IB Business Management Past Paper PDF

1.1 What is a business? Four functional areas: Human resources (HR) – handles all aspects related to staff within an organization. Examples - Recruitment - Induction - Training The HR Department must comply with legal aspects of the external business environment. Must observe different l...

1.1 What is a business? Four functional areas: Human resources (HR) – handles all aspects related to staff within an organization. Examples - Recruitment - Induction - Training The HR Department must comply with legal aspects of the external business environment. Must observe different labour laws in all the countries it operates in Eg. - Equality - Equal opportunities - Anti discriminatory Finance and accounts - Refers to the responsibility for ensuring that the business has sufficient funds to conduct its daily operations. - Manages business’s money and maintaining accurate records of the firms funds Marketing - Identifying the needs and wants of customers to satisfy them Operations management - Process of making goods and services Adding value – practice of producing a good or service that is worth more than the cost of the resources used in the production process The business uses capital for their machinery to produce the goods and services that’d satisfy their customers. The entrepreneur is responsible for the management, organization, and planning of the other three factors of production. Land is where the business settles and where the production process takes place. Labour are the workers hired by the business to help produce the goods or services. PRIMARY SECONDARY TERTIARY AND QUARTERNARY RISER Risk taker Innovative Strategist Enthuisasitc Resilient Unit 1.2 Private sector organisations – owned and controlled by private individuals and businesses Aim – earn profit (revenue (money earned from selling its products)) - costs (production expenditures)) Public sector organisations – controlled by the government - Provides essential goods and services Why? - To ensure everyone has access to basic services - Avoid wasteful competition as the government is able to achieve huge economies of scale - Protect citizens and businesses thru insitutions such as the police and the courts - Create employment opportunities Veil of incorporation – owner and business are two separate legal entities Can only lose what they invested Profit-based organizations Goals: - Make a profit - Reward the owners with profits - Return some of the profits back into the business for capital growtj Types of organisations 1. Sole traders a. Individual who owns his/her business b. Only person held responsible for its success or failure c. Unincorporated i. Owner is the same legal entity as the business itself (could lose their personal belongings if the business falls) Advantages Disadvantages Few legal formalities – easy to set Unlimited liability – full legal up and start up costs are low responsibility for all debts Profit taking – the owner is the High risks – have the largest risk only one to receive all profits of failure – the presence of larger and more established firms create a huge threat to the profits and  survival of small businesses Privacy – Sole traders don't have Workload – Owners have to do to make their financial records their own accounts, marketing, public and HR management Unlimited liability – Has to sell personal assets to pay debts 2. Partnerships a. Profit-based organisation owned by 2 or more people b. Unincorporated business → in the eyes of the law, the owner and business are seen as one entity c. Advantages Disadvantages More financial strength – more owners Unlimited liability – responsible for all to invest into the business the debts of the business Specialisation and division of labour – Unincorporated - business and Partners can benefit from shared owners are seen as one expertise, shared workload, and support Financial privacy – don't have to Decision making is longer publicise their financial records Cost-effective – each partner Lack of harmony – disagreements and specialises in certain aspects of their conflict can happen business → raises labour productivity and operational efficiency Unlimited liability exists to prevent sole traders and partners from making careless decisions in managing their businesses. It makes private individuals accountable for their actions and decisions. However, the risk of loss of private property and belongings can deter them from taking risks 3. Privately held companies a. A business owned by shareholders with limited liability but whose shares cannot be bought by or sold to the public on a stock exchange i. Owned by friends or family ii. Corporations – “joint stock companies” – shares are jointly held by numerous entities 4. Companies a. Commercial for-profit businesses owned by shareholders → Profits of a company belong to and are shared among the various owners b. Incorporated business → limited liability  i. Protects shareholders as they can't lose more than the amount they invested in the business 1. Shareholders are not personally liable for the debts of the company should it go into debt or bankruptcy ii. Divorce of ownership and control → owners are treated as separate legal entities from those who control and run the business (ceo + board of directors) → responsible for the strategic direction of the company iii. Privately held companies and publicly held companies CEO → an appointed position Difference between un/incorporated vs un/limited liability UNincorporated – Business and owner are seen as the same entity UNlimited liability – Owner has to give up personal assets if the business goes bankrupt Incorporated - Business and owner are seen as separate entities Limited liability – shareholders don't lose more than what they invested into the business LLC Advantages Disdvantages Raising finance – companies can raise large Communication problems amounts of capital by selling shares → no interest charges and shareholders are paid dividends Limited liability Disclosure information – financial data must be provided to all shareholders → time consuming and expensive → auditors have to be hired and Annual Reports have to be published and distributes Continuity Loss of control Economies of scale → discounts w bulk, lower interest charges Tax benefits – pays corporate tax on their profits but no income tax Productivity – can hire directors and specialist managers to run the firm as there's no need for owners to be directly involved in the daily running of the business. Productivity levels are high Privately held company A limited liability company that cannor raise share capital from the public via a stock exchange. Instead, shares are sold to private family members and friends. The shares cannot be bought or sold without the prior agreement from the BOD, so that the directors can maintain overall control of the company. Publicly held company ❖ An incorporated limited liability business that allows shareholders to buy and sell shares in the company via a stock exchange - Able to sell its shares to public - Flotation – when a plc first sells all or part of its business to shareholders - Process is known as Initial public offering - Makes the publicly held company listed or registered on the public stock exchange - Helps to generate additional sources of finance for the company For-profit social enterprises 1. Private sector companies 2. Public sector companies 3. Cooperatives Social enterprises – revenue-generating businesses with social objectives at the core of their operations. Can be operated as a non-profit organisation or as a for-profit company. Goals: 1. To achieve social objectives 2. To earn revenues in excess of their costs Social entrepreneurs cannot deliver the social good they desire if they dont manage the financial health of their business. Their success in helping others depends on their ability to operate as a sustainable business. Benefits: - Uses any financial surplus to benefit others in society, beyond personal rewards for shareholders and owners - Creates employment opportunities → improves the economic and social landscape of local communities - Ran in a transparent way – provides tangible benefits + has a clean corporate image - 3 Main types of for-profit social enterprises - 1. Private sector companies - 2. Public sector companies  - 3. Cooperatives Private sector companies - Reinvests or donates any surplus to create positive social change - Uses ethical business practices to achieve their social aims related to the needs of local communities and societies - Earns their revenues and financial surpluses in socially responsible ways - Conducts activities related to society to benefit them - Unlike charities that rely on donations, they need to earn a financial surplus to survive and operate as a sustainable business - Important to enable these social enterprises to expand their business activities and outreach programmes - Produces goods or services in the same way as commercial organisations - Can be established as different legal entities that operate in the private sector (private or publicly held companies or as cooperatives) - Also competes with other businesses that operate in the same market - Both private and public sector for-profit social enterprises have 3 aims (Triple bottom line): 1. Economic aims – to earn a profit and to reinvest this surplus back into the business for societal benefits 2. Social aims – to provide benefits to people in society, such as jobs opportunities and to support less-fortunate members of society 3. Environmental aims – to protect the planet by operating in environmentally friendly and sustainable responsible ways Public sector companies Definition: Public sector companies are government-owned enterprises that operate commercially to generate revenue while providing essential services that may not be efficiently handled by the private sector. - National airline carriers - Airport authorities - Telecommunications Publicly held company Public corporation LLC that operates in the private sector but Owned and operated by the government on offers its shares to the public on the stock behalf of the public exchange Cooperatives Definition: For-profit social enterprises owned and run by their members such as employees or customers with the common goal of creating value for their members by operating in a socially responsible way. All employees have a vote, thus contributing to decision-making. Shares profit earned between members. 3 Types of Cooperatives: 1. Consumer cooperatives - Owned by customers who buy the goods and/or services from cooperatives for personal use. 2. Worker cooperatives are set up, owned and organised by their employee members. - Cooperatives involved in production and manufacturing - Cafes - Tourism 3. Producer cooperatives join and support each other to process and/or market their products a. A farmer cooperative might unite to buy equipment, fertilizers and seeds collectively - PRIVATE sector for-profit social enterprises - Aim to make a surplus instead of relying on donations to achieve social aims - Uses triple bottom lines as an accounting framework for ethical business practices PUBLIC Sector For-Profit Social Enterprises - Are state-owned to operate in a commercial way - Helps raise government revenues to provide essential services to society that may be inefficient and undesirable if left solely to the private sector 1. For-Profit Social Enterprises: Primary Goal: Generate profit while also addressing social or environmental issues. Profit Distribution: They make a profit and can distribute it to shareholders or reinvest it back into the business. Funding: Typically funded through investments, loans, and sales of products or services. Example: A company selling eco-friendly products and using part of its profits for environmental conservation. 2. Non-Profit Social Enterprises:  Primary Goal: Fulfill a social or environmental mission without the aim of generating profit for distribution. Profit Use: Any surplus revenue is reinvested back into the organization to support its mission, rather than being distributed to owners or shareholders. Funding: Often relies on donations, grants, and fundraising, in addition to revenue from activities. Example: A charity running a thrift store to support homeless shelters. Summary: Limited liability companies - Privately held company - Publicly held company Cooperatives - Consumer - Producer - Worker For profit socal enterprise - Private sector companies - Public sector companies Non profit social enterprises - NGO/PVO - Operational - Advocacy Unit 1.3: Business Objectives Vision statement – outlines an organisation's aspirations in the distant future Mission statement – declaration of the underlying purpose of an organisation's existence and its core values Main differences: 1. Vision statement addresses the question “what do we want to become?” whereas the mission statement deals with the question “what is our business?” 2. Vision statements are focused on the long term, whereas mission statement can focus on the now ‘each and every day’ 3. Vision statements allow people to see what could be 4. Mission statement outlines the values of the business ie. its beliefs and guiding principles Objectives – goals or targets an organisation strives to achieve → specific and quantifiable Important because: 1. Measure and control – helps to control a firm's plans as they determine the parameters for business activity. Objectives provide the basis for measuring and controlling the performance of the business as a whole 2. Motivate – help to inspire managers and employees to reach a common goal → unify and motivate the workforce 3. Direct – provide an agreed and clear focus for all people and departments of an organisation → used to device appropriate business strategies Types of business objectives: 1. Growth 2. Profit 3. Protecting shareholder value 4. Ethical objectives Growth - Measured by an increase in its sales revenue or by its market share - Essential for the survival of a business in order to adapt to ever changing and competitive business conditions Profit - Profit maximisation - An incentive for entrepreneurs to take risks in setting up a business Protecting shareholder value - Challenge for the directors of a firm is to balance short term profits with an investment in the long term value of the company - Generating long term value for shareholders of the business  - BOD is responsible for protecting and managing shareholders interests in the company Ethical objectives - Ethics are the moral principles that guide decision making and business strategy Business ethics – actions organisations that are considered to be morally correct employ - Disposal of waste in an environmentally safe manner - Fairer conditions of trade with low income countries - Increased recycling - Reducing pollution Can be measured by: 1. Employee retention rates 2. Customer surveys 3. Pollution levels 4. Carbon emissions 5. Energy consumption Benefits of mission and vision statements - Provides a shared sense of purpose and direction - Guides decision making - Motivate and inspire - Differentiates the business - Informs external stakeholders Drawbacks: Objectives are the goals or targets an organisation strives to achieve  - Specific and quantifiable - SMART objectives - Informs decision making and planning Strategies – medium to long term plans of actions to achieve the strategic objectives of an organisation Tactics – short term methods used to achieve an organisation's tactical objectives CSR → Corporate social responsibility - Conscientious consideration of ethical and environmental practice related to business activity CSR policies and practices need regular review in order to adapt to evolving attitudes and expectations of different markets/countries CSR practices can provide firms with competitive advantages and long term sustainability Examples: - Provide accurate product labelling - Be conscious of the impacts to the environment - Adhere to fair employment practices - Contribute to communities via volunteer or charitable activities CSR Video Case Study Q’s 1. Misleading food labels a. No standard for what natural means b. 62% of shoppers find the natural label → no universal definition of ‘natural’ c. ‘Natural’ is misleading d. ‘Natural’ is what the consumer wants it to mean One advantage is that businesses can build consumer trust and loyalty 2. Community engagement with Nissan a. Nissan sponsored this 500 home build b. Donated 104 vehicles with the help and support of 500 volunteers c. Shows their dedication to the hoh program 3. Furniture recycling in IKEA a. Millions of ppl throw furnitures every year b. Makes their furnitures from recyclable materials c. 10000 products that are able to be recycled d. Buy back program e. Uses too much wood … i. Helps 39m products a 2nd life f. Canada i. Has a program that reward customers for selling their furniture (gift cards) g. Advantages:  i. Environmental sustainable → 1. Reduces waste Driving forces of greater CSR - Influence of pressure groups - Societal expectations - general public becoming more aware and concerned with csr issues - Exposure and pressure from mass media and social media - Growth of ethical consumers → greater social and environmental awareness Benefits of being socially responsible - Increased sales - Boosts brand image - Less price elastic demand (increases added value) - Staff recruitment and retention - Employee motivation - USP (differentiates them from other brands) - New sources of finance (ethical investors) - Less chance of legal action Drawbacks - Increased costs (greater due diligence when selecting suppliers) - Increased complexity - Higher production costs (sourcing from ‘Fairtrade suppliers’ rather than lowest price) - Higher overheads (u have to train your staff and communicate ethical policies) - Charge higher prices - May build up false expectations → greenwashing Unit 1.4 Stakeholders Stakeholder – a party that has an interest in a company cand can either affect or be affected by the business Internal stakeholders – individuals or groups within an organization who are directly involved in its operations and are affected by its activities Employees Likely to strive to improve their pay, working conditions, job security, and opportunities Managers and directors Managers are people who oversee the daily operations of a business (tactical decision making) Directors are senior executives who have been elected by the companies shareholders to take charge of business operations on behalf of their owners Senior managers and directors aim to maximise their own benefits ○ Profit maximisation ○ Will look at the long term financial health of the organisation Shareholders LLC companies are owned by their shareholders Invests money in a company by purchasing its shares Shareholders/stockholders are powerful as they have voting rights and a say in how the company is run Entitled to a share of its annual profits Has 2 main interests ○ 1. Maximize dividends ○ 2. Achieve capital gain in the value of the companies shares (a rise in the value of the shares) External stakeholders → not part of the business but have a direct interest or involvement in the organisation Customers - They can simply choose to spend their money elsewhere, thereby threatening the survival of a business - Business should pay attention to the needs of their customers - Business use market research to find out what customers want - Many businesses such as fast food restaurants and hotels use customer satisfaction surveys to get feedback from their customers  - Complaints and suggestions can then be considered by the management team.Suppliers Provides a business with stocks of raw materials, component parts, and finished goods needed for production Provides commercial services Strives for regula contracts with clients at competitive prices Requests that customers pay any outstanding bills Businesses try to establish good working relationship with their suppliers in order to receive quality stocks on time and at a reasonable price A good working relationship can also mean that suppliers offer preferential credit terms which allows a business to purchase today but pay at a later date, thus improving its cash flow position Financiers - Financial institutions as well as individual investors who provide sources of finance - Interested in the borrowing organisation's ability to generate sufficient profits and to repay the debts as well as making regular interest payments - Earns money by charging interest on the amount borrowed Pressure groups - Consist of individuals with a common interest who seek to place demands on organisations to act in a particular way or to influence a desired change in their behaviour - Examples include organisations set up to campaign against smoking, deforestation - Local community might also put demands on businesses to provide jobs in order to create extra income and spending in the area - Be accountable for the impact of their activities on the local environment Competitors - Rival businesses of an organisation - Objectives: 1. Remain competitive 2. Benchmark performance 3. Be creative and innovative Government - Strives to ensure that businesses act in the interest of the public - Can lower interest rates or taxes to create employment and investment opportunities - Mnight offer incentives to multinational companies to locate in their country such as subsidised rent and tax concessions - Might constrain business activities Interests: - Unfair business practices are avoided - Correct amt of corporate tax is paid from the profits - HEalth adn safety standards - Compliance with empliynent legislation - Consumer protection laws are upheld Stakeholder conflict - Refers to differences in the varying needs and priorities of the various stakeholders groups of a business. Such conflicting interests mean that its not possible for a business to meet all of its stakeholder objectives simultaneously - Arises when people disagree with each other due to differences in their opinions - Conflict arises because a business cant simultaneously meet the needs of all its stakeholders - A common cause of stakeholder conflict is the remuneration of the company's directors - Some stakeholders have more than one role or set of interests in an organisation. Sources of Mutual Benefit and Sources of Conflict 1. Type of business entity – A partnership might strive for profit maximisation, whereas a non profit org is likely to have different priorities Sources of mutual benefit Sources of mutual conflict - Sales growth of its core products - Shareholders and market analysts wouldve pleased some of Apple’s (who can influence share purchase investors and the BOD decisions thru their recommendations) - Apple customers show brand loyalty are clearly expecting more from apple and this can be very beneficial to the given that share prices in the company given that it adopts a ‘high company fell even after this set of price strategy’ relative to the impressive results competition - Shareholders and investors think that - US gov would enjoy the benefits of the $158.8b is a waste because they Apples growth thru higher werent being invested on better  employment, consumer confidence technology, expansion, and taxes paid thru apples profits mergers+acquisition Unit 1.5 Growth and evolution Diseconomies of scale – when the expansion of output comes with increasing average unit costs Economies of scale – the cost advantages companies gain from increasing their output - a major reason why businesses aim to grow - Lower average cost of production as a firm operates on a larger scale due to an improvement in its productive efficiency - Help businesses gain a competitive cost advantage because lower average costs can mean a combination of lower prices being charged to customers and a higher profit margin earned on each item sold - Average cost → TC/Q - Average fixed costs → TFC/Q - Average variable costs → TVC/Q - AFC will decline continuously with larger levels of output - Remains constant but is spread over an increasing amount of output - As a firm operates on a larger scale, EOS are experienced up to the optimal levels of output (average costs are minimised) - Firms minimise their costs by operating at the output level where average costs are at their lowest  - EOS that occur INSIDE the firm and are within its control are known as internal EOS - Those that occur within the industry and are generally beyond an individual firms control are known as external EOS Internal EOS Technical economies → large firms can use sophisticated capital and machinery to mass produce their products ○ High fixed costs of the equipment are spread over the huge scale of output, reducing the average cost of production ○ Have the money available to invest in automation → can mass produce goods Financial economies → large firms can borrow large sums of money at lower rates of interest compared to smaller competitors because the larger organisations are seen as 😨🤓 less risky to financial lenders → large firms can offer collateral (any asset they own that the bank can take in case they don't pay back ) Managerial economies → specialisation leads to higher productivity → decrease avg unit costs ○ Large firms divide managerial roles by employing specialist managers  ○ Thru growth, a business can avoid a duplication of effort in planning, communication, marketing, distribution, and production processes. Specialisation economies ○ Results from division of labour of the workforce rather than the management ○ Specialists are responsible for a single part of the production process and their skills and expertise mean that there is greater productivity thereby helping to reduce the avg cost of output Marketing economies ○ Large firms can benefit form a lower avg cost by selling in bulk, thus benefiting from time savings and transaction costs Purchasing economies ○ Large firms can lower their avg costs by buying resources in bulk Risk-bearing economies ○ Savings can be enjoyed by conglomerates (firms with diversified portfolio of products in different markets) ○ Can spread their fixed costs such as advertising or research and development ○ Unfavourable trading conditions for certain products can be offset by more favourable conditions in other sectors of the conglomerate → a loss in one area of their biz does not jeopardise the business overall External EOS Technological progress ○ increases the productivity level within the industry ○ Internet has created a huge cost savings for businesses engaged on ecommerce Improved transportation networks ○ Ensure prompt deliveries ○ Congestion and inefficiencies raise business costs and reduce profits ○ Abundance of skilled labour might exist in the local area Provides local businesses with a suitable pool of educated and trained labour → helping to cut recruitment and training costs Abundance of skilled labour ○ Certain locations may benefit from reputable education and training facilities ○ Local businesses benefit from this by having a suitable pool of educated and trained labour ○ Reduces costs of recruitment and training Regional specialisation ○ Particular location or country has a highly regarded and trustworthy reputation for producing a certain good or service  ○ Allows the industry to benefit from having access to specialist labour, sub contractors and suppliers → helping to reduce the avg cost of production for the industry ○ Firms in those locations benefit from having access to specialist labour, sub contractors, and suppliers Internal DEOS’ - Result of higher unit costs as a firm continues to increase in size → business becomes outsized and inefficient → avg cost of production rises - Occurs due to problems of mismanagement - Lack of control and coordination - Firm becomes larger → managers lack control and coordination as the span of control is likely to increase and cause communication problems - Slows down decision making - Coordination and control problems also occur for orgs with business operations in diff locations throughout the world - Workers in large orgs might feel a sense of alienation which can harm staff morale - Poorer working relationships - Senior managers are more likely to become detached from those lower down in the org hierarchy → making them feel distanced - Damage communication flows and the motivation of staff → reducing their productivity and leading to higher average costs - Outsized organisations are likely to suffer from the disadvantages of specialisation and division of labour - Workers become bored with performing repetitive tasks - May cause workers to slack off - Lower productive inefficiency → increase in avg costs of production - Amount of bureaucracy increases - Decision making more time consuming and adds to production costs but is unlikely to contribute to proportional rise in the output of goods and services - Make communication more challenging → worsening working relationships and contributing to higher unit costs - Potential for large firms to experience diseconomies of scale means that some businesses prefer to grow via franchising External DEOS - Occurs once theres an increase in the avg cost of production where a firm grows due to factors beyond its control  - Too many businesses locating ina certain area causes land to become even more scarce → higher rents - Adds to fixed costs of all businesses in the area - Businesses might have to offer higher pay and financial rewards to retain workers ot attract new staff as workers have a great choice from a large no. of employers - Increases costs without increasing output - Local market conditions for pay and financial rewards - Traffic congestion results from too many businesses being located in an area - Deliveries are likely to be delayed due to the overcrowding → increases transportation costs for businesses → contributing to an increase in unit costs of production XDifference between internal growth and external growth Internal growth → occurs when a business grows organically, using its own capabilities and resources to increase the scale of its operations and sales revenue. Financed through retained profits, borrowing and issuing of new shares - Changing price → more customers tend to buy a product at lower prices - If there are few substitutes for the product, demand is said to be price inelastic so the business will earn more revenue by raising prices - For products in highly competitive markets, demand is price elastic so a reduction in the selling price will lead to higher sales revenue - Improved promotion → ppl are more likely to buy a product if they are informed, reminded, and persuaded about its benefits - Producing improved or better products → thru methods like market research, innovation, and new product development, businesses can produce products that are more appealing to the market → raises sales - Selling through a greater distribution channel - If a product is widely available, customers are more likely to buy it - Offer preferential credit - Customers are more likely to make a purchase if they are offered the option to ‘buy now and pay later’ → allows customers to pay in regular instalments perhaps over 12 or 24 months for the purchase of expensive products - Increased capital expenditure - Form of internal expansion of the business to new locations or the introduction of new production processes and technologies in order to improve productivity - Improved training and development - Employees are often said to be a firm's most important asset - Training and development are important as customers are unlikely to buy from salespeople who have little or no product knowledge  - Can make employees more confident and competent in their jobs - Helps motivate the workforce - Improve quality of customer services → greater customer loyalty and higher sales for internal growth - Providing overall value for money - Businesses that can provide improved value for money are most likely to experience internal growth - Customers tend to look at more than just the price when making purchasing decisions - Product quality - After-sale care - Brand image Advantages of internal growth Disadvantages of internal growth Better control and coordination → often easier to grow internally than to rely on Diseconomies of scale 🤓 costs of products can arise → higher avg external sources Hierarchical structures tend to eba feature of Enables the org to maintain control, whereas internal growth → communication problems, external growth can lead to a loss of control slower decision making and ownership Inexpensive → main source of internal growth Restructure → when a business grows, the is retained profits business organizational structure has to be Might also be a need to secure changed → takes time, effort and money interest-bearing loan capital to fund the Specialist mamagers also have tp be hired growth → less risk involved with interal growth as the amount of capital tends to be lower Higher cost of external growth means that for  many firms, internal growth is the only suitable option Maintains corporate culture → a major Dilution of control and ownership → if a firm problem for mergers and acquisitions is that grows by changing its legal status, the when two or more firms with very different owners will have to share decision making cultures work together to create a new power with new owners (shareholders) company → internal growth has no problems related to culture clashes Less risky → internal growth is the easiest Slower growth → internal growth is slower and least risky method of growth and than external growth evolution for most businesses !! >< Shareholders may more rapid methods of Builds on the strengths of the organisation growth (mergers, acquisitions, takeovers, franchising) to increase ROI External growth → occurs through dealings with outside organisations rather than from an increase in the organisation's own business operations - Mergers & Acquisitions - Takeovers - joint ventures - Strategic alliances - Franchising Growth methods → amalgamation or integration of firms Advantages of external growth Disadvantages of external growth Quicker than organic growth – external More expensive than internal growth growth tends to be a faster way ro grow and diversify Synergies – Businesses can benefit from a Greater risks – inadequate knowledge of new greater pool of skills, knowledge and the markets and the greater uncertainties opf expertise of external parties external growth creates greater risks Reduced competition – quick, albeit Regulatory barriers – external growth, such expensive, method of reducing the degree of as acquisitions and takeovers, can be competition and raising the firms market blocked by governments if the move is share deemed to be anti competitive Economies of scale – rapid external growth Potential DEOS – increased complexities of can help businesses to gain access to larger internal growth can equally cause  markets and eos inefficiencies and hence a rise in avg costs Spreading of risks – external growth enables Organisational culture clash – hard to business to benefit from diversification combine diff cultures and management styles Firms face fewer risks overall from failures in any aspect of its business operations Mergers → takes place when 2 firms agree to form a new company with its own legal identity Acquisition → occurs when a company buys a controlling interest in another firm with the permission and agreement of its BOD Predatory firm which consumes another firm + - Greater market share – integrated company Redundancies - jobs losses are likely to occur is likely to benefit from having greater market due to cost savings power, higher sales revenues and a larger Conflict - disputes and differences between customer base the companies involved EOS - operating on a larger scale helps to Culture clash - adapt to the desired corporate lower unit costs of production culture of the newly formed organisation → Synergy – integrating firms have access to changes to the companies core values and each others resources such as distribution mission statement channels, technologies, human resources, Staff might also need to adapt to new and management expertise → able to make methods of working use of their combined resources to increase Loss of control - bod loses some degree of productivity, sales revenue and profits control as new bod will need to be Survival – quick method of growth → allows restructured + new management team the new firm to be in a stronger position to DEOS - larger firm may suffer from increased compete with its rivals bureaucracy and longer channels of Diversification - allow firms to diversify their communication → less effective decision product mix → spreads and reduces risks as making well as benefit from larger customer base Regulatory problems - government may be Gain entry to new markets concerned with and prevent Takeover – occurs when a company buys a controlling interest in another firms without the prior agreement or approval of the target companies Joint Venture – growth strategy that combines the contributions and responsibilities of two or more different organisations in a shared project by creating a separate legal enterprise Strategic alliance – voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services - Strategic Alliance: Two businesses help each other achieve goals without creating a new business or combining into one. It’s more of a collaborative partnership. - Joint Venture: Two businesses form another business together specifically for a project or objective, sharing ownership and control of the new entity. - Merger: Two businesses combine into one single entity, often with a new or existing brand name, resulting in the loss of at least one original business’s independence 1. Non equity alliances a. 2. Equity alliances 3. Joint ventures 1. Feasibility study → investigate and establish the rationale, objectives and feasibility of the SA 2. Partnership assessment – analyse the potential of different partners → what they have to offer to the coalition in terms of both human + financial resources 3. Contract negotiations – discussions take place to determine each member's contributions and rewards 4. Implementation – operations are initiated with commitment to the contract from all parties involved in the newly created SA Oversaturated market – supply of goods or services exceeds demand, meaning there are more businesses, products, or services available than there are customers to buy them. + - Synergy — pooling of experiences, skills, Rely heavily on goodwill and resources of and resources of the collaborating firms in their counterparts the JV should create synergy Enormous expenditure on brand development Spreading of costs and risks – Possible culture clash Financial costs, risks, and losses are shared in the JV → helps reduce the financial burden on any single org - Allows firms to diversify their products → helping to spread the risks associated with growth and evolution Entry to foreign markets – used by companies to enter foreign countries by forming an agreement with local firms → national laws make JVs the only optio for businesses that want to enter foreign markets Cheap – M&A’s can be highly expensive as they entail lengthy legal procedures + administrative costs unlike JV are cheaper to establish and easier to pull out of Competitive advantages – Competition is reduced —> unlikely to directly compete with each other → combined size → eos Exploitation of local knowledge – take advantage of local knowledge and reputation High success rate – friendly and well received Franchising - A form of business ownership whereby a person or business buys a licence to trade using another firm's name, logos, brands, and trademarks - Franchisor: firm selling the licence ; business with an established brand - Franchisee: person/business who buys the licence + - - Solid customer base - Cost – investing into a franchise is - Solid brand image very expensive - Does not have to establish own brand - Franchisee must pay a % of their - Abiding to an established business – profits to the franchisor and to the  risk of failure is lower marketing - Provides training and ongoing support - Annual franchise fee must be paid already - 30.3% of net sales must go to the - Marketing is already taken care of franchisor - Franchisor already has SET ways on managing the business to ensure brand stays consistent → no autonomy Benefits Franchisor Franchisee - Cheaper and faster than internal - Low risk growth - Lower start up costs - Enter new local and international - Training and advice on financial markets management - Growth without incurring dya to day - Large scale advertising performed by running costs franchisor - Income from royalty payments - Greater likelihood of s success due to - Franchisees are more motivated local market insights Reasons for businesses to grow !!! Size of a business can be measured in diff ways: - Market share – firms slaes revenue as a % of the total sales revenue - TSR – value of annual SR for a given time period - Size of workforce - Profit - Capital employed Advantages of EG Disadvantages of EG EOS Cost-saving benefits due to operating on a larger scale, which reduces the firm's avg cost of production Lower prices  Level of Interest Level of power Low High Low Min effort Keep informed High Keep satisfied Max effort Generic benefits of being a large business - Economies of scale - Lower prices - Brand recognition - Brand reputation - Value added services - Greater choice - Customer loyalty Disadvantages Reason Explanation Cost control Large scale operations can mean that a firm encounters diseconomies of scale due to problems of control, coordination and communication. Owners of small firms might not want to expand as they could face higher unit costs. Growth can also require additional borrowing costs. Loss of control External growth through methods such as mergers and acquisition and takeovers may result in the dilution of ownership and control for the original owners Financial risks As the costs of running a large global business are huge such as Government aid  Products Markets Existing New Existing New Reasons for businesses to stay small - Cost control - - Loss of control - - Financial risks - Government aid - Local monopoly power - Personalised services - Flexibility - Small market size Multinational Companies A company that has business operations in at least one country other than its home country - has operations overseas - spends on FDI in overseas markets - FDI —> Chapter 45 – Business Management Toolkit – The Ansoff Matrix Ansoff Matrix → analytical tool that helps managers to choose and devise various product and market growth strategies Market Penetration - Growth strategy that involves a business choosing to focus on selling existing products in existing markets, i.e., to increase their market share of current products → low risk growth strategy - Might be achieved thru offering more competitive prices or by improved advertising to enhance the desirability of the product - Might attempt to entice existing customers to buy more frequently by offering customer loyalty schemes - (+) → business focuses on markets and products its familiar with - (-) → competitors are likely to retaliate to any business trying to take away their customers and market share Product development - Involves selling new products in existing markets - Relies heavily on product extension strategies to prolong the demand for goods and services that have reached the saturation or decline stage of their product life cycle - Features of this strategy: - Moderate risk - Innovation to replace existing products  - Product improvements - Reason for m&a’s with other companies Market development - Involves selling existing products in new markets - Features of this strategy: - Moderate risk – involves a business competing in new markets - Entry into overseas markets - New distribution channels - (+) → Business is familiar with the product that is being marketed - (-) → The success of a product in one market doesnt necessarily guarantgee its success in other marketers Diversification Involve selling new products in new markets - High risk - Enables spreading of risks with a balanced product portfolio - Use of subsidiaries and strategic units One way to diversify is to become a holding company – a business that owns or holds a controlling interest in other diverse companies This means the holding company owns enough shares in other business to be able to take control Holding companies/parent companies can benefit from having a presence e in a variety of industries in different regions 1. Related diversification occurs when a business caters for new customers within the broader confines of the same industry a. Less risky – builds on the product and market knowledge of hte business b. Unrelated diversification refers to growth by selling completely new products in untapped markets 2. Unrelated diversification refers to growth by selling new products in untapped markets Diversification is the riskiest – business is not operating in a familiar territory when launching new products in markets has little if any experience of. Market penetration Product Market development Diversification development  Same products for New products for New customers for New products for new existing customers existing customers existing products customers Minimal risk Moderate risk Moderate risk High risk Seek to maintain or Innovation to replace Entering overseas Spreading of risks raise market share existing products markets Intense competition Product New distribution USe of subsidiaries improvements channels and strategic business units SWOT analysis Situational tool used to assess the internal strengths and weaknesses and the external opportunities and threats of a business. Strengths → internal factors that are favoured compared with competitors – strong brand loyalty, good corporate image, highly skilled workers Weaknesses → internal factors that are unfavourable Opportunities → external possibilities for future development → changes in external environment that create favourable conditions Threats → External factors that hinder the prospects for an organisation (tech breakdowns, product defects and recalls, changes in fashion, price wars, recessions) Can be used to provide a framework for: - Competitor analysis - Assessing opportunities - Risk assessment - Reviewing corporate strategy - Strategic planning Once a SWOT analysis is completed, appropriate business strategies can be identified and discussed to deal with potential situations Orgs should strive to: - Build on their organisational strengths - Reverse their weaknesses - Maximise their responses to business opportunities - Overcome threats to their business Offensive strategies - ideal situation occurs if a strength meets an opportunity as business can gain maximum benefit from a favourable situation - Should make most of it - Gaps in the market !? Defensive strategies - strength meets threat so it's a bit risky which requires the business to defend itself - Pay close attention to competition so that it doesn't lose market share Reorientation strategies - opportunities meet weaknesses → favourable citation in the environment but correlates to an internal weakness → business needs to adjust or reorient its policies and practices (eg. cut costs to improve liquidity position) Survival strategies - threats meet weaknesses – undesirable situation – survival policies are aimed at minimising the adverse effects of such a situation ADVANTAGES DISADVANTAGES - Quick and simple - Doesnt guarantee that a strategy will - Encourages foresight and proactive be successful thinking - Identifying weaknesses and - Organises thinking and presents strengths doesn't mean that findings in an easy understandable the business has sufficient way financial and human resources - Helps determine the organisation's to tackle these risks position in the market - Lack quantitative assessment with no - Aids the development of appropriate value for the costs of addressing an business strats for its long term identified weakness or potential survival rewards from pursuing an identified opportunity - Overly simplistic and does not require a large amount of detail - Use of insufficient data leads to poor business decision making - Potential for bias from managers in terms of what the choose to include or omit in the analysis - Only useful if decision makers are open about the weaknesses and threats and willing to act upon them - Model is static whereas the business environment in the real world is always changing Multinational companies - A company that has business operations overseas - Spends on FDI in overseas markets - Cross border investments in which a foreign country establishes an ongoing and significant stake in its operations in another economy Driving factors of MNC’s - Reduction of trade barriers - Growth of the internet - Government incentives - Increased competition - Differences in labour costs - Globalisation - Cheaper transformation costs Globalization Advantages Disadvantages - Creates many opportunities for - Increases and intensifies competition businesses looking to grow and - Large MNC can force  evolve in overseas markets domestic businesses to lose - Stimulates international competition SR as there are more foreign - Encourages more consumption multinationals competing to sell their - Pressure to expand overseas can be goods and services in the domestic overwhelming economy → incentivizes domestic - Make businesses more vulnerable firms to be more efficient and innovate in order to remain competitive - larger customer base and EOS Higher SR + lower average costs result in improved profitability - Increases job opportunities - Reduces transportation and distribution costs - Better meet customer needs - Reduces overall risks of businesses Reasons why businesses become MNC’s Increased customer base Cheaper production costs (especially inexpensive labour) Economies of scale Brand development and brand value Avoid protectionist policies Spread risks Host countries - Any nation that allows a MNC to set up in its country + - - Job creation - Job losses - Higher national income - Repatriation of profits - Knowledge and technology - Vulnerability transfer - Social responbsibilites - Increased competition to - Competitive pressures incentivize local firms  (a) MNC’s are organisations that cooperate in 2 or more countries. For example, MNC’s tend to operate in the UAE due to their low tax rates, political stability, and high GDP. (b) Changes in tax policies, such as increases in corporate tax rates or the introduction of new taxes, can make a country less attractive for MNCs to operate in. Political instability or changes in government policies can lead MNCs to reconsider their presence in a particular country and potentially relocate to more stable environments. (c) One benefit of MNCs operating in the UAE is that one of their countries, Dubai, is a popular tourist destination. This means that this country attracts a lot of tourists and has gained a reputation for shopping. This would lead to companies being able to easily have a customer base leading to an increase in growth and brand image. Another benefit is that the UAE is known for its political and economic stability, which provides a secure environment for MNCs to operate in. STEEPLE analysis Social – Influences on businesses related to people in society, their lifestyles and their beliefs Technological – Scientific knowledge and application to the external environment that presents constant threats and opportunities, such as Internet technologies Economic – Covers key economic objectives of the nation to control inflation, to reduce unemployment, to achieve economic growth and to achieve a healthy international trade balance Environmental – ecological influences that have a direct impact on the operations of an organization (climate change and green technologies) Political – refers to the role that governments play in business operations Legal – framework of rules, regulations, and laws as part of the countries legislative framework and govern business activity Ethical – moral values and judgements that society believes businesses need to adhere to in their decision making Focuses on external factors Advantages Disadvantages - Simple to use - Helps managers to be thorough and logical in their analysis of the external  opportunities and threats faced by the business - Useful situational tool for brainstorming and discussions - Promotes forward and proactive thinking - More likely managers will be better informed and prepared to deal with changes in the external environment Case Study 46.1 Marks & Spencer Social Opportunities and threats - Social factors that can affect business activity include: - Social - Cultural - Demographic - Values and attitudes - Values and attitudes of society towards a wide range of different issues - Growing public support for environmental protection has altered business behaviour - Liberal and modern social attitude towards women - Migration and the increased awareness and acceptance of multiculturalism has created more choice for consumers - Societal pressures for businesses to act more ethically and socially responsible → higher costs - Demographic changes in society (ageing population in high income countries) have affected recruitment practices, marketing strategies and the products supplied by businesses - Language can create opportunities and threats too. The largest multinational companies are aware that the most commonly spoken languages around the world a r e Mandarin, English, Spanish and Hindi. However, ti si not always possible to translate marketing messages and other communications across different languages and cultures Technological Opportunities and Threats - Technologica developments present contant opportunities and threats \ Function Opportunities Threats HR - New working - Job losses  practices - Job creation Finance - Reduced operational - Increased costs of costs product development - Vulnerability to costly security breaches Marketing - New products and - Shorter product life new markets cycles Operations management - Increased productivity - Pressure firms to innovate faster Advantages and disadvantages of internet technologies Advantages Disadvantages Speed of access to information Price transparency Reducing language and cultural barriers Online crime Reduced costs Higher production costs Overcome geographical limitations Reduced productivity Speed of access to information – businesses and customers ca dn gain access to uptodate information from nay part of the world thru websites such as the huge ranhe of online news media sources that give info to suers in a cost effective way Economic opportunities and factors Key economic objectives: 1. Control inflation 2. Reduce unemployment 3. Achieve economic growth 4. Achieve a healthy ihnternational trade balance Control inflation - Inflation is the continual rise in the general level of prices in an economy - High unemployment rates – ppl are not earning enough disposable income → decreased gdp - Affects the international competitiveness - Inflation can be caused by excessive demand in the economy - Any factor that causes a rise in consumption, investment, government spending or intl trade earnings will increase the economies aggregate demand - Inflation can be caused by higher costs of production Economic growth - Increase in economic activity which is measured by GDP - Means the economy is more prosperous - Greater consumer spending on goods and services - Balance of trade - Diffference between the value of countrys export earnings and its import expendit - If there is an imbalance, this is undesirable as it causes exchange rates to fluctuate. - This can cause export prices to decline and import prices to increase Reduce unemployment - Measures the proportion of a countries workforce not in official employment - Governments aim to deal with this bc there are social costs of high unemployment - Local community might suffer from poverty and increased crime levels - Increased burden on taxpayers to support government spending on welfare benefits for the unemployed → less disposable income to spend on goods and services - International competitiveness will deteriorate Achieve economic growth - Increase in the value of a countries economic activity over time  - Measured by the change in the economies gdp per year - Higher rates of economic growth suggest that the economy is more prosperous and the avg person earns more income → more opportunities Boom – level of economic activity rises with consumer expenditure → investment spending and export earnings all increasing; at the peak, economic activity is at its highest → unemployment is low while consumer and business confidence elvels are high → higher sales and profit Recession – Fall in GDP for two consecutive quarters (6 months) Caused by continual decline in spending, lower investments, falling export earnings, and rising unemployment Business that will suffer – small product range and sell products that are sensitiive to changes in incomes Trough – the bottom of recession and last stage of decline – high unemployment, low levels of consumer spending, investment and export earjings Businesses suffer form poor cash flow and many will have alredy closed down due to poor liquidity Consumers have little confidence in the economy Workers suffer from lack of job security Recovery – level of GDP rises again National output and income begin to increase again \ GDP C+I+G+(X-M) C- consumer spending I - business investment G - government spending X - Exports M - imports X - M - net exports Environmental factors Political factors Fiscal policy - Use of the taxation and government expenditure to influence business activity - Expansionary fiscal policy - Government policy aimed at stimulating economic growth by increasing aggregate demand - Increase in government spending - Reduction in taxes - Used during economic slowdowns, recessions  - Contractionary fiscal policy - Aimed at slowing down economic growth to curb inflation - Decrease in government spending - Increease in taxes - Used during excessive economic growth or high inflation to stablize the economy - Prevent overheating of the economy Monetary Policy - Use of interest rates to influence business activity - When interest rates are low ppl spend on big assets - Interest rates affect business spending in terms of investment (equipment and machinery) - Businesses will spend less and produce less - Interest rates are controlled by a countries central bank - Central bank can choose to increase/decrease interest rates to affect the money supply and exchange rates Legal opportunities and threats - Governments establish laws to: - Protect the general public - Protect the interests of businesses - Legal factors generally theretaen businesses due to compliance costs - Compliance with laws will benefit the companies reputation and public image in the long term Type of legislation Purpose Opp/thr Reason To prevent thr Compliance costs businesses stating Consumer false or misleading protection descriptions of goods and services To protect the opp Compliance costs interests and safety Employee of workers such as a protection minimum wage and anti-discrimination To reduce or prevent thr Compliance costs Social and consumption of environmental demerit goods such protection as tobacco and  petrol Copyright, opp trademark and Earning profits from patent laws prevent innovation competitors from Competition copying inventions legislation To ensure monopoly thr firms do not engage Due to compliance in price fixing or costs charge excessively high prices Ethical factors - Business ethics are the moral principles that are or should be factored into bsuiness decision making - WHAT SI RIHGT AND WRONG - Social audits - Reports in the ethical and social stance of the company - Level of pollution emitted - Involvement in the community - Pressure groups also undertake their own audits of firms in order to achieve their objectives for social change Ethical opportunities and threats - Audits help to identify ethical thretas to the business - Attract and retain good quality workers - Attract and retain customers - Have good publicity and public relations - CSR;sustainable outlook - Cost benefit analysis -