PRODUCTION manufacturing, processing and construction whichtransform raw materials into goods. Ex: Car production, distilling, baking, shipbuildingand office construction.

TERTIARY PRODUCTION the provision of services. Hairdressing, distribution,security, banking, theatre and tourism.

Other methods of classifying business include by: size, geographical area, sector, ownership.

1.2Types oforganization

Private sector

Public sector

Distinguish between organizations in the private and public sectors

Private sector businesses that are owned by individuals or groups of individuals.Ex: Sole trader, partnership, public limited company, private limited company.

Public sector business organizations which are owned or controlled by central or localgovernment, or public corporations.


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Starting a businessoReasons for setting

up a business

o Identifying amarket opportunity

oPossible problemsfaced by start-ups

Explain the reasons for setting up a business.

Entrepreneur the person who takes risks to manage, plan and organize the other threfactors of production in order to provide goods and services.

Why do people set up in business? GET CASHGrowth Earnings Transference/Inheritance Challenge Autonomy Security Hobbie

Explain the process a business will have to go through to start upFactors to consider when setting up a business:

1. Business Idea2. Finance3. Human Resources4. Entrepreneurial Skills5. Fixed Assets6. Suppliers7. Customers8. Marketing9. Legalities

Market opportunity -the identification of new/unsatisfied customer needs.

Can come in several ways:

o Identifying a gap in the market.o Innovative ideas and creations.o Developing the entrepreneurs personal qualities and skills.

Market Research allows businesses to better understand the nature of the industry anthe customers needs and wants. In turn, this should improve the businesss chances of

success.

Analyse the problems that business start-ups may face

1. Lack of finance capital.2. Cash flow problems3. Marketing problems4. Unestablished customer base5. People management problems6. Legalities

7. Production problems8. High costs of production9. Poor location10.External influence

Most people find that their technical skills are much greater than their managerial skillsIt is often this lack of managerial skills which leads to problems.


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Profit-basedorganizations

o Sole trader(proprietors)

o Partnerships

oCompanies(Corporations)

Evaluate the most appropriate form of ownership for a firm

Factors that affect the choice of business organization:1) Amount of finance2) Size3) Limited Liability4) Degree of ownership of control5) Type of business activity

Distinguish between different types of business organization (structures) andidentify their main features

- Analyse the extent to which ownership and control differ in organizations.- Analyse the impact of the division between ownership and control on

internal and external stakeholders

Sole trader (Sole Proprietor)

An individual who is the owner of his or her own business. The owner also runs andcontrols the business and is the sole person held responsible for its success or failure.Most common type of business ownership. Examples: self-employed painters anddecorators, plumbers, mechanics, restaurateurs and freelance photographers.

Unincorporated the owner is legally the same as the business.

Advantageso Cheap and easy to start few legal formalitieso All the profit is yourso You are your own bosso You do all the worko More personalized customer serviceo Privacy no public disclosure of financial records.

Disadvantageso You have unlimited liabilityo All the risk is yourso Limited sources of financeo Workload and stresso What about sickness and holidays?o Do you have all the skills?o Higher costs of production

Partnership

A profit-seeking business that is owned by two or more persons. The law allows apartnership to have between two and twenty partners, although some professionals are

allowed more. Partnerships need rules so most operate according to a PartnershipAgreement.

Partnership Agreement document drawn up which defines:1. The amount of capital contributed by each partner.2. The procedure in case of partnership disputes3. How the profit will be shared between partners.4. Partners voting rights5. The procedures for bringing in new partners and old partners retiring.


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Partnership

Advantageso More capital

o More ideas/expertiseo Division of labour/Specialization of partnerso Partners can cover each others holidays and illness.

Disadvantageso Partners still have unlimited liabilityo Each partner is liable for decisions made by other partnerso Risk of conflict between partners.

Companies (Corporations)

Companies are essentially businesses that are owned by their shareholders.Shareholders are individuals or other businesses that have invested their money toprovide capital for a company. In North America, more common term is Corporation.

Incorporated there is a legal difference between the owners of the company (theshareholders) and the business itself. The company, being treated as a separate entity,

has its own legal rights and duties.

Limited Liability Shareholders do not have to bear the responsibility of a companysdebts and will not stand to lose personal belongings if the company goes into arrears.The maximum a shareholder can lose is the value of their investment in the business, anhence there is a limit to how much they can lose.

Board of Director elected by shareholders to run the company on their behalf.

The term limited companies is used to clarify the fact that all companies have limitedliability. Two types private limited company and public limited company.

Private limited company

A company that cannot raise share capital from the general public. Instead, shares aresold to private family members and friends. (Ltd.)

Advantageso You have limited liabilityo Easier to raise larger sums of capitalo More flexible than PLCs

o Opportunities for bringing in more skills. Disadvantages

o You can only sell shares privatelyo Not very flexible if expansion becomes possibleo More legal formalities than sole traders

Public limited company

Able to advertise and sell its shares to the general public via the stock exchange. (PLC)


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Advantageso You have limited liabilityo Easier access to financeo More funds available for investmento Public awareness gives status

Disadvantageso You have to publish resultso Others, e.g. auditors have to look at your bookso Greater need to conform to legal procedureso Owners might lose control

Initial Public Offering (IPO) when a business first sells all or part of its business toexternal investors (go public!)

Non-profit and non-governmentalorganizations,including charities,and pressure groups

Compare and contrast the objectives of NGOs and non-profit organizations with

other organizations.

Non-profit organization(a.k.a not-for-profit organization), an establishment that is runin a professional and business-like manner but without profit being the major objective.

Instead, such organizations aim to provide a service or to promote special causes.

CharitiesCharities are organizations with very specialized aims. They exist to raise money forgood causes and draw attention to the needs of disadvantaged groups in society.

Charities rely on donations for their revenue. They also organize fund raising events.

Generally run according to business principles. They aim to minimize costs, marketthemselves and employ staff. Most staff are volunteers, but some of the larger charitiesemploy professionals.

Provided charities are registered, they are not required to pay tax. In addition,businesses can offset any charitable donations they make against tax. This helpscharities when raising funds.

(Read pages 36 about advantages and disadvantages of charities.)Pressure groups

Groups without the direct political power to achieve their aims, but whose aims liewithin the sphere of politics. They usually attempt to influence local government,central government, businesses and the media. They aim to have their views taken into

account when any decisions are made. Such influence can occur directly, throughcontact with politicians, local representatives and business people, or indirectly byinfluencing public opinion.

The use of pressure groups is one way in which stakeholders can exert influence overthose making decisions within a business. Pressure groups can represent stakeholdersdirectly involved with the business, such as employees or shareholders. They can alsorepresent those not directly involved in the business, such as local communities orconsumer groups.


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Analyse the impact of the actions of NGOs and other non-profit organizations

There is a number of ways in which pressure groups can affect firms.oPressure groups often seek to influence the behaviour of members of the public abou

a particular product, business or industry.oPolitical parties are able to pass laws which regulate the activities of business.oThe actions of pressure groups can reduce the sales of firms.

oFirms can face increased costs as a result of the activities of pressure groups.oBusinesses with a tarnished reputation as a result of pressure group activity may find

it more difficult to recruit employees.

How should businesses react?1. By positively responding to the issues raised by pressure groups.2. Through promotion and public relations.3. Lobby politicians themselves or par for the services of professional lobbyists.4. Legal action.

1.3Organizationalobjectives

The importance ofobjectives

Explain the importance of objectives in managing an organization

Aims the general long-term goals of an organization. They are broadly expressed asvague and unquantifiable statements, such as to provide high quality education to thelocal community or to promote social and environmental integrity. Aims serve to giva purpose to the general direction of an organization and are often expressed in a missiostatement.

Objectives the short-term and more specific goals of an organization, based on itsaims. They are more likely to be quantifiable or measurable.

Without having clear aims and objectives, organizations have no sense of direction orpurpose. Organizational aims and objectives are set for several crucial reasons:

1. Sense of direction, purpose and unity.2. Foundation for business decision-making.3. Encourage strategic thinking (long term planning)4. Basis for measuring and controlling performance of the workforce, the managementand business as a whole.

Ex: Objective of increasing sales by 20% over 3 years. If it had increased sales by only5% then it might conclude that it has been unsuccessful.

Organizational objectives have 3 key functions:1) To control 2) To motivate 3) To direct.

Businesses must set objectives that are SMART: Specific, Measurable, Agreed,Realistic, and Time Specific.


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StatementsoMission statementsoVision statements

Aims & objectivesoAimsoStrategic objectivesoTactical/Operational

objectives

What determines business objectives? There is a number of factors that can influence thchoice of objective:

1. The size and status of the business.2. The power of the stakeholders.3. Ownership.4. Long and short term objectives.

5. External and internal pressures.6. Risk7. Corporate and business culture.

Explain the purpose of mission and vision statements

Having vision means to have an image of an ideal situation in the future. A visionstatement therefore outlines a businesss aspirations (where it wants to be) in the distanfuture. Ex: To be the leading sports brand in the world is the vision of Adidas.

Having a mission means to have a clear purpose. It explains in general terms what the

business is trying to achieve and outlines the organizations values. A missionstatement tends to be a simple declaration that broadly states the underlying purpose ofan organizations existence. Ex: a school may set its mission as provision ofachievement for all students.

Hence, a mission statement outlines how a vision statement will be achieved.

Analyse the role of mission and vision statements in an organization

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Distinguish between objectives, strategies and tactics and assess how these

interrelate.

Strategy refers to any plan or scheme to achieve the long-term aims of a business. Used

for trying to achieve strategic objectives.

Tactics short-term ways that firms can use to achieve their aims and objectives, i.e.they are used to achieve an organizations tactical objectives.

Strategic Objectives (Primary) the longer term aims of a business organization, e.g.targets for the next few years.

Typical Strategic Objectives:

1. Profit maximization 2. Growth 3. Image and reputation 4. Market standing


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Tactical (Operational) Objectives (Secondary) short-term objectives that affect asegment of the organization, such as a department. Refer to specific goals that guide thfunctioning of certain operations that are in line with the primary objectives of thebusiness. Departments will tend to set their own short-term departmental objectives,such as the Sales Department planning to raise sales by $20,000 within the next year orthe HR Dept planning to keep staff turnover below 10%. Short-term objectives tend torefer to targets for the next 6-12 months.

Typical Tactical Objectives:1. Survival 2. Sales revenue maximization

Ethical objectives Examine the reasons why organizations consider setting ethical objectivesEthics are a set of values and beliefs which influence how individuals, groups andsociety behave. Business ethics are concerned with how such values and beliefs operatin business. They help firms to decide what actions are right or wrong in certaincircumstances. Ethics might influence business decisions and consider the interest ofother stakeholders.

Examples of Ethical Objectives:! Treating and paying employees fairly.! Reducing pollution by using more environmentally friendly production

processes.! Increased recycling of waste materials.! Disposal of waste in an environmentally friendly manner.! Offering staff sufficient rest breaks during their work shift.! Fairer conditions of trade with less economically developed countries.

Examples of Unethical business behavior financial dishonesty, environmental neglectexploitation of the workforce, exploitation of suppliers, exploitation of consumers.

In order to achieve their ethical objectives, businesses have adopted a code of ethics(ethical code of practice) and publish this as part of their mission statement or in theirannual report.

Analyze the advantages and disadvantages of ethical objectives. Discuss the impact

of implementing ethical objectives

The benefits of ethical behaviourThere are certain advantages for businesses in behaving in an ethical or sociallyresponsible way.

1. Improved corporate image2. Increased customer loyalty3. Cost cutting4. Improved staff motivation5. Improved staff morale

Effects of ethical behaviour1. Increasing costs2. Loss of profit3. Stakeholder Conflict


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Corporate socialresponsibility(CSR)

oDiffering views ofsocial responsibility

o Policies to

implementsociallyresponsibleobjectives (e.g.,environmentalauditing)

Explain the different views firms may take of their social responsibility in an

international context.

Modern-day organizations are aware of the importance of their image, and of therelationships they have with the wider community. They acknowledge their socialresponsibilities to employees, customers, shareholders and other stakeholders.

Examples of specific social responsibilities include:

! Equal opportunities as well as obeying labor laws, firms will wish to publicisetheir commitment to EO.

! ethical trading firms have to balance moral and ethical stances with the need tomake an adequate return on investment (i.e. adequate profit)

! Environmental awareness firms realize the negative effect of bad publicity.! Health and safety most firms do not limit themselves to the minimum legal

requirements, believing that a good health and safety record helps create apositive image which can be used to develop their business.

There are different views and attitudes towards the role of businesses in delivering sociaresponsibility:

Free-market (or non-compliance) CSR attitude.Many economists believe that the role of business is to generate profits for theirowners. They argue that governments, rather than businesses, are responsible fosorting out any social problems. They believe that in pursuing the profit motivebusinesses will become more efficient and prosperous, thereby helping societyindirectly (such as through job creation and payment of corporation tax).

Altruistic CSR attitude.Altruism refers to acting in a humanitarian and unselfish manner. Thesebusinesses do what they can to improve the society, regardless of whether theiractions help to increase their profits. It can be difficult to determine in reality

whether businesses help society due to altruism or because they believe suchaction would (selfishly) help to improve their corporate image.

Strategic CSR attitudeArgue that businesses ought to be socially responsible only if such actions helpthe business to become more profitable. Such firms see CSR as a method oflong-term growth.

Analyse the value of social and environmental audits to different stakeholders

Social auditingis the process by which a business organization attempts to assess theimpact of the entire range of its activities on stakeholders. It might try to produce a setof social accounts to evaluate its performance against a set of non-financial criteria.This might include its effect on the environment and its attempts to meet socialobligations to employees.

Why might social auditing be seen as useful?

They provide valuable information to pressure groups and consumers about the csr oa business.

They allow the managers of a business to gain a complete picture of the impact of thebusinesss activities.


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1.4 Stakeholders Internal

stakeholders

o Employeeso Stockholderso Managers

Externalstakeholders

o Supplierso Customerso Special Interest

groupso Competitors

------------------------

o Creditorso The

Communityo Government

Stakeholder conflict

A business can use a social audit as a means of preventing future criticism of itsactivities.

A business will be able to identify the extent to which it is meeting some of its non-financial objectives.

Shareholders can use social audits to raise questions about a businesss activities atannual shareholder meetings.

Government use to legislate business and regulate industry

Stakeholder any person or organization that has a direct interest in and is affected bythe performance of a business.

Explain the interests of internal stakeholders

Internal stakeholders are members of the business organization.

Employees want high earnings, an interesting job and secure employment

Shareholders (Stockholders) (Owners) want regular, secure and high returns anda say in the goals of the business.

Managers want responsibility, high rewards and a lack of interference in theiractions.

Explain the interests of external stakeholders

External stakeholders are not part of the business.

Suppliers want secure, regular and profitable orders

Customers want quality products at low prices and a good service

Government wants to achieve a large number of goals including growth in theeconomy and low inflation.

The local community wants thriving local businesses which do not causeproblems.

Discuss possible areas of conflict between stakeholders

Conflict can exist between many different groups of stakeholders.

Employees vs. Owners Customers vs. Business1. Levels of pay 1. Price2. Working conditions 2. Quality3. Changing practices 3. Delivery time4. Redundancy 4. After sales service

Owners vs. ManagersIn some businesses the management team may become powerful and influential. Whenthis happens they may pursue their own interests rather than those of the owners. This

might involve paying themselves high salaries or organizing their time to suit their ownneeds, whilst achieving satisfactory levels of profit rather than high levels of profit. Thwould go against the interests of owners who benefit from higher profits. Such conflictcould result in some owners selling their shares.

Suppliers vs. Managers and Owners1. Late payment for products by owners/managers2. Late delivery by suppliers (can delay production, and lost orders and profits)

Owners vs. the communityWhen the quality of life enjoyed by local residents is threatened by business activity.Ex: pollution.


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1.5 External

Environment

PEST (political,economic,sociological,technological)analysis

(STEEPLE, PESTLE,

and other variations)

Social/Cultural

Technological

Economic

Environmental

Political

Legal

Ethical

Prepare a PEST analysis for a given situation and use it to analyse the impact of th

external environment on a firm.(Note: you will not be tested on country-specific laws, regulations, or economic policies. The focus is on

the impact of the external environment on business.)

PEST analysis is concerned with the environmental influences on a business.

The acronym stands for the Political, Economic, Social and Technological issues thatcould affect the strategic development of a business.

Identifying PEST influences is a useful way of summarizing the external environment inwhich a business operates. However, it must be followed up by consideration of how abusiness should respond to these influences.

It is very important that an organization considers its environment before beginning thebusiness process. In fact, environmental analysis should be continuous and feed allaspects of planning. The organization's external environment is made up of:

1. The internal environment e.g. staff (or internal customers), office technology, wagesand finance, etc.2. The micro-environment e.g. our external customers, agents and distributors, suppliersour competitors, etc.3. The macro-environment e.g. Political (and legal) forces, Economic forces,Sociocultural forces, and Technological forces. These are known as PEST factors.

Political Factors.The political arena has a huge influence upon the regulation of businesses, and thespending power of consumers and other businesses. You must consider issues such as:1. How stable is the political environment?2. Will government policy influence laws that regulate or tax your business?

3. What is the government's position on marketing ethics?4. What is the government's policy on the economy?5. Does the government have a view on culture and religion?6. Is the government involved in trading agreements such as EU, NAFTA, ASEAN, orothers?

Economic Factors.Economic factors affect the purchasing power of potential customers and thefirm's cost of capital. Businesses need to consider the state of a trading economy in theshort and long-terms. This is especially true when planning for international marketing.You need to look at:1. Interest rates.2. The level of inflation Employment level per capita.3. Long-term prospects for the economy Gross Domestic Product (GDP) per capita, andso on.

Some examples include:tax policyemployment lawsenvironmental regulationstrade restrictions and tariffspolitical stability


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Sociocultural Factors.

Social factors include the demographic and cultural aspects of the externalmacroenvironment. These factors affect customer needs and the size of potentialmarkets. The social and cultural influences on business vary from country to country. Itis very important that such factors are considered. Factors include:1. What is the dominant religion?2. What are attitudes to foreign products and services?3. Does language impact upon the diffusion of products onto markets?4. How much time do consumers have for leisure?5. What are the roles of men and women within society?6. How long are the population living? Are the older generations wealthy?7. Do the population have a strong/weak opinion on green issues?

Technological Factors.Technological factors can lower barriers to entry, reduce minimum efficientproduction levels, and influence outsourcing decisions. Technology is vital for

competitive advantage, and is a major driver of globalization. Consider the followingpoints:1. Does technology allow for products and services to be made more cheaply and to abetter standard of quality?2. Do the technologies offer consumers and businesses more innovative products andservices such as Internet banking, new generation mobile telephones, etc?3. How is distribution changed by new technologies e.g. books via the Internet, flighttickets, auctions, etc?4. Does technology offer companies a new way to communicate with consumers e.g.banners, Customer Relationship Management (CRM), etc?

economic growthinterest ratesexchange ratesinflation rate

health consciousnesspopulation growth rateage distributioncareer attitudesemphasis on safety

R&D activityautomationtechnology incentivesrate of technological change


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Environmental FactorsBusinesses are affected by many environmental issues, including global warming,pollution and recycling. As a result, most large firms have their own environmentalpolicies that will influence the work of their various business functions.

Function Example of influence of environmental policy

Finance may cause an increase in costs, which must be financed;

may obtain investment from environmentally conscious sourcesMarketing helps to define the nature of advertising and promotion used;

creates a positive consumer-friendly image for the products

Production raw materials are chosen with the environment in mind;production processes are less harmful to the environment

HR staff become prouder and more satisfied working for the firm;may encourage more (qualified/able) people to apply for jobs.

Although many firms recognize the value of having environmental policies, environmenagencies also exist to protect the environment.

Evaluate the impact on a firms objectives and strategy of a change in any of thePEST/PESTLE factors

1.6 Organizational

planning tools

Business plans

Analyse the importance of the information in the business plan to different

stakeholders.

Business plan a report detailing how a new business sets out to achieve its aims andobjectives. A useful planning tool as it requires the owner to plan marketing, financingand human resources of the business.

However, the main aim of producing a business plan from the entrepreneurs point ofview is to gain financial backing from lenders and investors.

The business plan is used to show people that are lending the business money, so theyhave an indication of the likely success of the business. It can be used to monitor thebusinesses progress.

Identify problems that may occur to allow the business to deal with them before they cabecome a problem.

Highlight its strengths and weaknesses.

A good business plan includes the following:

Details of companyDescription of productMarket/Customer infoOrganization and locationHow much money the business hasDetailed analysis of cash available - cash flow forecasts etc.The personnelMarketing


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Decision makingframework

Apply formal decision making frameworks to a given situation

Businesses are DECISION MAKING units. Making the right decisions help abusiness to achieve its aims and objectives.

Decisions in a business are likely to be strategic (long term), tactical (medium term), oroperational decisions (day to day).

Typically, a business will have to decide: Whatproduction should take place, e.g. which goods or services to produce or

supply?

How muchproduction should take place, e.g. what combination of capital andlabour should be used?

For whomproduction should take place, e.g. only for those with high disposableincomes?

A decision-making frameworkis a systematic process of dealing with businessproblems, concerns or issues in order to make the best decision.

In a simple decision-making model, the following seven steps take place:1. Identify the business problem, concern or issue.2. Gather sufficient data and information in order to make rational decisions.3. Analyse data and information to produce a list of possible options.4. Assess the consequences (in terms of costs and benefits) of each option.5. Select the most favorable option, in terms of costs and benefits and what is

realistically achievable.6. Communicate this decision to the staff since the proposal is very likely to affect

them.7. Review and evaluate the outcome, i.e. did it help achieve the organizations

objectives and what lessons were learnt?

The above process can be remembered by the acronym IDEALI Identify the problem, concern, or issue.D Define (or describe) the problem.E Explore possible solutions and their effects on the organization.A Action to tackle the problem.L Look back to review the progress and level of success in dealing with the problem.

There are many models or frameworks that a business can use to limit the risks involvedin decision-making. Commonly used decision-making frameworks include:

Cost-Benefit analysis (CBA) examines the financial costs and benefits of a

decision. Used when costs and benefits can be quantifiable. If benefits outweigthe costs, go ahead. Examples:Break-even analysis (topic 5) and Investmentanalysis (topic 3).

Six Thinking Hats Psychologist Edward De Bono argued that it is important tlook at decisions from (six) different perspectives. 6 different color hatsrepresenting different ways of thinking: white hat (factual info), red hat (thinkinbased on emotions and feelings), black hat (consider only the bad points ofdecision), yellow hat (all the benefits of a decision), green hat (creative solutionto a problem, and blue hat (neutral thinking).


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Force Field analysis examines the forces for and against a decision. Drivingforces refer to the advantages of implementing a decision and restraining forcesare limitations or disadvantages. The forces affecting the change are thenweighted according to the level of importance of each one as valued by thedecision maker.

Pareto analysis the 80/20 principle, 20% of the work can generate 80% of theoutput.

The 5 Whys Simple process of asking, five times, why an issue or concern hahappened in order to get to the root cause(s) of the problem.

SWOT analysisand Ansoff matrixdiscussed in greater detail next.

SWOT analysis Prepare a SWOT analysis for a given situation

Strengths, Weaknesses, Opportunities and Threats (SWOT).SWOT analysis is a tool for auditing an organization and its environment. It is the firststage of planning and helps businesses to focus on key issues. SWOT stands for

strengths, weaknesses, opportunities, and threats. Strengths and weaknesses areinternal factors. Opportunities and threats are external factors.

In SWOT, strengths and weaknesses are internal factors. For example: A strengthcoulbe:

! Your specialist marketing expertise.! A new, innovative product or service.! Location of your business.! Quality processes and procedures.! Any other aspect of your business that adds value to your product or service.

A weaknesscould be:! Lack of marketing expertise.! Undifferentiated products or services (i.e. in relation to your competitors).! Location of your business.! Poor quality goods or services.

! Damaged reputation.

In SWOT, opportunities and threats are external factors. For example: An opportunitycould be:

! A developing market such as the Internet.

! Mergers, joint ventures or strategic alliances.! Moving into new market segments that offer improved profits.! A new international market.! A market vacated by an ineffective competitor.

A threatcould be:! A new competitor in your home market.! Price wars with competitors.! A competitor has a new, innovative product or service.! Competitors have superior access to channels of distribution.! Taxation is introduced on your product or service.


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A word of caution, SWOT analysis can be very subjective. Do not rely on SWOT toomuch. Two people rarely come-up with the same final version of SWOT.

Simple rules for successful SWOT analysis.! Be realistic about the strengths and weaknesses of your organization when

conducting SWOT analysis.! SWOT analysis should distinguish between where your organization is today,

and where it could be in the future.! SWOT should always be specific. Avoid grey areas.! Always apply SWOT in relation to your competition i.e. better than or worse

than your competition.! Keep your SWOT short and simple. Avoid complexity and over analysis! SWOT is subjective.

Once key issues have been identified with your SWOT analysis, they feed intomarketing objectives. SWOT can be used in conjunction with other tools for audit andanalysis, such as PEST analysis and Porter's Five-Forces analysis.

Analyze an organizations position using a SWOT analysis

1.7 Growth and

Evolution

Economies anddiseconomies ofscale

Apply the concepts of economies of scale to decisions relating to the scale of

business decisions. Recommend an appropriate scale of operation for a given

situation.

The size of an organization can be measured using a range of indicators. These includeprofit, turnover, capital employed, and #of employees.

Most firms seek to grow in size. Large size brings with it not only economies of scale,

but also improved survival prospects, better capacity utilization of resources, and anincreased sense of power and status.

An organization can achieve growth in 2 ways: 1. external growth (integration) and 2.internal growth (organic growth).

External growth two firms join together.Internal growth firm expands using its own resources.

Internal Economies of Scale these occur when the increase in a firms size and thescale of its production reduces its unit costs. Although total costs production,

marketing, or administration increase, the average cost per unit falls because the costsare being spread over a greater output.

Internal economies of scale can be evaluated financially because they can be quantified(measured). There are different economies of scale, largely based on the variousfunctions of a typical business.

Economies ofincreased dimensions these arise from an increase in size: forexample, a double-decker bus contains twice the passengers but still only needsone driver.


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Small vs. largeorganizations

Financial economies larger firms are thought to be more financially stable,therefore find it easier to borrow money, often at cheaper rates.

Managerial economies larger firms can employ more specialist (and efficientmanagers.

Marketing economies larger firms can employ specialist advertising agenciesand can spread marketing costs over much greater output.

Purchasing economies bulk-buying discounts can be obtained as a result oflarger orders, reducing the unit cost of materials, and also more favourable crediterms can be agreed with suppliers.

Risk-bearingeconomies a wider product range allows the firm to spread riskmore successfully.

Technical economies - larger firms can afford to invest more in research anddevelopment, and can also afford more specialist and efficient technology.

External Economies of Scale - These result from an increase in size of the industry,rather than the firm. External economies most commonly occur when the industry islocated in a limited area geographically: examples include car-making (traditionally theWest Midlands), and pottery and ceramics (Stoke-on-Trent).

All firms in the industry may benefit from these economies, examples of which are:

training local training providers concentrate on the skills and knowledgerequired in the particular industry.

support local firms provide specialist support, e.g. producing componentsneeded in the industry.

information local chambers of commerce and trade associations focus on theindustrys needs.

Diseconomies of Scale

There are limits to the amount of growth for any business: the most commonlimitation is the level of demand for its products.

After the business achieves a certain size, it may find that its unit costs start toincrease: it is now starting to experience diseconomies of scale.

There may be a number of reasons for these diseconomies:less efficient and slower communication, due to the increased number of levelsin the firms hierarchy a long chain of command, which means greater

bureaucracy (red tape) and slower decision-making. The overall effect of diseconomies of scale is to make the firm become less

competitive through lower efficiency, poor staff morale, a weaker managementfunction, and slower reaction to changing market conditions.

Evaluate the relative merits of small versus large organizations.

Survival of the small firm

Small firms survive despite not benefitting from economies of scale. Reasons for theirsurvival include:

o Offering specialized product and operating in a niche market.o having a local demand.


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Internal/organicgrowth

Explain the difference between internal and external growth

Internal growthis when a firm expands without involving other businesses.ORGANIC GROWTH means that the firm expands by selling more of its existingproducts. This could be achieved by selling to a wider market, either at home or abroadIt is likely that internal growth will take a long time for many businesses, but willprovide a sound base for development.

External growth occurs through dealings with outside organizations. Such growthusually comes in the form of alliances or mergers with other firms or through theacquisition (takeover) of other businesses.

External growthoJoint venturesoStrategic alliancesoMergers and

takeovers

Evaluate joint ventures, strategic alliances, mergers and takeovers as methods of

achieving a firms growth objectives

Joint venture occurs when two or more businesses decide to split the costs, risks,control and rewards of a business project. In doing so, the parties involved in the jointventure agree to set up a new legal entity. For example, Coca-cola has a joint venturewith San Miguel with shared ownership of Coca-colas bottling plant in the Philippines

Typically, a joint venture between two firms will involve a 50:50 split in costs,responsibilities and profits (or losses).

Other advantages of joint ventures:

Synergy

Spreading costs and risks

Entry to foreign markets

Relatively cheap

Competitive advantage

Exploitation of local knowledge

High success rate

Strategic alliance similar to a joint venture in that two or more businesses seek toform a mutually beneficial affiliation by cooperation in a business venture. The firms inthe strategic alliance also share the costs of product development, operations, andmarketing. However, unlike joint ventures, forming a strategic alliance means that theaffiliated businesses remain independentorganizations.

Drawbacks of joint ventures and strategic alliances1. Partners in the joint venture tend to rely heavily on the resources and goodwill of theicounterparts.2. Likely dilution of the brands, yet firms spend huge amounts of money in trying todevelop their own brands.3. When firms work together on a project, there is likely to be some sort oforganizational culture clash between the businesses and this can lead to problems for thjoint venture.

Merger takes place when two firms actually agree to form a new company, such as thmerger between the UKs British Petroleum and USAs oil company Amoco in 1998 toform BP Amoco, which since shortened to BP. Other examples of large mergers Daimler Benz and Chrysler (98), Hewlett-Packard and Compaq (2001), and Nokia andSiemens (06).


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Takeover occurs when a company buys a controlling interest in another company, i.eby buying enough shares in the target business to hold a majority stake.In order to entice shareholders of the target company to sell their shares, the priceoffered by the buying company is likely to be well above stock market value of theshares.

Mergers and takeovers can benefit from several interrelated advantages:

Greater market share

Economies of scale Synergy

Survival

Diversification

Mergers and takeovers can also suffer from some disadvantages:

Loss of control

Culture clash

Conflict

Redundancies

Diseconomies of scale Regulatory problems

Management buy-out (Leverage Buy out) a defensive strategy that many businesseuse when faced with a hostile takeover. Involves the management team of the targetbusiness buying shares in the company to become the owners, or part-owners, of thebusiness thereby preventing it from being taken over.

!Franchises Analyse the advantages and disadvantages of a franchise for both franchisor andfranchisee

If a person wants independence, but is better at carrying out or improving someoneelses ideas than their own, franchising might be the ideal solution.

Franchise form of business ownership whereby a person or business buys a license totrade using another firms name, logo, brands, and trademarks. In return for this benefithe purchaser of a franchise (franchisee) pays a license fee to the parent company of thebusiness (franchisor). In return, the franchisee pays a royalty payment.

The benefits to the franchisor:! using the specialist skills of a franchisee! the market is increased without expanding the firm! a fairly reliable amount of revenue (because royalties are based on turnover not

profits, money is guaranteed even if a loss is made by the franchisee)! risks and uncertainty are shared.

The advantages to franchisees:! the franchisor might advertise and promote the product nationally! they are selling a recognized product so the chance of failure is reduced! services such as training and administration may be carried out by the franchisor.


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Disadvantages of FranchisingFranchising is not without its problems.oThe royalty must be paid even if a loss is made.oFranchisees may be simply branch managers, rather than running their own

businesses, because of restrictions in the agreement.oThe franchisor has the power to withdraw the agreement and in some cases, prevent

the franchisee from using the premises in future.

Evaluate the use of franchising as a growth strategyFranchising involves one business selling a license to others. The license allows onefirm to use anothers name, product or service in return for an initial payment and furthecommission or royalties.

This is a quick and relatively easy way into foreign markets and it allows the franchiserhigh degree of control over the marketing of its product. However, a share of the profitdoes go to the franchisee.

!Ansoff Matrix

Explain the value of the Ansoff Matrix as a decision making tool

Ansoff's Matrix - Planning for Growth.This well known marketing tool was first published in the Harvard Business Review(1957) in an article called 'Strategies for Diversification'. It is used by marketers whohave objectives for growth. Ansoff's matrix offers strategic choices to achieve theobjectives. There are four main categories for selection.

Apply the Ansoff Matrix growth strategies to a given situation

Market PenetrationHere we market our existing products to our existing customers. This means increasingour revenue by, for example, promoting the product, repositioning the brand, and so on.However, the product is not altered and we do not seek any new customers.

Market DevelopmentHere we market our existing product range in a new market. This means that the producremains the same, but it is marketed to a new audience. Exporting the product, ormarketing it in a new region, are examples of market development.


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Product DevelopmentThis is a new product to be marketed to our existing customers. Here we develop andinnovate new product offerings to replace existing ones. Such products are thenmarketed to our existing customers. This often happens with the auto markets whereexisting models are updated or replaced and then marketed to existing customers.

Diversification

This is where we market completely new products to new customers. There are twotypes of diversification, namely related and unrelated diversification. Relateddiversification means that we remain in a market or industry with which we are familiarFor example, a soup manufacturer diversifies into cake manufacture (i.e. the foodindustry). Unrelated diversification is where we have no previous industry nor marketexperience. For example a soup manufacturer invests in the rail business.

Ansoff's matrix is one of the most well know frameworks for deciding upon strategiesfor growth.

1.8 HL only ---

1.9 Globalization!Multinational

companiesDiscuss reasons for the growth of multinational companies

Globalization the integration of the worlds economies in terms of economics,sociology, and politics. For businesses, this means an attempt by firms to efficientlyproduce and sell the same products or services simultaneously in different countries.The outcome of globalization is that markets, cultures and tastes have converged at anaccelerating pace.

Factors contributing to the growth of globalization! Liberalization of international trade

! Technological progress! Deregulation! Cultural awareness and recognition! Language

Multinationals (MNC) business organization that operate in two or more countries.

Examples: Ford, Exxon Mobil, GM.

Why become a multinational?1. Customer base

2. Economies of scale3. To avoid protectionist policies tariffs, quotas.4. Cheaper production costs5. Spread risks6. Globalization of markets

Read p. 157 Potential problems of expansion overseas


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Analyse the role played by multinationals in the global business environment

Globalisation has had many effects upon business throughout the world. The impact hanot been evenly spread. Some provide opportunities whilst others present threats.1. Competition2. Meeting consumer expectations and tastes.3. Economies of scale.4. Choice of location.

5. Mergers and joint ventures.

Read pp. 154-155 The effects of globalization on business activity.

Evaluate the impact of multinational companies on the host country

Create jobs

Increase GDP

Technology transfer

Competition

Social responsibility

Unemployment in host country

Takeover bids

!Regional tradingblocs

Explain the impact on business of a country being a member of a regional economi

group/bloc

Regional trading blocs (RTB) or regional economic blocs members strive to eliminatetrade barriers on the movement of goods, services, labour and capital.

p. 159-160 The main regional trading blocs around the world " The European Union (EU)" The European Free Trade Association (EFTA)" The North American Free Trade Agreement (NAFTA)" The Association of South East Asian Nations (ASEAN)" Closer Economic Partnership Agreement (CEPA)

Trade creation takes place when a country switches from buying commodities from ahigh cost country to buying them from a lower cost country, following the formation ofRTB. Trade diversion results in losers in a trading bloc when a country switches formbuying commodities from a low-cost country to buying from a higher cost country.

Tariffs, a tax on imports, are one form of restriction. The effect of a tariff on productsexported countries which impose them is to increase the price charged by businesses orto lower their profit margins.

Quotas may also be used, which restrict the amount of a product that can be exported toa particular country or trading bloc. For individual businesses, quotas can mean thatthey can only export small quantities of their products, or indeed none at all, to countriewhich impose them.

It is easier for businesses exporting aboard to compete with local businesses when theydo not have to pay a tariff or have quotas imposed upon them.


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ib bus mgt topic 1 business organization and environment

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