AcomprehensiveguidetoUnit4aoftheEdexcelGCE08

specification

Making Business
Decisions
EdexcelA2BusinessStudiesUnit4a
QuaziNafiulIslam

2011

Thedude321.sf@gmail.com
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CORPORATE OBJECTIVES AND STRATEGY

OVERVIEW

1. CORPORATE OBJECTIVES

a. Development of corporate objectives from mission statement/corporate aims

b. Understanding the value of mission statements

2. STAKEHOLDER INFLUENCE ON CORPORATE OBJECTIVES

a. Different influences on different objectives

i. Use examples of conflicts between stakeholder objectives
b. Conflicting and common aims between stakeholders
i. Examine the business principles and objectives of a multinational company and
consider how these conflicts with stories about their unethical behaviour.
c. Potential conflicts of socially responsible and ethical behaviour with profit-based
and other objectives
d. Corporate Social Responsibility (CSR)
i. Define corporate social responsibility and consider the CSR policies
of major companies such as Cadbury and Coca Cola.

3. CORPORATE CULTURE

a. Strong and weak cultures

b. Classification of company cultures
c. How corporate culture is formed
Figure 1 - New employees at Google have to wear a
d. Difficulties in changing an established culture
'Noogler' hat

4. CORPORATE STRATEGY

a. Development of corporate strategy

b. Aim of portfolio analysis
c. Aim to achieving competitive advantage through distinctive
capabilities
d. Effect of strategic and tactical decisions on:
i. Human resources
ii. Physical resources
iii. Financial Resources
e. Porters Strategic Matrix
f. Competition vs. Co-operation
i. Resource implications and the difficulty of
changing corporate strategy in response to the
influence of
1. A competitive environment
2. Political, legal or other influences that encourage co-operation between companies on
strategy.
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CORPORATE OBJECTIVES

CORPORATE OBJECTIVES

Corporate objectives are company-wide goals that need to be achieved in order to keep the
business on track to achieve its aims. These objectives have to be SMART: Specific, Measurable,
Ambitious, Realistic and Time-bound.

BUSINESS STUDIES FOR A LEVEL, THIRD EDITION BY IAN MARCOUS

Corporate objectives are developed from the mission statement as well as the aims of the
business.
Corporate objectives will vary depending on the aim of the business which is determined by
the type of business
Public Limited Companies (PLCs) will tend to be more profit-centric as their key owners are the
shareholders; shareholders have no direct influence on the day-to-day running of the business
hence they only care about:
o Price of Shares
Shareholders Value
o Dividends
Sole-Traders, Partnerships, Private Limited Companies (PVT) may have more
varying objectives as their mission could be different. For example, The
Grameen Bank in Bangladesh is a bank whose main aim is to MARKET STANDING
empower the poor through Micro-Credit loans, and
therefore their main aim objective will not be Profitable businesses will
profit maximisation; if Grameen chose to maximise want to go on and become
profits then the poor would not receive lucrative leaders in the market. They GROWTH | PROFIT
loans. will also want a good image
Corporate Objectives that are the main focus of to prove to the public that
PLCs may include: they are a force for good
o Maximising shareholder value SURVUIVAL
o Growth Adopted by
o Diversification new
Essentially becoming a conglomerate businesses
business
Very hard to achieve in practice Figure 2 - The hierarchy of corporate objectives; objectives any business could adopt.
If achieved, will give the
business greater stability as a downfall in one sector or economy will not damage the business as
much.
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CORPORATE AIMS

Corporate Aims are a generalised statement of where the business is headed, from which
objectives can be set.

BUSINESS STUDIES FOR A LEVEL, THIRD EDITION BY IAN MARCOUS

An example of an aim would be:

o To become a football league club AFC Wimbledon, who are currently in the Isthmian league
o To provide a friendly service in a relaxed, safe and consistent restaurant environment McDonalds
Essentially as seen from the above example, aims are vague and do not have any specific or measurable progress plan
through which it can be achieved, it is simply what the business wants to do, and objectives aid to realise that aim.

HOW VALUABE ARE MISSION STATEMENTS

Mission statements are brief statements, written by the business, of its purposes and its
objectives, designed to encapsulate its present operations.

BUSINESS STUDIES 4TH EDITION, DAVE HALL

Missions Statements are short sentences or paragraphs used by a company to explain, in simple
and concise terms, their purposes for being. These statements serve a dual purpose by helping
employees to remain focused on the tasks at hand, as well as encouraging them to find innovative
ways of moving towards an increasingly productive achievement of company goals.

INVESTOPEDIA

A mission statement is likely to convey the

o Purpose the reason why the company exists
o Values what the company believes in, such as environmental friendliness
o Standards and behaviour the standards set by managers and essentially how staff are treated
o Strategy medium to long term pans adopted by the business to make aims and mission achievable
o The mission statement should be capable of inspiring those who read it or hear it; it should be highly
memorable.

We create happiness by providing the finest in entertainment to people of all ages, everywhere.

MISSION STATEMENT OF WALT DISNEY

Some businesses however do not have mission statements such as M&S (Marks and Spencer) as they feel that their
mission cannot be summarised in a sentence or paragraph.
Often the mission statement is seen as little more than a public relations exercise and in truth they are often changed
when perspectives change, such as Coca-Cola changing its mission statement.
o If a business lacks a purpose or inspiration, it is far more useful to go to the root of the problem rather than
writing a mission statement.
Critical appraisal of Mission Statements means that students need to look at Mission Statements with a critical eye. In
other words, do they genuinely outline the aims of the business, or are they more part of the marketing of the business
and aimed at giving a good impression? Students could compare business mission statements with their recent actions
to determine this.
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STAKEHOLDER INFLUENCE ON CORPORATE OBJECTIVES

Stakeholders are individuals or groups that have an effect on and are affected by the activities of
the organisations

BUSINESS STUDIES FOR A LEVEL, THIRD EDITION BY IAN MARCOUS

Managers

Suppliers Owners

Customers Customers

Stakeholders
Future
Employees
generations

Government Environment

Communities

Figure 3 - Different stakeholders of an organisation

THE INFLUENCES BY STAKEHOLDERS ON AIMS, THEIR COMMON AIMS AND CONFLICTS

Shareholders will always have conflicting aims, as they have interests in different aspects of the business.
When dealing with shareholders, there are two types of approaches:
o Shareholder approach
This gives priority to the shareholders meaning that managers focus on maximising shareholder value.
This is very common in PLCs as the shareholders do not directly influence the day-to-day activities of
the business.
o Stakeholder approach
This treats all stakeholders equally and in theory should lead to long term benefits; this is increasingly
being adopted by most businesses.
Managers have to take into account that they have a responsibility to all stakeholders.
The shareholders of the business will want high returns on their investment i.e. short-term returns; however this may
endanger the stability of the business by sacrificing long term growth.
Managers will want growth for the business however this may lead to a fall in short term returns as more money is
being kept for expansion. Some managers however are loyal to shareholders and are intent on maximising shareholder
value.
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Employees of the business will want the maximum possible wage with the best
possible benefits however, they have to be careful when bargaining for higher
wages; if wages are too high this may lead to losses for the company and
therefore employees may be laid off later on.
Customers will want value for their money and this may be achieved by
investing more into R&D. This will reduce the short-term
returns, angering shareholders.
Suppliers will want to charge high prices; charging too high
may motivate the business to seek other
suppliers
The government will be keen on
the business providing more jobs
so will be keen on growth.
However, there will be
environmental consequences
to expansion that the
government will try to minimise
through environmental and
safety standards; hence costs will
rise for expansion.
Pressure groups will push the
business to make more ethical
decisions such as reducing their
carbon foot-print or paying
cocoa workers more for their
produce (Fair Trade).

Figure 4 - Cadbury Schweppes' stakeholders

THE STAKEHOLDER APPROACH

ADVANTAGES
Attractive employment policies will attract higher
quality of applicants. This may lead to the business
becoming more efficient.
Effective consumer care policies should lead to
higher sales and greater customer loyalty in the
long run
Good co-operation with supplier should lead to
the purchaser getting value for money;
Will be easier to sort out late deliveries or
defective goods with whom the business has
good co-operations
Aiding the community such as through charities or
public funding will cause the business to acquire a
better reputation and thus achieve greater market
standing; excellent for PR.
Reducing environmental waste could reduce costs
for the business itself as well as having a positive
effect on PR.
DISADVANTAGES
Less importance to profit will likely cause less
return on capital employed: this may detract
investors.
Adopting the stakeholder approach may be a PR
exercise as in practice successfully being able to
execute the shareholder approach is very difficult
as there will be mounting pressure from
shareholders to focus on maximising shareholder
value.
Owners have the most influence of the business
but in a PLC, the managers have the most control.
GAP and Nike have often been criticised for having
a stakeholder approach but still running sweat-
shops in China.
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CORPORATE SOCIAL RESPONSIBILITY (CSR)

Corporate Social Responsibility is the responsibility that a business has towards its shareholders

BUSINESS STUDIES 4TH EDITION, DAVE HALL

Corporate Social Responsibility policies are now

available from most major businesses, as it makes the
business seem good to the public, and as a result it
means that it will have a positive impact on sales and
increase market standing as well as profits in the long
run.
Businesses have started to make auditing teams and
indexes to take better care of its stakeholders
o Employment Indicators
How well businesses treat their staff
and this is comprised of many parts
including pension, healthcare plans,
accidents in work places payments
etc.
o Human rights Indicators
Whether the businesses uses child
labour
Performance of businesses in
establishing gender equality
o Community Indicators
Donations to charity and public works
o Business Integrity Indicators
How corrupt is the business?
o Product Responsibility
How safe are the products?
o The environment
The carbon foot-print of the firm
Rating on waste management systems
Fines due to environmental regulations
Pressure groups claim that often businesses publish social and environmental audits simply
as a PR exercise; laws and regulations need to be in place so that businesses are
answerable to the law and that they are fined.
o The history and policies of a business need to be examined with scrutiny in order to understand whether the
business is really trying to do something good or whether it is simply trying to woo the public.

COCA-COLA CSR

If you go to the Coca-Cola website, you will see how they claim to be trying to change the
world through their product, trying to make new and innovative products in order to become
Figure 5 - CSR - fad or tradition?
more socially responsible.
Coca-Cola has been criticized for alleged adverse health effects, its aggressive marketing to children, exploitative labour
practices, high levels of pesticides in its products, building plants in Nazi Germany which employed slave labour,
environmental destruction, monopolistic business practices, and hiring paramilitary units to murder trade union
leaders. In October 2009, in an effort to improve their image, Coca-Cola partnered with the American Academy of
Family Physicians, providing a $500,000 grant to help promote healthy-lifestyle education; the partnership spawned
sharp criticism of both Coca-Cola and the AAFP by physicians and nutritionists; its spends millions on advertising.
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CORPORATE CULTURE

Corporate Culture is the values, attitudes, beliefs, meanings and norms that are shared by people
and groups within an organisation

BUSINESS STUDIES 4TH EDITION, DAVE HALL

STRONG AND WEAK CULTURES

Strong cultures are said to exist if the staff agree and believe in that particular culture
o This usually leads to the firm performing most efficiently
o People do this because they believe that it is the right thing to do
Weak cultures are said to exist if the staff do not agree or have little affinity to the
culture.
o To make this culture practiced, it has to be enforced by bureaucracy.

CLASSIFICATION OF COMPANY CULTURES Figure 6 - Click to view Google's corporate culture

Central source of power that makes all decisions (usually present in

new business start-ups and sole-traders)
People compete to gain more influence making it a very political
atmosphere

Decisions based on rules and procedures

Power lays in the system and hierarchy
Marketing supervisors etc.

Power is given to those who can accomplish tasks thus with those
who have expertise
Present in firms that have team work central to its activity for example
the R&D department of a firm

The business is centred around a few individuals with expertise such

as doctors or lawyers
The purpose of the business is to support the individual
Often, the individual is not directly related to the business personnel
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FORMATION OF CORPORATE CULTURES

Corporate cultures are formed from the aims and behaviour of company executives
Treatment of staff as well as the risk associated with making business decisions also aid to form the culture
Recruitment and training procedures determine what type of people the business wants and what skills they are trying
to promote

ADVANTAGES OF HAVING A STRONG CORPORATE CULTURE

Provides a sense of identity to workers and makes them feel like a part of the business.
The business can rely on them at times of need.
Facilitates team-work
Employees become more committed and this leads to increased productivity
Helps to reinforce values of business and senior management.

DIFFICULTIES IN CHANGING AN ESTABLISHED CULTURE

Corporate culture has been argued to provide businesses will a competitive advantage. Japan in
the early 70s and 80s promoted lean product and the idea of making quality the most important
aspect of the product. This lead to Japanese cars dominating the market, however this change
had many barriers to it in the western automotive industry.

Change in culture forms a cultural gap, as there will be managers and workers that had
an affinity to the previous culture and thus they will resist change.
Change often means that there is a change in beliefs and values, which may conflict with
the beliefs and values of the worker that were coherent with the previous beliefs and
values. Often this has to be made in order to make the business more competitive.
Change may threaten job and/or pay.
Successful implementation of a culture change often means that change is slow and
gradual so that workers become used to it.
However when quick change in culture is needed, businesses may often resort to sacking
workers and managers and hiring new ones.

CORPORATE STRATEGY

Corporate strategies are the policies developed to meet a companys objectives. It is concerned
with what range of activities the business needs to undertake in order to achieve its goals. It also is
concerned with whether the business organisation makes it capable of achieving the objectives set.

BUSINESS STUDIES 4TH EDITION, DAVE HALL

Essentially, objectives are what the business is trying to achieve and strategies are the plans via which the objective will be

achieved.

DEVELOPMENT OF CORPORATE STRATEGIES

Corporate strategies are made to achieve corporate objectives and hence take into account the implication on business
resources.
Corporate strategies are formed from a series of strategies at each level of business; however the key decisions will
always be made at the top.
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AIM OF PORTFOLIO ANALYSIS

The aim is to allow the firm to consider its existing position of a product and plan what to do next, so that firms can
make better corporate strategies. The main way that this is done is through the Boston Matrix.

These strategies may follow after analysis:

POLICY DESCRIPTION PRODUCTS APPLIED TO

This involves investing
in promotion and Problem Children
Building distribution to boost (Often referred to as
sales Question Marks)

This means marketing

and spending on the
Holding product to maintain Rising Stars
sales

Maximising profits with

Milking as little new Cash Cows
investment as possible
Selling off the product Dogs
Divesting i.e. liquidising it Problem Children
Figure 7 - The Boston Matrix was made by the Boston Consulting Group.

COMPETITIVE ADVANTAGE THROUGH DISTINCTIVE CAPABILITIES

Competitive Advantage is an advantage which a business has that enables it to perform better
than its rivals

BUSINESS STUDIES 4TH EDITION, DAVE HALL

Competitive advantages is an area of strength that matters to the consumer but cannot easily be
copied by competitors

BUSINESS STUDIES FOR A LEVEL, THIRD EDITION BY IAN MARCOUS

Distinctive capability shown by a firm is the basis of competitive advantage; essentially making the business product
seem superior to the consumer.
Different businesses have different capabilities such as:
o M&S has customers trust in its food.
o Walls Ice cream is delivered to the retailer within 24 hours
anywhere in England, so it has a powerful distribution
system.
o Toyotas quality in combination with its cost and fuel
efficiency makes it the first choice for first-time car buyers. It
also has great expertise in the green car.
o Companies such as apple differentiate their products on the
basis of design and ease of use.
o Businesses such as Gucci, Dolce & Gabana and Giorgio
Armani, BMW, Mercedes Benz etc. rely on their brand
image.
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PORTERS STRATEGIC MATRIX

Porter argued that 5 forces determined the profitability in an

industry.
The aim of competitive strategy was to turn these factors in favour
of the business.
Where the factors were not in favour of the business, the business
would make little profit and even the amount made would fluctuate.

SUPPLIERS

Will want to maximise profits

The more powerful the supplier the less profits the business will make
Ways to combat
o Backward vertical integration
o Seek new suppliers that offer better deals
o Find cheaper substitutes for the materials required to make the
product
o Minimise information provided to suppliers so that suppliers cannot
understand their influence over the business

BUYERS

The greater the bargaining power of customers, the lower the price will be; often results when there are few buyers
Ways to combat
o Forward Vertical Integration
o Encourage similar businesses in the industry to make the same move
o Make it difficult to choose another business:
Game manufacturers make cartridges so that they are incompatible with
other devices and so that its devices are incompatible with others; you
have no choice but to buy from them.
Printer makers have different types of cartridges that do not work with
other printers. Lexmark cartridges will not work with HP printers and
vice versa. Even if you refill the ink from a third party.

NEW ENTRANTS

If entry and exit from a market is very easy, businesses specialising in the market can find it difficult to sell their
products, when the market enters a recession or downfall (sales will be low).
High rates of return could attract more businesses into the market, which lead to a
reduction in price of the products due to increase in competition; profits will fall.
Ways to combat (By erecting Barriers to Trade)
o Patents and Copyrights
o Develop strong brand image that encourage customer loyalty
o Large amounts of advertising (so that new firms get the impression that market is
expensive due to high marketing costs)
o Give the impression that there are large sunk costs (A cost that has been incurred and cannot be reversed)
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SUBSTITUES

The more the substitutes, the fiercer the competition.

Little Competition means that businesses can charge high prices (niche markets).
Ways to Combat
o Invest into R&D and patent new and innovative products
o Buy patents in order to prevent other companies from introducing a new product into the market

RIVALS

High competition will lead to low prices

Ways to Combat
o Price fixing (this is illegal)
o Horizontal Integration (buying off rivals)
o Innovation through R&D and the creation of a strong brand image though
advertising.

THE EFFECTS OF STRATEGIC AND TACTICAL DECISIONS

A strategic decision is one that is made in a situation of uncertainty and has medium to long term
significance for the business

BUSINESS STUDIES FOR A LEVEL, THIRD EDITION BY IAN MARCOUS

Tactical decisions are decisions that affect the business on a day-to-day scale, whereas strategic
decisions affect the direction in which the business is headed. Often this is in response to an event.
Mistakes in tactical decisions are unlikely to have a major impact on the business

THE PERSON WHO WROTE WHAT YOU ARE NOW READING

STRATEGIC DECISIONS TACTICAL DECISIONS

Should we expand our business into China?
Should we focus on strengthening our delivery
services in order to gain a competitive
advantage?
Should we reduce our expenditure on employee
benefits?
Should we replace our old computing systems
with new ones?
Questionnaires have indicated that employees
feel that there is too much pressure on them to
work, should we have more recreational
facilities in the lounge?
Should we consider changing our opening times
so that they are earlier in the morning?

In simple terms, strategic decisions have far higher implications on physical, financial as well as human resources because they
affect the direction in which the business is headed. However, tactical decisions in general can affect all three types of resources
but on a far smaller scale. Strategic decisions can be planned for, so it is expected that the human, physical, financial resources
would be in place. With tactical decisions this may not be the case, thus limiting the business' ability to react tactically.
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COMPETITION VS CO-OPERATION

This part of the specification is not important to the examination

The implications are simple in that they force businesses to become more competitive and this leads to the adoption of different
corporate strategies:

Price Cutting
o Reducing the price of the product to make the product more competitive by making it more affordable to the
consumer
Increase in product differentiation
o DESIGN
Outstanding design such as apple iPads and iPhones
differentiate its products from the competition.
o BRAND IMAGE
Car companies such as Mercedes Benz and BMW rely on
their image of unmatched quality and design to differentiate
its products
o UNIQUE PRODUCT FEATURES
Introducing truly innovative products in response to modern
technology or popular demand
o SUPERIOR QUALITY
Find New Markets
o Can be in response to market saturation e.g. when Vodafone began expanding in developing nations.
Takeover
o Large businesses will want to prevent new business with innovative ideas to take over their market share.
Predatory Pricing
o When a firm cuts its costs deliberately in order to put its rival out of business

More competition means that often there has to be changes in corporate strategies. Changing corporate strategies can be
difficult as the business has made these strategies based on corporate objectives and aims. New strategies that will have to
adapt to the current situation have to meet those aims, or the current situation may not allow those aims to be met. Often
under new legal, political or economic circumstances may force the business to change its corporate
strategy.

External influences such as the recession in 2008 might force the business to become far more
competitive through the abovementioned strategies because now businesses are fighting to
gain market share in markets that have shrunk and as a result their revenue has shrunk.

However, businesses might choose to co-operate instead becoming a stronger force due to
the combination of two or more companies that will be able to dominate the market.

Mergers can take place to keep the companies from failing. British Airways and Iberia merged
in order to prevent further damage to their markets due to the recession; AIR FRANCE KLM and
Lufthansa were already aiming to target the market share of the weakened BA after months of
strikes from their workers.

However sometimes especially when it comes to R&D, businesses might work together in order to gain
access to new technologies that are very expensive to develop.

In a few rare instances, businesses will break the law by through collusion e.g. price fixing etc.
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MAKING STRATEGIC DECISIONS

OVERVIEW

1. DECISION MAKING MODEL

a. Use of Ansoff Matrix to communicate intended strategic direction.

i. How the Ansoff Matrix can be used to show strategic direction of the business; e.g. if they're
expanding into new markets, this would be seen as Market development, which is more risky than
Market Penetration.

2. DECISION MAKING TECHNIQUES

a. Investment Appraisal
i. Simple Payback
ii. Average Rate of return
iii. Discounted Cash-Flow (Net Present Value only)
b. Decision Trees
i. Construction and interpretation of simple decision tree diagrams,
limitations of technique.
c. Project planning and Network Analysis
i. Nature and purpose of Critical Path Analysis
ii. Be able to draw simple networks
iii. Calculate Earliest Start Time and Latest Finish Time
iv. Identify the critical path and calculate the total float
v. Limitations of technique
d. Contribution and special order decisions, determining whether a
special order is worth the effort.

3. CONTRIBUTION WITH RESPECT TO SPECIAL ORDER DECISIONS

a. Need for contingency planning

b. Consideration of risk of operating in a country or seeking growth in
new overseas markets
i. Use the Ansoff Matrix to consider why a company may
seek to invest in a factory overseas, for example to
reduce dependence on domestic market through
planning for growth.
c. Risk reduction through information from decision-making models
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DECISION MAKING MODEL

THE ANSOFF MATRIX

EXISTING NEW

PRODUCTS
EXISTING

Market Product
Penetration Development

INCREASING RISK
MARKETS

Market
Diversification
Development
NEW

INCREASING RISK

The Ansoff Matrix is essentially a tool developed to help people chose what strategy they should use in order to
successfully develop their product. Essentially, these are marketing strategies for growth through the development of
new products and markets.

THE DIFFERENT MARKETING STRATEGIES FOR GROWTH

MARKET PENETRATION

Concentrating on gaining greater growth in existing markets

This has the least risk involved as the businesses has developed the product and knows the market
Can be achieved through:
o Increasing brand-loyalty of consumers so that they use alternatives less
o Encourage consumers to increase usage; instead of selling a pack of chips in a medium sized pack,
chips makers make large sizes available e.g. Lays Extra Large
Figure 1 - Lay's XL Classic potato chips
MARKET DEVELOPMENT

Finding new markets for existing products

This is expensive as there needs to be investment into market research. However,
there are considerable risks in understanding consumer behaviour as it is constantly
changing.
Can be achieved through:
o Repositioning the product to target a different market segment
o Moving into new markets, e.g. India, China etc.
Figure 2 - With saturated markets in the west Vodafone developed
markets in Africa and South Asia. Nokia simply added torchlight to
its previous model to help its phone-users in South Asia cope with
power outages.
 3|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c

PRODUCT DEVELOPMENT

Launching new products into existing markets

One in five products succeed, even with heavy investment into R&D as well
as aggressive marketing
o Even the best companies such as Sony (Sony Egg), LOreal, Walls,
Cadbury (Cadbury Aztecs) and Microsoft (Zune, Windows Vista)
Can be achieved through:
o Changing existing products
Shampoos offering new and improved formulas
Cars adding features to older models and releasing them
as new yearly models every year
o Developing new products from scratch

Figure 4 - The successful development of the iPod propelled

Apple into the music industry.

DIVERSIFICATION

When a business tries to market new products in absolutely new markets;

making it a conglomerate
This has the greatest risks involved in doing this, but successful
diversification has great rewards.
It gives the business greater stability as a recession in one market can be
buffered by another.
It gives businesses more room to make riskier decisions which will
ultimately reap greater rewards.

Figure 5 - Nintendo was originally a card game making

company and Nokia made tires. Successful Figure 3 - Shampoo Companies always claim that their 'new
diversification led Nokia to become the world's largest and improved' formulas are really new and improved. But
mobile manufacturers and Nintendo to become a personally, no commercial shampoo has worked for me, only
successful console manufacturer. medicated shampoo.
4|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c

DECISION MAKING TECHNIQUES

INVESTMENT APPRAISAL

Investment appraisal is the evaluation of an investment project to determine whether or not it is

likely to be worthwhile.

BUSINESS STUDIES 4TH EDITION, DAVE HALL

Investment appraisal has a set of tools that we use in order to assess the return of an investment made by the
company.

SIMPLE PAYBACK

The payback period is essentially the time taken for a firm to cover its costs. Basically, if you invested $30,000 into a
business, how long would it take the business to generator $30,000?
Say, you have to invest $30,000 into capital and this capital is estimated to generate $10,500 a year and would take
$3,500 to maintain. Calculate the pay-back period.
Calculating payback:
As you can see, Year Cash In Cash Out Net Cash Flow Cumulative Cash Flow
that there is no
NOW $ - $ (30,000) $ (30,000) $ (30,000)
clear year that
YEAR 1 $ 10,500 $ (3,500) $ 7,000 $ (23,000)
the payment is
made up. So, we
YEAR 2 $ 10,500 $ (3,500) $ 7,000 $ (16,000)
are going to YEAR 3 $ 10,500 $ (3,500) $ 7,000 $ (9,000)
have to calculate YEAR 4 $ 10,500 $ (3,500) $ 7,000 $ (2,000)
it in months. YEAR 5 $ 10,500 $ (3,500) $ 7,000 $ 5,000
th
We can see that up till the 4 year, there was still a cumulative cash-flow of $2,000.
$10,500
In the 5th year, $10,500 was generated. So we need to calculate how much was generated per month, = $875
12
Therefore, we now need to calculate the number of months that it would take $2,000 to be generated,

$2,000 2
= 2
$875 7

Therefore, the pay-back period is 4 years and 3 months.

Often directors will set a pay-back period for the managers to suggest a suitable investment, such as being less than 20
months. This is referred to the criterion level.

Advantages Limitations
Easy to calculate and understand Ignores what happens after payback period.
Essentially, there is more effort being put into calculating finances
The method ignores the profitability of the project, since the
over a comparatively shorter period of time. So, it is likely to be
criterion used is the speed of repayment.
more accurate.
Takes into account timing of cash-flows. So the discounted cash-
May encourage short-termism.
flow can be calculated to gain its NPV.
Businesses with weak cash-flows will be able to seek out quick
payback investments.
It is of limited use on its own (because it does not pay attention to
This is useful for sectors with rapidly changing technology e.g. the
profits) and is therefore used together with the Average Rate of
electronics industry. New consumer electronics can be designed
Return as well as the Net Present Value
and introduced regularly. It is important to cover the cost of the
investment before the new good is designed.
5|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c

AVERAGE RATE OF RETURNS

This is the profit an investment will give over the period of its lifetime.
How to calculate:

S TEP 1 I DENTIFY P ROFITS AND INITIAL INVESTMENT

Say, an investment will give $20,000 in profit over its lifetime.

The firm invested a total of $25,000 to make this project happen.

S TEP 2 D IVIDE THE PROFIT BY THE PERIOD OF ITS LIFETIME (I N YEARS )

Say, the period is 5 years.

$20,000
=
5

= $4000

S TEP 3 C ALCULATE ANNUAL PROFIT AS A % OF THE INITIAL INVESTMENT

= 100

$4,000
100 = 16%
$25,000

Usually, the exam will give you table from which you are going to have to interpret this from.
However, there is another term that we must familiarise ourselves with, and that is Reward for Risk
Basically, the business is taking a risk in order to make a profit. However, it can simply put the money in the bank and
get the interest out of it. Say the interest is 6%.
So, the business can make 6% profit without even having to take any risks.
The Reward for risk is the .
So, in this case, the Reward for risk would be10%.

A DVANTAGES AND LIMITATIONS

Advantages Limitations

Shows the profitability clearly and allows comparisons with other Not as accurate as payback as it makes assumptions over a large
modes of investment such as interest etc. number of years

Uses all the cash flows over the projects life - Payback only
considers cash flow up until the payback month - it might be that
the project generates larger cash flows after this period, but the
method ignores these. ARR looks at all the cash flow projections Ignores the timing of cash flows
and included these, so it is fairer to projects that might generate
large incomes in later years e.g. those that might require a lot of
training and getting used to new equipment.
Focuses on profitability Ignores the opportunity cost of the money invested
6|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c

DISCOUNTED CASH FLOWS NET PRESENT VALUE

$100 today will be worth a lot less in 3 years time. This is because of inflation that reduces the value of money and
makes goods more expensive as well as the interest that banks provide that increase the value of money.
The ARR and payback methods provide insight into profitability and cash flow. But, what we need to now is the
opportunity cost of making an investment. What are we throwing away in order to make an investment?
The higher the rate of interest and the longer the waiting time for the money to come in, the less money it is actually
worth in todays term.
The predicted value of money in todays terms is calculated from discount tables that will be given to you in the
examination. Here is an example:

Rate of interest
Years Ahead 4% 6% 8%
0 1.00 1.00 1.00
1 0.96 0.94 0.93
2 0.92 0.89 0.86
3 0.89 0.84 0.79
4 0.82 0.8 0.75

So the value of $200 in 4 years time at 6% interest would be $200 0.6 = $160

CALCULATING NPV

Say a company has two projects, Projects X and Y. Say the rate of interest is 8%.
Their cash-flows and Discounted cash flows are given below:

Project X Project Y
Discount Discounted Discount Discounted
Year Cash Flow Cash Flow
factor Cash Flow Factor Cash Flow
0 ($250,000) 1.00 ($250,000) ($250,000) 1.00 ($250,000)
1 +$50,000 0.93 $46,500 +$200,000 0.93 $186,000
2 +$100,000 0.86 $86,000 +$100,000 0.86 $86,000
3 +$200,000 0.79 $158,000 +$50,000 0.79 $39,500
= $40,500 = $61,500

Despite the fact that both projects have the same initial cost, and they bring in the same quantity of money over their
lives, there is a large difference in the NVP, as project Y generates more income at the beginning, whereas project X
generates more income towards the end. As the discount factor increases over time, the actual value of the money
generated by X is reduced. Also, the predictions are less accurate the further we predict thus there is great uncertainty
as to whether project X can generate the NVP even if the value of money decreases as expected.

A DVANTAGES AND L IMITATIONS

Advantages Limitations

Takes the opportunity cost of the investment into account Complex to calculate and communicate

A single measure that takes the amount and timing of cash flows
The meaning of the results is often misunderstood
into account
Only comparable between projects where the initial investments
are the same
Can consider different scenarios
The rate of discount used is critical, if the rate is not accurate,
the business could make big mistakes
7|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c

DECISION TREES

Decision trees offer a visual representation of the companys possible choices that it can make.
There are four parts to a decision tree:
o Decision points are the decisions the business has to make; represented by boxes.
o Outcomes are the possible outcomes of taking a decision; represented by circles.
Obtained often from back-data.
o Expected Values are the financial outcomes of a decision i.e. how much profit or loss a decision will make.
However, there is a term called the Expected Value no s at the end.
Expected Value
Decision Point

Outcome
Calculating the expected value of B:
o = ( ) + ( ) +
( )
o = (0.3 50,000) + (0.3 30,000) + (0.4 10,000)
o = 84,000
Calculating the expected value of C:
o = ( ) + ( )
o = (0.5 40,000) + (0.5 10,000)
o = 25,000

A DVANTAGES AND LIMITATIONS

Advantages Limitations
Construction of diagrams may highlight decisions that we not
Much of the data including probability is estimated.
previously considered
Decisions often have several aspects. Decision tress only focus on
Putting numeric values on these choices tends to improve
the quantitative aspect. Qualitative data is also important, e.g. the
results.
effect on the environment of one particular decision.
There are time lags in decision making, by the time a decision is
finally made, some of the numeric information may be out of date.
The process is quite time consuming. However, computers have
Force management to take into account the risks involved in now made this a lot faster.
making these decisions. This helps to separate the important Managers may manipulate the probability of a decision to suit
risks from the unimportant risks. their preferences, distorting the final results.
Decision trees cannot take into account the dynamic nature of a
business. Sudden changes in the economic climate might render a
decision based on the decision tree obsolete.
 8|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c

PROJECT PLANNING AND NETWORK ANALYSIS

In a production line, there needs to be proper organisation in order for the production to go on smoothly.
In order to do this the needs to be a plan for the process to operate smoothly.
This is done through a model called Network Analysis.

A network path diagram helps to identify the critical path, which shows the activities that require
the most careful management scrutiny.

BUSINESS STUDIES FOR A LEVEL, 4TH EDITION IAN MARCOUS

There are different parts to a network diagram. The lines represent an activity: which is essentially that is a part of the
process that requires time and/or resources; waiting for supplies is an example of an activity.
A node (represented by circles) is the start of or end of an activity.
This is what a Network diagram looks like:

Start Node

The
Lines represent activity
Earliest Start Critical
Time Path

Step Number Latest Finish Time

End Node

INSTRUCTIONS FOR DRAWING NODES

1. The network must start and end with a single node
2. No lines in the network can cross
3. When drawing an activity, do not draw the end
node, as you cannot calculate where the whole
process is going to end, this is not exactly a rule
but rather a precaution.
4. There cannot be any line that is not an activity.
5. It is helpful to draw nodes with large circles and
short lines, to save space and also because you
need to put figures in those circles.
6. The start nodes all have an EST and an LFT of 0.
The Critical path will have the following characteristics:
o The EST and the LFT will be equal
o It will be the longest past through those nodes
=

Advantages Limitations
Processes should be smoother as there is careful planning involved
It shortens the length of time taken to complete a project, as tasks A complex process which will have many lines and will be long;
are handles simultaneously this can be very advantageous as getting computer rendering will be needed. Software may need to be made or
a product first to the market can often be a positive factor, especially bought which will be expensive.
with technology.
Delays can be handled adeptly as time is accurately planned.
Drawing a diagram does not ensure success; it will be the effort of
There is better time management, facilitating JIT management. Also, the managers that ultimately brings the results.
due to better management, there is reduced pressure on Cash Flow.
9|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c

CONTRIBUTION AND SPECIAL ORDER DECISIONS

A business might get an unexpected order from a new customer.

In these cases the business has to consider whether the deal will be profitable and often this is done through contribution
costing.
A business will have both fixed and variable costs.
Based, on the contribution that each finished good
provides, the business will need to make this decision.
Say, there is a special order for 2000 extra laptops and the
company needs to decide whether or not to accept. The
customer is willing to pay $670 for each laptop.
The fixed costs are at $500,000 per year and the variable
cost is $350 for a laptop
So, the total cost for the laptop, for the manufacturer will
$500,000
be $350 + = $600.
2000
Thus, the business can take the order and still make a profit.
However, this is on the assumption that fixed costs remain the
same. If they were to increase, which they likely will, then the profit made from making laptops would be very small.
$600,000
If the fixed costs were to increase to $600,000, then the price of the laptop would become $350 + = $650, the
2000
business would be making very little profit. However, this might be a new customer that may become a regular customer
for the business, like this there are many non-financial motives to take or decline an order:
o Capacity: Whether the business has the machinery and the labour to take the order. Will taking this order sacrifice
something more profitable?
o Customer response: If existing customers find out that products were sold at a cheaper price to others, then it will
damage the image of the business and may lead to a loss of customers.
o Future Orders: Unprofitable orders might lead to more profitable orders in the future from the customer.
o Current Utilisation: An unprofitable order may be accepted in order to keep staff occupied. Its better to have
permanent staff occupied with work that will give little contribution, than not working at all, because when
permanent labourers have no work to do, the business is still paying for their wages.
o Retaining customer loyalty: A business may accept an un-profitable order as a favour to a loyal customer. Greater
co-operation from the business to the customer will increase brand loyalty.
10 | Q u a z i N a f i u l I s l a m w w w . s t u d e n t t e c h . c o . c c

BUSINESS CONTINGENCY PLANNING

NEED FOR CONTINGENCY PLANNING

Contingency planning is the creation of plans of how particular crises which might affect a
business will be dealt with should the arise

BUSINESS STUDIES 4TH EDITION, DAVE HALL

Things do not always go according to plan, an employee might be sick such as in a school, a class
teacher may be sick and may not come to class. If this happens, then there needs to be a
replacement teacher capable of taking the class. Contingency planning is essentially a back-up plan
the business has.
Similarly, in times of a crisis such as a fire or flood, the business will need a back-up plan to make sure
that it can survive the crisis.
But there are many other types of crises that may occur, and these may be financial, related to machinery,
human resources, public relations etc. To combat all these problems, the business will need a contingency plan in place.

A DVANTAGES AND LIMITATIONS

Advantages Limitations

It gives the business some kind of plan as to what it can do in times It can be argued that there are relatively few contingency plans that
of a crisis. are effective as there are many unforeseen eventualities.

CONSIDERATION OF RISK OF OPERATING IN A COUNTRY OR SEEKING GROWTH IN NEW OVERSEAS

MARKETS

Developing a new market with existing products will fall into the
market development category. Essentially, if the business fails to do
well in the market, it will need a contingency plan to get itself out of
the operations e.g. sell the operations, or go into a joint venture with
a local firm in order to increase chances of survival and to gain
additional knowledge about the market as well as getting information
from the company.
The extent of the risks will depend on how different the foreign
market is in comparison to the domestic market.
The product may need to be modified, as when Whirlpool set out to
make the world washer, when it sold the washer to India, people
stopped buying it because some special types of Indian clothes got
stuck in the washer. Also, when PEPSI started out in China, when it
translated its logo, the literal translation was something very insulting
in Chinese culture.
There needs to be thorough market research done, both primary and
secondary in order to gain a comprehensive understanding of the
market. Even after thorough market research businesses fail because
of the ever changing nature of consumer taste.
11 | Q u a z i N a f i u l I s l a m w w w . s t u d e n t t e c h . c o . c c

RISK REDUCTION THROUGH INFORMATION FROM DECISION MAKING MODELS

Decision making models such as decision trees allow businesses to

assess the risk of an operation, because it highlights the probability
of both profits and losses.
Investment appraisal shows how long a business will need to earn
its investment back from the operation i.e. payback. Also, ARR will
allow the business will allow the business to consider how much
rewards it is getting for the risk it is taking.
o When TESCO set up Fresh & Easy stores in America, it
calculated that the payback period would at least be 5
years. But it did so, in order to get a foothold into the lucrative American retailer market.
Network analysis will make the business more efficient and will highlight critical paths, which have the most risks
associated with them, so managers can proceed with more caution.
1|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c

ASSESSING COMPETITIVENESS
OVERVIEW

1. INTERPRETATION OF FINANCIAL STATEMENT

a. Gross profit margin

b. Net profit margin
c. ROC (Return on Capital)
d. ROCE (Return on Capital Employed)
e. Acid test ratio
f. Current ratio
g. Gearing ratio
h. Interpretations of these margins and ratios
i. Limitations of ratios as a decision making tool

2. HUMAN RESOURCE COMPETITIVENESS

a. Labour productivity
b. Labour turnover
i. Unavoidable leavers
c. Limitations of these calculations

INTERPRETATIONS OF FINANCIAL STATEMENTS

Ratio analysis is an examination of accounting data by relating one

figure to another. The approach allows more meaningful
interpretation of the data and the identification of trends.

BUSINESS STUDIES FOR A LEVEL 3RD EDITION BY IAN MARCOUS

Before we proceed onto actually calculating the ratios, it is very important to

familiarise ourselves with a financial statement, as these statements are what we
need to calculate these ratios. The gross profit margin, the net profit margin and the
ROCE is calculated from the profit and loss account. The table to the left is an
example of a profit and loss account. The expenses are essentially costs that are not
involved in the production of goods and services such as advertising, wages of the
administration staff as well as depreciation (the value of the companys capital
decreases with age). Cost of sales are the costs directly related to production
including wages for labour as well as the overheads for rent, fuel etc.

Figure 1 - This has been taken from Dave Hall's book,

Business Studies 4th Edition
2|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c

GROSS PROFIT MARGIN

First, we need to calculate the gross profit, and then we can calculate the margin.

= ( )

= 100
( )

400,000 4
= 100 = 44 %
900,000 9
44%

NET PROFIT MARGIN

First, we need to calculate the net profit, and then we calculate the margin. As a simple rule of thumb, the net profit is the profit
before tax essentially, after you have taken all the costs, other expenses not directly linked to the production of the product as
well as interest payable, you get the net profit: the value that the business is taxed on. The net profit will be very clearly stated
in the tables that the exam board will provide, because its exact location can vary depending on the financial transactions of
each individual business.

= 100
( )

110,000 2
= = 12 %
900,000 9

12%

ROCE (THE RETURN ON CAPITAL EMPLOYED)

To calculate this value, we need to be familiar with the balance sheet. The
balance sheet is essentially a financial statement that lists a firms assets and
liabilities: in simple terms, its what a business owns and owes. We need to
remind ourselves that long term loans are also counted as investment into the
business and therefore do count as capital employed into the business. The
business made an operating profit of 5,600,000.

Fixed assets are assets that the business will have in the long term i.e.
buildings, machinery etc. basically, assets that the business will have
for more than a year.
Current Assets are assets that will last for less than a year. These
assets are the most liquid assets the business has; examples include
things such as cash etc.

( ) =

= + ( )

= +

= 100

5,600,000
= 100 22%
(17,400,000 + 8,000,000)
3|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c

ROC (RETURN ON CAPITAL)

This essentially measures the profitability of a business. If a business invests into a project, it will want to know the profitability
of the project.

( ) = 100

This value is expressed as a percentage.

THE CURRENT RATIO AND THE ACID TEST RATIO

Both these ratio assess the liquidity of a business i.e. how easily a business assets can be turned into cash. Again, this is another
ratio that is concerned with the balances sheets a business publishes.

CURRENT RATIO

The current ratio of a business is essentially the ratio between its current asses and its current liabilities.

ACID TEST RATIO

The acid test ratio takes into account that stocks are the least liquid of all the current assets
and should not be counted as an asset that can be easily liquefied.

GEARING RATIO

This essentially is a ratio that gives an indication of how much debt the business is
under, giving insight into the long term stability of the organisation.

-
( ) = 100

This value (like every other ratio that is multiplied by 100) is expressed as a
percentage. In boom times, investors and banks find gearing a good thing, as the
business is focusing on growth, however this entails great risk. However, if a recession
suddenly hits, then the business will be in grave danger because now the business still
has to pay back the interest with a reduced income from battered sales.
4|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c
INTERPRETATIONS OF THESE MARGINS ANS RATIOS
RATIO OR MARGIN
GROSS PROFIT MARGIN
NET PROFIT MARGIN
ROCE (RETURN ON CAPITAL EMPLOYED)
ROC (RETURN ON CAPITAL)
CURRENT RATIO
ACID TEST RATIO
GEARING RATIO
ANALYSIS
The gross profit will differ from industry to industry and hence needs to be looked at with the
context of the business in mind. Can be improved by:
Raising sales revenue without increasing total costs i.e. make production cheaper
e.g. can be done via automation.
Similarly to the gross profit margin, this will vary from industry to industry and has to be
looked at with the context of the business in mind. For example, the food industry has both a
low gross and net profit margins, but since there is a very high volume sold, it is not a
problem. Can be improved by:
Same as gross profit margin.
This is a fundamental ratio that essentially shows how well the business is making use of its
resources and essentially, how lucrative it is for investment. The ROCE of a business needs to
be compared with previous years to identify a trend in its growth. Also, if the ROCE is less
than 6 %, then there is little incentive to invest as if an investor were to invest this money into
the bank instead, then the person would be much better off still making money with no risk.
Can be improved by:
Increasing the efficiency of the business through generating greater profits from the
same amount of capital invested.
This measures the profitability of a project or operation and thus is a good indicator of how
successful the project was to the business.
Shows the ratio between assets and liabilities. The business would do best to keep this at 1.5:1.
However if this is too high, it means that the business has too much money that it is not
investing. However, having too low a current ratio means that it may not be able pay back debts
in times of crisis such as a downturn. Can be improved by:
Selling under-used fixed assets
Selling shares to gain more share capital
Postpone or reduce planned investments
Take long term-loans
Arguably, the best ratio is 1:1. A result that is too low means that that the business may not be
able to pay off its short term debts. However, companies such as supermarkets operate with
very low liquidity ratios. In fact, some of the major companies such as BP, Imperial Tobacco
and TESCO have very low acid test ratios.
Adopting JIT, this way you have not stock to worry about and you can divert more
capital into production
Selling under-used capital or selling old machinery
Selling shares to increase share capital
Take long term loans
The more geared the business is, the more debt it has. By this, it means that investing in this
business is risky as well as it will be hard for the business to gain finances from banks.
However, whether a business that is geared will get investment will also depend on the state of
the industry. Can be improved by:
Issue more shares to raise share capital
Buy back debentures (bonds)
Retain more profit
Repay loans
5|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c

VALUE AND LIMITATIONS OF THESE RATIOS AS A DECISION MAKING TOOL

VALUE LIMITATIONS

Comparisons have to be made with businesses that are similar

(same industry, similar operations) and also businesses in the
same time frame in order to get a fair comparison.
Ratios are very simple to calculate, most of them have a consistent
Sometimes, businesses in the same industry are vastly different.
formula.
Sainsbury focuses on food and groceries alone, while TESCO is
moving onto home appliances these new products will have a
different gross profit margin and will affect comparisons.

Businesses might also have different accounting techniques, which

Analysis can be carried out very quickly as they are very simple to
will determine how their financial statements are made financial
calculate and demand only basic financial statements.
statements determine ratios.

Can be used to compare one company with another; they can be The ratios are limited to the quality of the balance sheets the
used to compare businesses in the same industry. Comparisons balance sheet represents a snapshot of the business at the end
can also be made within the companies as it may have many on- of a financial year and is not representative of the business
going projects. circumstance over the entire year.

Qualitative information is ignored, making it quite ineffective in

Can be used by decision makers to identify the strengths and the service industry.
weaknesses of a business. For example, if gross profit margin is
very high, but the Net profit margin is very low, then the business
may try to reduce operational costs as well as reduce its debts. The ratios are only as good as the financial accounts. Inflation can
make a business assets look more valuable when there might
not actually be a change in real value.

WINDOW DRESSING

Window dressing is the legal manipulation of company accounts by a business to present a

financial picture which is to its benefit.

BUSINESS STUDIES 4TH EDITION, DAVE HALL

Business managers may want to paint a good financial image of the

business in order to attract investors.
Businesses might manipulate the financial picture to look bleak for the
short term to make it look better in the long term business tend to
choose to get over with a financial crisis quickly than having poor
financial performance for a long time; if the business shows strength in
coming out of a financial crisis then they will become a favourite with
investors.
Making financial statements look worse can be used to reduce the tax
on a business.
Businesses trying to sell itself or one of its operations will do their best
to manipulate accounts in order to get the best possible value for the
business.
6|Q u az i N a f i u l I sl a m w w w . s t u d e n t t e c h .c o . c c

HUMAN RESOURCE COMETITIVENESS

Both labour productivity and turnover show the effectiveness of the work force and can be a very useful yard-stick for
measuring the efficiency of the business in question.

LABOUR PRODUCTIVITY

( )
=
( )

This essentially measures the how many products (on average) a worker produces over a specific period of time. There can be
many ways to improve this:

Making production more capital intensive will reduce the need to labour as well as produce at a cheaper rate as
machines can work continuously unlike workers.
Often, changing the type of production can improve the efficiency of a business; using cell production instead of
assembly line production is an example as it meets workers social needs.
Training can make workers more able, allowing them to perform their work more efficiently.
Overall, increasing the motivation of workers by giving them more power or authority is also a great way to increase
productivity, as they can highlight the main problems with the production process and can therefore come up with a
better solution.

High labour productivity will drive the costs of the business down and hence the business can sell cheaper products to gain
greater sales or keep prices the same and get more profit depending on the elasticity of the product.

However, even after adoption these measures, often businesses are unable to compete:

Often competing businesses may offshore production to places such as China, where the labour cost is very cheap.
Rivals may be able to increase productivity at an even faster rate, than the business, through a combination of
technology and cheap labour.
Rival might also enhance the quality of the product while at the same time increasing the productivity of the business.

LABOUR TURNOVER

( )
= 100
( )

Labour turnover can be caused by a variety of reasons.

Some being:
The company paying staff low wages
Relatively few training programmes
Poor methods in recruitment and selection
process
Poor working conditions unsafe, bullying etc.
Lack of transport may also be a reason
Some turnover is unavoidable as some businesses
may have passed the working age.
Problems with recruiting new staff:
It takes time and has high administration costs
o Induction programmed given by large
companies increase the cost of
recruitment
Why turnover may be a good thing:
New staff bring in new ideas
Some workers may be ineffective
If a business is shrinking, reducing business size
can be good in cutting costs.
If a business pays low wages, it might prefer hiring
new workers than increasing the wage.
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USES AND LIMITATIONS

These ratios give an indication of a problem in the business, but does not give any specific detail about the problems
that the business and often business have to carry out additional research to get to the root of the problem.
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COMPANY GROWTH
OVERVIEW

1. TYPES OF GROWTH

a. Organic
b. External
i. Mergers and Takeovers

2. BUSINESS INTEGRATION

3. EFFECTS OF GROWTH ON A BUSINESS AND THE ANSOFF MATRIX

TYPES OF GROWTH

Growth is of two types: organic and inorganic growth. Organic growth is when the business
expands by setting up new outlets, factories or offices (service). Inorganic methods of growth
involve combining with or taking over other businesses which happens in the form of takeovers or
mergers.

QUAZI NAFIUL ISLAM

ORGANIC GROWTH

Slow growth through internal expansion and the increase of sales.

Safer than inorganic growth as culture clashes are avoided.
However, reliance on organic growth alone could lead businesses to miss out on lucrative deals that have the potential
of making the business a lot of money, as well as gaining a lot of influence.

INORGANIC GROWTH

Takeovers happen when businesses buy 51% of the shares in another business. Mergers happen when two businesses
combine in order to form a bigger business with both businesses
having mutual control over the business.
o They both are in charge and there is a new board of
directors formed when this happens. Arcelor and Mittal
merged to become the worlds largest producer of steel,
the board of directors consisted of both Arcelor and Mittal
directors this happened in 2006.
o Cadbury inorganically grew by taking over Green and
Blacks organic chocolate it sounds kind of ironic when
someone inorganically takes over something organic!

Figure 1 - Cadbury was taken over by Kraft after the

recession. Cadbury was financially very weak and unable
to continue trading and needed financial assistance.
Read more
2|Q u a z i N a f i u l I s l a m w w w . s t u d e n t t e c h . c o . c c

WHY MERGE OR TAKEOVER?

Can be a way for businesses to grow fast.

The benefits of combining can be very significant the power of synergy:
o They both will benefit from greater economies of scale as a combination will lead to a reduction of
administration costs (no need for two head-quarters they can have one, less administration costs needed
and this restructuring will lead to a fall in average costs)
o They can both become more sophisticated businesses as they both gain access to each others R&D.
Becoming a conglomerate can give business greater stability in times of recession.
Both businesses benefit as they gain greater market power, which might enable them to increase their prices as
consumers have fewer alternatives.

BUSINESS INTEGRATION

Picture the diagram in your mind and

Backward Vertical
Integration When a
business buys a supplier
Forward Vertical
Integration When a
business buys a retailer
Horizontal Integration When a
business buys another business
in the same industry
Diversification When a business
buys another business that it is
totally unrelated to in the market.
think of the business as one straight line
starting from the beginning till the end. In
the production process, the supplier
sends the product to the business and
then when the business done with the
product, it sends the product to the
retailer. If the business reaches back, it
will take over the supplier, and if it
reaches forward, it will reach the retailer.
Similarly, if the business reaches
sideways, it will find another business
that produces the same things it does. If
it reaches towards wherever else it can, it
will find something totally unrelated to its
core business a simply way of
remembering the entire diagram.

EFFECTS OF GROWTH AND THE ANSOFF MATRIX

Although there are benefits to inorganic growth, there are several problems associated with it as well. Businesses often grow
too big for their own good; not being able to handle such a large business often leads businesses to demergers and
retrenchments. A majority of takeovers are unsuccessful. This is mainly because businesses take into account the advantages,
but forgets the problems associated with it as well.

Diseconomies of scale such as communication, co-ordination and culture are often a big problem with takeovers
many employees will not want to change their way of doing business and can often lead to culture clashes.
Large businesses mean that there are likely to be large administration costs, if the business is not restructured properly.
Co-ordination is also very important, as people need to co-operate within the business if the business wants to
successfully do business.
The Ansoff matrix gives an indication of the risk involved in expanding a business through the different types of growth
this has already been covered in a previous chapter.