Growing as a BusinessUnit 2

Business Organization

Benefits and risks of expansion

– Advantages– Horizontal Integration can lead to economies of scale (the cost per

unit falls as a business expands)– Vertical Integration can ensure a firm keeps control of its supplies or

distribution, or denying it to its competitors, which can improve quality and reliability.

– Conglomerate Integration can spread risks as the firm is operating in more than one market. A fall in demand in one market may be offset by an increase in demand in another.

– Disadvantages– Diseconomies of scale: the problems involved with controlling,

communication and motivating staff in a bigger business.– Culture clashes: firms are used to doing things in different ways.

Methods of integration– Takeover: When one business gains control of the other by buying a

majority stake.– Merger: Two or more businesses join together to form a new business.– External Growth: by joining with another business

– Horizontal Integration: when one firm joins another firm at the same stage of the same production process.

– Vertical Integration: when one firm joins another firm at a different stage of the same production process.

– Backward: When a firm joins with its suppliers– Forward: When a firm joins with its distributors

– Conglomerate Integration: when one firm joins together with another firm in a different market.

– Internal Growth: by selling more of its own products

Franchise– Involves selling the rights to the business’s name and products to another

business.– Advantages of selling franchises:

– The franchisor gets a fee from franchisees and a percentage of their profits.

– The franchisee provides most of the finance to set up the new outlet.– The franchisees can learn from each other.– All the franchisees can help to finance an overall marketing campaign.

– Disadvantage of selling franchises:– The original entrepreneurs no longer control the entire business.– If there are problems in any of the franchisees, it can damage the

whole business.

Conflict between stakeholders

– Advantages of growth for the stakeholders– Employees have more job security and receive greater rewards. There

may be more opportunities for promotion.– Suppliers may benefit from additional orders.– The local community may benefit if he business has more funds to

invest. It may recruit locally.– The government will benefit, higher tax and lower rate of

unemployment.– Disadvantages of growth for the stakeholders

– Suppliers may be bullied by large firms into selling for cheaper prices.– Employees may no longer feel part of the business.– Communication can be difficult in a big business.– The business may not invest in the local community, it may switch its

production overseas.– The government may not benefit if the business relocates some of its

production overseas.

Spider Diagram

Stakeholders protecting interest

– Lobby government– Stakeholders can try to get the government to force the business to

change its policies.– Boycott the products

– If the customers feel that a business is behaving badly, they can stop buying the products to force the business to change its policies.

– Strike– When employees stop working and bring production to a halt.

– Complain– Employees, suppliers, the community or the government could

complain to the business.– Vote or sell shares

– Can vote against managers in the next Annual General Meeting.

Becoming a PLC– There are many advantages and disadvantages of becoming a public

limited company:– Advantages:

– A public limited company can advertise its shares to the general public.– Public companies attract more media coverage because they usually

have more shareholders.– PLCs are usually thought to have more status.– Easier to trade shares.

– Disadvantages– A PLC cannot control who buys its shares, may result in hostile

takeovers.– A PLC is more regulated, it has more requirements in a law.– May clash with outside owners.

Reasons for changing objectives

– Growth– Market share targets (to be the market leader)– Publicity targets

– Innovation– Expanding product range– Percent of profit from new products

– Diversification– Moving into new markets– Spread risks

– International expansion– Move retail or production overseas.– More investors

Ethical and environmental– Business ethics refers to whether a business decision is ethically right or

wrong.– Ethical considerations:

– Are customers well informed?– Do adverts create a false impression?– Are staff treated fairly?– Are suppliers paid on time?

– Environmental considerations– What does the company do to conserve energy?– What does the company do to control is emissions?

– Bigger businesses are more pressured to be concerned about ethics and environment.

Location to growing businesses

– Growing businesses have to consider a variety of factors before deciding on a location.– The costs involved

– Cost of labor– Cost of taxes

– The possible impact on revenues– Does it help the business to attract new customers?

– The availability of resources– Does the location offer employees with the right skillset?– Availability of skilled / cheap labor

Locating overseas– Advantages of locating overseas

– Cheaper labor– Access to resources that are not available– Financial incentives from foreign governments– Avoids protectionist measures (tariffs / quotas) by foreign

governments.– Market growing fast overseas, local market saturated.

– Disadvantages of locating overseas– There are different rules and regulations in other countries.– Customers have different tastes.

– Products might have to be changed to suit different markets.

Marketing

Product Portfolio– Product portfolio analysis is the process of looking at a business’s product

portfolio to decide what to do next.

Boston Matrix– Question Mark

– Low market share in a high growth market.– Most new products will be question marks.– Need a lot of market research and promotion in order to succeed.– If successful they may become stars or cash cows, if not they become

a dog.– Star

– High market share in a high growth market.– Increasing sales revenue.– Growing market – lots of promotion needed to inform customers.– Ideal product.

– Dog– Low market share in a low growth market.– Little scope for future profit making.– Products are likely to be withdrawn.

Boston Matrix– Cash Cow

– High market share in a low growth market.– Exists in established markets that have reached maturity.– Low rate of growth discourages competitors from entering the market.– High profit potential.– Cash cows produce money to develop new question marks.

Product Life CycleStages DescriptionDevelopment

Market Research, Recruiting, Generating Ideas, Testing. No products being sold, business working at a deficit.

Introduction

Launching the product, Sales may be slow at first (not tech products). Customers may be reluctant to change from existing brands. High promotion costs. Shops may be reluctant to stock products on shelves. The prices start low.

Growth Sales grow as product becomes more popular. Retailers are more likely to put the product on shelves.Lots of money spent on promotion to try and lengthen the growth phase.

Maturity Stable sales. Longest stage. Number of competitors increase. Amount of money spent on promotion lowers as market becomes saturated.

Decline Sales decline. Company may cut its promotion costs to retain profits. The firm should take the product off the market before they start to lose money.

Extension Strategies

 Attempts to maintain the sales of a product and prevent it from entering the decline stage of the product life cycle.

Extension strategies– Attempts to maintain the sales of a product and prevent it from entering

the decline stage of the product life cycle.– Increasing usage amongst existing customers. (Kellogg's - "cereal not

just for breakfast")– Modifying the product. (Coke has Coke Light, Coke Diet etc.)– Changing the image. (Lucozade was "overcome illness".)– Promotions, advertising and price offers.

Channels of Distribution

Channels of Distribution– Factor

– Location of customer base– Size of market– Speed of distribution– Quantity of products– Accessibility to product– Labor costs– Local conditions– Type of products– Competition– Degree of control of producer

– Intermediaries– Wholesalers– Retailers– Agents

Price– Penetration Pricing

– When the price is set lower than the competitor's prices in order to be able to enter a new market.

– Ensures sales are made and the new product enters the market.– The product is sold at a low price and therefore sales revenue may be

low.– Cost-Plus Pricing

– The cost of manufacturing the product plus a profit mark up.– Method is easy to apply.– Sales can be lost if the selling price is a lot higher than competitors.

– Price Skimming– Where a high price is set for a new product on the market.– Skimming can help establish the product as being of good quality and

can help cover high development costs.– It may put off some potential customers due to the high price.

Price– Competitive Pricing

– When the product is priced in line with or just below competitor's prices to try to capture more of the market.

– Sales are likely to be high as price is at a realistic level and the product is not under or over-priced.

– Researching the prices being charged by competitors costs time and money.

– Loss Leader– When a product is sold at a loss to stimulate other sales of more

profitable goods or services.– Sales Increase, buyers purchase other items in addition to the loss

leader.– Loss leader pricing is an excellent way to attract shoppers to a new

location.– Risk of loss, customers may buy only the loss leader and in large

quantities.– When setting the price, a business should consider demand, cost,

competitors, place in the product life cycle, quality, market share, target demographic.

Finance

Finance for Large Businesses

– Retained Profit is the money left after the business has paid all its costs.– Bank Loans are loans from a bank, often requires collateral to secure the

loan,– Mortgage are long term loans to secure properties.– Assets can be sold for capital, fast liquid funds (sell and lease back).– Issue Shares easily raises capital, may risk control and / or takeover.– Businesses need finance because:

– Developing new products– Research and development

– Promotional campaign– Recruitment / training– New methods of production– Expansion

Factors for Finance– Profitability (Financial Position)

– Retained profit– Creditability

– Demand for capital– Amount of capital– Use of capital

– Use of multiple sources– Consider legal structure

– Change to limited company– Assets owned by the business

– Used as collateral– Past history / future projections

– Projected sales figures / cash flow forecast– Financial accounts

Balance SheetFixed Assets Fixed AssetsBuildings 37,000 Buildings 57,000Equipment 21,000 58,000 Equipment 21,000 78,000

Current Assets Current AssetsCash in Bank 12,000 Cash in Bank 12,000Stock 32,000 Stock 32,000Debtors 17,000 61,000 Debtors 27,000 71,000

Current Liabilities Current LiabilitiesCreditors 16,000 16,000 Creditors 25,000 25,000

Working Capital 45,000 Working Capital 46,000

Net Assets Employed 103,000 Net Assets Employed 124,000

Shareholder's Funds Shareholder's FundsShare Capital 63,000 Share Capital 100,000Retained Profit 10,000 Retained Profit -6,000Reserves 30,000 103,000 Reserves 30,000 124,000

Long-term Liabilities Long-term LiabilitiesN/A 0 0 N/A 0 0

Capital Employed 103,000 Capital Employed 124,000

Balance Sheet Calculations– Calculations

– Current Assets – Current Liabilities = Working Capital– Fixed Assets + Current Assets – Current Liabilities = Net Assets

Employed– Net Assets Employed = Capital Employed– Shareholders Funds (Share Capital + Retained Profit + Reserves) +

Long Term Liabilities = Capital Employed

Balance Sheet Definitions– Assets are items of value that the business owns.

– Fixed Assets: Assets that are in the business for more than one year.– Property, Machinery, Fixtures, Vehicles

– Current Assets: Assets that are in the business for less than one year.– Cash, Stock, Debtors

– Liabilities are sums of money that a business owes to another business or individual.– Long-term Liabilities: Debts that will be paid back over many years.

– Mortgages, Bank Loans– Current Liabilities: Debts that will be paid back within a year.

– Money owed to suppliers, tax– Total Equity is the value of assets owned by the business once it has paid

their liabilities. The amount of money shareholders would receive if the business were to be sold.

– Working Capital is the difference between current assets and current liabilities.

– Shareholder’s funds is the total amount of capital invested into the business.

Ratio Analysis– Ratio Analysis is used to judge the performance and financial strength of

the company– Gross Profit Margin: The gross profit made from the level of sales.

– (Gross Profit / Sales Revenue) * 100– Net Profit Margin: The net profit made from the level of sales.

– (Net Profit / Sales Revenue) * 100– Return on Capital Employed: The return on capital invested in the business,

effects the interest rate in the bank, investors are unlikely to risk investing into a low ROCE percentage business.– (Net Profit / Capital Employed) * 100

– Liquidity Ratios: Percentage of assets which are of high liquidity.– (Current Assets / Current Liabilities) * 100

– 1.5-2– ((Current Assets – Stock) / Current Liabilities) * 100

– 0.5-1

Profit and Loss Account– (Starting Inventory + Products Produced – Ending Inventory) * Cost of

Production per Product = Cost of Goods Sold– Revenue – Costs of Good Sold = Gross Profit– Revenue – Costs of Good Sold – Expenses = Net Profit– Net Profit After tax – Dividends– Retained Profit

People in Business

Organizational Structures– An organizational structure shows the roles played by each employee in

the business and who reports to whom in the business.– An organization chart is a plan showing the roles and relationship between

all the employees.– Directors set long –term plans and targets for the business.– Managers are used to achieve the targets set by the directors. Directs the

employees.– Supervisor help managers to achieve their targets by reporting problems

and passing on instructions.– Workers carry out basic word. – Span of control is how many members under each superior.– Delegation is the passing down of controls and authority to more junior

employees.– Authority is the power to control others.

Centralization– Centralization is when decisions are made at the top of the hierarchy.– Decentralization is when decision making is spread out to include more

juniors.– Advantages

– Reduces pressure on the senior management.– Motivate employees by giving them responsibility.– Decisions made by people directly involved.– Quicker decision making.

– Disadvantages– Takes a lot of planning to prepare for decentralization.– All employees must understand the business’ s aims and objectives.– Training may be required.– Good communication is very important.

Recruitment– Human Resources is the department that is usually responsible for

recruitment.– Steps of recruitment are:

1. Identify the vacancy2. Write a job description3. Write a person specification4. Advertise the vacancy5. Shortlist the applicants6. Interview the applicants7. Select and appoint the most suitable candidates.

– Reasons for Vacancy– Resignation– Expansion– New skillset required– Maternity cover

Job Description & Specification– Job Description is a brief description of pay, responsibilities, etc.– Person specification is written to identify what the business is looking for in

an applicant.– Qualifications– Experience– Skills– Attributes

– Advertising the Vacancy is done through– Recruitment Agency– Advertisement

– Job Advert usually summarizes the details in the job description.

Training– Training involves organized occasions for employees to learn and develop

their knowledge and skillset that help with their occupation.– Induction

– The first type of training that an employee will receive.– Help new employees familiarize with the workplace.– Occurs within the workplace.– Learns key info about the business.

– Off the Job– Takes place outside the workplace.– Can help bring new ideas to the business.– Can motivate employees– Can be expensive.

Training Cont.– On the Job

– Given in the workplace.– Relatively cheap.– Conforms to the needs of the business.– Unlikely to bring in new ideas.– Improvement likely not as dramatic.

– Appraisal is reviewing an employee’s performance within a business over a period of time.

Operations Management

Identifying & Measuring Quality

– Quality involves meeting customer requirements.– Businesses identify quality problems by setting targets, e.g. in a hospital:

– The length of time patients have to wait before being seen– How long it takes to treat patients– How many operations are successful

– Businesses measure quality by:– Customers

– Complete surveys– Encourage feedback, complaints– Other primary market research

– Mystery Visitors– Visitors to test their product and evaluate it from the perspective of

a customer.– Staff

– Supervisors are asked to check the quality of work done.

Cost of Quality– Cost of better quality include…

– Inspection and evaluation– Training staff to check own quality– Using better suppliers

– Cost of poor quality include…– Recalling faulty products– Replacing / refunding goods– Waste– Lack of demand– Legal action

Maintaining consistent quality

– Make sure its suppliers (outsourcing) are reliable.– Train staff so they perform at an optimum state.– Invest in equipment that staff need– Inspect the products during the production process to find defects– Involving staff in improvement process (Kaizen)– Total Quality Management involves all employees in the process of

preventing mistakes to ensure that there are zero defects.

Why good quality matters– Customers are more likely to become long-term customers (customer

loyalty)– McDonalds or Starbucks have the security of knowing what is on the

menu– Customers assured of quality– Help launch products in the future because the brand name is

established– Avoiding mistakes saves money

– Avoid litigation– Avoid recall / redesign of products– Avoid returns / refunds

– Be able to charge more– Assured of quality and reliability

Flow Production– Flow Production involves continuous production; each item moves

continuously from one stage of the process to another. – Specialization occurs when individuals focus on a limited number of tasks,

increasing production effectiveness.– Advantages

– It allows firms to produce huge volumes of output and therefore enables them to sell in bulk.

– It allows for specialization (division of labor).– Relatively low variable costs (cheap per unit).

– Disadvantages– Flow production is capital intensive, thus there is a high startup cost for

the machinery.– Lacks flexibility, can produce millions of items but they are the same,

cannot be customized to customer specifications.– Can lead to boredom and dissatisfaction and thus the lack of

motivation.

Efficiency– Efficiency of a business refers to how well it is using its resources to

produce products.– High Input, Low Output = Low Efficiency.– Low Input, High Output = High Efficiency.

– Factors of efficiency– How well employees are managed.– How good suppliers are.– Investment in machinery and technology.– The way in which products are produced.

Lean Production– Lean Production is to reduce waste in the production process.– Forms of waste

– Production exceeds demand.– Wasted time is inefficient.– Any faulty products which need to be refunded.– Holding stocks can be wasteful as they might be damaged or stolen,

and warehouse costs.– Just-in-time Production means producing to order – the business only

makes an item when there is a demand for it.– Reduces waste and the business does not hold any stock.– Suppliers and manufacturer’s have to respond quickly.

– Kaizen means continuous improvement. It is an approach in which all employees are involved in how things are done.– Employees discuss how to improve the production process.– Involves actual workers, who are most familiar with problems, etc.