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AQA A2 Business Studies

BUSS3Strategies for SuccessQuick Revision Notes

Jim Riley

BUSS3-Revision-Guide.indd 1 15/10/2012 11:44:06

AQA A2 Business Studies BUSS3 Quick Revision Guide Page 2

Corporate & functional objectives

This is the most fundamental part of your BUSS3 exam. Every one of your exam answers must make reference to the stated objectives of the case study business. Are the chosen strategies consistent with those objectives? How feasible or realistic are the objectives given the competitive position of the business and the resources available to management? Are there any inconsistencies between the business objectives and the strategic options? Also consider how changes in management and ownership have or are likely to affect the business objectives.

What is a business trying to achieve? What goals has it set for itself and how are these translated into detailed targets for each functional area of a business? Look out for evidence of objectives described in the BUSS3 case study and make sure you consider their implications.

Mission

Vision

Aims or goals

Objective

The overall purpose of the business

The overall aspiration of the business

General statements of what business intends to achieve

More precise & detailed statements of the aims / goals

Objectives are statements of specific outcomes that are to be achieved

Mission

Corporate

Functional

Unit / Team

IndividualIncreasinglystrategic

Increasinglydetailed

The hierarchy of objectives in a business

CorporateObjective

FunctionalObjective

Unit Objective

Market share of 12%

Sales per customer of £45

Shop sales of £500,000

Examples of objectives in a hierarchy…

Area Examples

Market standing Market share, customer satisfaction, product range

Innovation New products, better processes, using technology

Productivity Optimum use of resources, focus on core activities

Physical & financialresources

Factories, business locations, finance, supplies

Profitability Level of profit, rates of return on investment

Management Management structure; promotion & development

Employees Organisational structure; employee relations

Public responsibility Compliance with laws; social and ethical behaviour

Corporate objectives are those that relate to the business as a whole

Corporate Objective Example Functional Objective

Increase sales Successfully launch five new products in the next two years (marketing)

Reduce costs Increase factory productivity by 10% by 2012 (operations)

Increase cash flow Reduce the average time taken by customers to pay invoices from 75 to 60 days (finance)

Improve customer satisfaction

Achieve a 95% level of high customer service (people)

Functional objectives are meant to act as the servant to the master corporate objectives

Corporate objectives set the scene for objectives set for the four main functional areas

S Specific The objective should state exactly what is to be achieved

M MeasurableAn objective should be capable of measurement – to determine whether (or how far) it has been achieved

A AchievableThe objective should be realistic given the circumstances in which it is set and the resources available to the business

R Relevant Objectives should be relevant to the people responsible for achieving them

T Time Bound Objectives should be set with a time‐frame in mind. These deadlines also need to be realistic

The SMART acronym is a good way of assessing the suitability of a business objective


Page 3

Interpreting Published Accounts

For effective analysis and evaluation, you need to look beyond the income statement, balance sheet and ratio calculations and consider the implications of the figures. Is the profit made by the firm sustainable (high profit quality)? Is the profitability of the firm (measured by profit margins) improving or declining? What do the liquidity ratios tell you about whether the business has adequate cash resources? If the gearing ratio is high, does it add to the risks faced by the business? Are shareholders getting a satisfactory return for their investment? Does the evidence suggest that the business is competitive and well-managed? And finally, are the corporate objectives realistic given the evidence from the financial numbers?

The basic financial accounts (income statement and balance sheet) provide the core information you can use to analyse and evaluate the historical financial performance of a business. The ratio formulae will be provide for you in the exam – make sure you have practised the calculations.

Evaluating ROCE

ROCE (%) = Operating profit

Capital employedx 100

ROCE%

Higher % is better

Watch for trend over time

Watch out for low quality profit Watch out for low quality profit which boosts ROCE

Leased equipment will not be included in capital employed

Evaluating liquidity ratios

Current ratio

• Interpreting the results• Ratio of 1.5 + suggests efficient management of working capital

• Low ratio (e.g. below 1) indicates cash problems

• High ratio: too much working capital?

• Look out for• Industry norms (e.g. supermarkets operate with low current ratios because they low debtors)

• Trend (change in ratio) is perhaps most important

Acid‐test ratio

• Current ratio adjusted for stocks

• Considered a better measure of liquidity, particularly for businesses which carry a lot of stock

• Focuses on the assets that a business can quickly turn into cash

• Important to look out for a change (e.g. a significant fall in the ratio indicates a problem)

Profit Quality

Profit quality looks at whether the reported profit can be sustained

High quality profit Low quality profit

Profit which can be repeatedor sustained

Not reliant on one‐off profits

Shareholders can have some confidence in the profit trend

Difficult to repeat

Includes one‐off profits (e.g. from the sale of surplus assets or businesses)

Shareholders need to adjust reported profit to assess what the likely profit is for next year

The Importance of Gearing

How to Reduce Gearing How to Increase Gearing

Focus on profit improvement (e.g. cost minimisation

Focus on growth – invest in revenue growth rather than profit

Repay long‐term loans or issue more shares

Convert short‐term debt into long‐term loans

Retain profits rather than pay dividends

Pay increased dividends out of retained earnings

Interpreting the result• Focuses on long‐term financial stability of business• High gearing (>50%) suggests potential problems in financing (interest &

capital repayments)• However gearing is not necessarily bad! Debt is often cheaper than

equityLook out for• Increased gearing & deterioration in other liquidity and/or financial

efficiency ratios

Interpreting the ratios – key questions to consider

Profitability Is the business making a profit? Is it growing?How efficient is the business at turning revenues into profit?Is it enough to finance reinvestment?Is it sustainable (high profit quality)?How does it compare with the rest of the industry?

Financial efficiency

Is the business making best use of its resources? Is it generating adequate returns from its investments? Is it managing its working capital properly?

Liquidity and gearing

Is the business able to meet its short‐term debts?Is the business generating enough cash?Does the business need to raise further finance?

Shareholder return

What returns are owners gaining from their investment?How does this compare with alternative investments?

Limitations of ratio analysis – some key evaluation ideas

• Ratios deal mainly in numbers – they don’t address issues like product quality, customer service, employee morale

• Ratios largely look at the past, not the future• Ratios are most useful when they are used to compare performance over a long period or against comparable businesses and an industry –this information is not always available

• Financial information can be “massaged” to make the figures used for ratios more attractive



Selecting Financial Strategies

All businesses should manage their costs effectively. However, a strategy of cost minimisation goes further. It implies a strategic decision to eliminate unproductive activities – which might include decisions to close or sell certain parts of the business and/or use outsourcing or offshoring. Consider the potential effects of cost minimisation on the functional areas – which will suffer most, and why? Cost minimisation is often done alongside finance-raising, particularly by businesses that find themselves with weak liquidity and inadequate cash resources. If finance-raising is proposed, what are the realistic options for the firm and is the proposed choice suitable?

BUSS3 asks you to focus on three main “financial strategies” – cost minimisation; raising finance and profit centres. These three are linked. For example, reducing unnecessary costs should improve cash flow which in turn reduces the need for extra finance.

Cost minimisation – approaches & benefits

Strategic• Based on the business model• E.g. locating production overseas

• E.g. core activities versus outsourced

Tactical• Focused on the detailed business functions

• E.g. choice of suppliers• E.g. approach to stock holding

Lower unit costs

Higher gross profit margin

Higher operating profits

Improved cash flow

Higher ROCE

Leading to…• Eliminating waste & avoiding duplication (lean production)

• Simplifying processes and procedures• Outsourcing non‐core activities (e.g. transaction processing, payroll, call handling)

• Negotiating better prices from suppliers• Pruning product ranges and customer accounts to eliminate unprofitable business

• Introducing flexible working practices• Aggressive control of overheads (e.g. banning first/business class travel)

Key Sources of Cost Reductions

A profit centre is a separately‐identifiable part of a business for which it is possible to identify revenues and costs (i.e. calculate profit)

Advantages Disadvantages

Shows where profit is earned within a complex business

Time‐consuming to set‐up and monitor

Supports detailed budgetary control including setting profit objectives

Hard to allocate costs (particularly) and revenues (occasionally)

Can improve motivation of those responsible for the profit centre (e.g. managers)

May lead to conflict and competition rather than cooperation within the business

Comparisons can be made between similar profit centres (e.g. shops in a chain)

Potentially de‐motivating if profit centre targets are too tough, or if unfair cost allocations are made

Improves decision‐making at a local level (likely to be closer to customer needs)

Profit centres may pursue their own objectives rather than those of the broader business

Profit centres Retained profit: the most important and significant source of finance for an established, profitable business

• Cheap (though not free, because of opportunity cost for shareholders)

• Very flexible: management control how reinvested & shareholders control the proportion retained

• Does not dilute the ownership of the company

Advantages of retained profit

• Danger of hoarding cash• Shareholders may prefer dividends if the business is not earning a sufficient return on investment

• High profits and cash flows would suggest the business could afford debt (higher gearing)

Drawbacks of retained profit

• Finance from shareholders• Return = dividends + share price growth• Highly flexible• Best suited for long‐term finance• No obligation to repay

Equity (e.g. shares, venture capital)

• Can be short, medium or long‐term• No loss of ownership or control• May require security• Interest costs• Repayment is an obligation

Debt (e.g. bank loans, debentures, overdraft)

Raising finance – key choices Factors to consider when choosing / raising finance

Purpose (e.g. working capital)

Cost (e.g. rate of interest)

Flexibility (amount & timing)

Ownership structure (e.g. Ltd Co)

Time period (short v long‐term)


Page 5

Making Investment Decisions

You need to practice the investment appraisal calculations and be ready to use at least one in the BUSS3 exam if the data is available. Much more important, though, is to interpret your findings in relation to the objectives and circumstances of the business and to consider some of the potential issues and uncertainties. For example, who has produced the forecast profits and/or cash flows which are used for investment appraisal? How reliable is the information used? How far (short v long-term) into the future are the calculations based on? Finally, consider how strategically risky the investment is. The higher the risk, the more uncertainty there is that the forecasts will prove reliable.

Investment appraisal includes several techniques used to evaluate the financial aspects of investment projects. Remember that shareholders are looking for a business to earn an acceptable return from investments made by a firm. Three key techniques to practice – payback period; average rate of return & net present value.

The distinction between capital & revenue spending

Revenue

• Cash spent on day‐to‐day operations: e.g.

• Raw materials•Wages & salaries

Capital

• Cash spent on investment in the business: e.g.

• Plant & machinery• IT systems

Add extra production capacitySupport the introduction of new products and production processesImplement improved IT systemsComply with changing legislation & regulations

spending used to…

Why appraise business investment?

Finance resources are scarce

ANDBusiness functions demand financial

resources

The Problem Choices have to be made

Which investments justify the risks?

How to choose between competing investments?

Payback period• The time it takes for a project to repay its initial investment

Average rate of return• Looks at the total accounting return for a project to see if it meets the target return

Discounted cash flow (NPV)• Net present value (“NPV”) calculates the monetary value now of the project’s future cash flows

Three main methods of investment appraisal Payback period method


Simple and easy to calculate + easy to understand the results

Ignores cash flows which arise after the payback has been reached – i.e. does not look at the overall project return

Focuses on cash – which is normally scarce

Takes no account of the “time value of money”

Emphasises speed of return;good for markets which change rapidly

May encourage short‐term thinking

Straightforward to compare competing projects

Ignores qualitative aspects of a decision

Average Rate of Return Method


ARR provides a percentage return which can be compared with a target return

Does not take into account cash flows – only profits (they may not be the same thing)

ARR looks at the whole profitability of the project

Takes no account of the time value of money

Focuses on profitability – a key issue for shareholders

Treats profits arising late in the project in the same way as those which might arise early

Discounted Cash Flow – Net Present Values (NPV)


Reflects the time value of money, with earlier cash flows more important to decision

More complicated method –users may find it hard to understand

Looks at all the cash flows of the project

Difficult to select the discount rate

Has a decision‐making mechanism – reject projects with negative NPV

The NPV calculation is very sensitive to the initial investment cost



Marketing Objectives & Influences

This is a critical area for your analysis and evaluation in BUSS3. Marketing strategies are particularly important because of their close link to corporate objectives and the chosen strategies. For example, the options in Ansoff’s Matrix are both strategic and marketing-related. Watch out for marketing objectives that are too optimistic – a frequent problem in business. Marketing is not conducted in a vacuum – external influences such as competitor actions and the economic environment often prevent a firm from achieving its marketing objectives. So too do key internal influences such as a lack of finance or operational capability (e.q. capacity, lack of innovation)

Marketing objectives are the marketing-related goals and targets that the firm wants to achieve. These are often closely linked (& similar to) corporate objectives, since they deal with factors such as revenue growth, market share, market standing etc.

The marketing challenge faced by all firms…

To find a way of achieving a sustainable competitive

advantage over the other competing

products and firms in a market

An advantage over competitors gained by offering consumers greater value, either by means of lower

prices or by providing added value that

justifies higher prices

What is a competitive advantage?

Common marketing objectives

Market share

Product/brand recognition

Customer loyalty & repeat business

Revenues (value, volume)

Market standing & reputation

Corporate objectives

Marketing objectives

Marketing strategies

Marketing tactics

Grow revenues by 15% p.a. in each of the next five years

Increase UK market share to 17%Grow average customer spend by 5%

Refocus product range on high margin itemsIntroduce CRM systems into industrial division

Improve agreements with key suppliersConduct search engine advertising campaign

The hierarchy of marketing objectives ‐examples How marketing objectives link with other functions

Example functional change How it supports marketing

Raising finance Investment in new products

Introduce quality assurance and lean production

Improve product quality and profitability

Training programme for staff Improve quality of customer service

Allocate specific production for a new retail customer

Expand product distribution and increase sales

In BUSS3, you should be able to make similar links between the other three functions (HRM, operations & finance)

Internal influences on Marketing objectives

Influence Explanation


Marketing objectives should not conflict with a corporate objectives. Often similar – e.g. market share & growth

Finance Financial position (profitability, cash flow, liquidity) directly affects the scope and scale or marketing activities

HRM For a services business in particular, the quality and capacity of the workforce is a key issue for marketing. A motivated and well‐trained workforce can deliver great customer service and productivity to improve competitiveness.

Operations A key role to play in enabling the business to compete on cost (efficiency / productivity) and quality. Capacity management also influences achievement of revenue objectives

External influences on Marketing objectives

Influence Description

Economic environment

The key factor in determining demand. E.g. marketing objectives thwarted or changed as a result of economic downturn

Competitor actions

Marketing objectives have to take account of likely / possible competitor response

Market dynamics

Key is market size, growth and segmentation. A market whose growth slows is less likely to support an objective of significant revenue growth or new product development

Technological change

Many markets are affected by rapid technological change, shortening product life cycles and creating great opportunities for innovation

Social & political change

Changes to legislation may create or prevent marketing opportunities. Change in the structure and attitudes of society also have major implications for many markets.


Page 7

Selecting Marketing Strategies

The key evaluation angle here is risk and reward. Ansoff’s Matrix provides a superb framework in which to assess the marketing strategies being considered by the BUSS3 case study. If diversification is being considered, are the higher risks compensated by suitably higher rewards? Does the business have the capability (think: all four functional areas) to make diversification a success? If a strategy of market penetration is being proposed, consider whether this is sufficient bold – will it enable the business to achieve its corporate objectives? Look out for the influence of new management into the BUSS3 case study – that often results in greater risks being taken, but not always successfully.

Which marketing strategy will be most appropriate and likely to achieve the corporate and marketing objectives? Focus your studies on Ansoff’s Matrix (market penetration product development; market development & diversification) and Porter’s generic strategies (cost leadership or differentiation) and consider the implications of each option.

Porter’s Generic Strategies ‐ Cost Leadership

With this strategy, the objective is to become the lowest‐cost producer in the industry

What it takes for this strategy to be successful

• High levels of productivity & capacity utilisation• Economies of scale• Bargaining power to negotiate the lowest supplier prices

• Lean production methods• Effective use of technology• Access to the most effective distribution channels

Porter’s Generic Strategies ‐ Differentiation

With differentiation, a business aims to differentiate within just one or a small number of niche market segments

What it takes for this strategy to be successful

• Market segmentation• Clearly identifiable customer needs and wants• A valid basis for differentiation – e.g. quality• Specialist expertise / experience• Exclusiveness (e.g. through distribution)

Ansoff’s MatrixA marketing planningmodel that helps a business

determine its product and market strategy

Ansoff’s Matrix – Evaluating Diversification

• Inherently risky strategy– A step into the unknown– No direct experience of the product or market– Few economies of scale (initially)– However, if successful, overall risk of the business is spread

• Approaches– Innovation & R&D: develop new solutions– Acquire an existing business in the market– Extend an existing brand into the market

Strategy options for marketing internationally

Exporting direct to international customers

The UK business takes orders from international customers and ships them to the customer destination

Selling via overseas agents or distributors

A distribution or agency contract is made with one or more intermediariesDistributors & agents may buy stock to service local demandThe customer is owned by the distributor or agent

Opening an operation overseas

Involves physically setting up one or more business locations in the target marketsInitially may just be a sales office – potentially leading onto production facilities (depends on product)

Joint venture or buying a business overseas

The business acquires or invests in an existing business that operates in the target market

Addressing the risks of expanding internationally

Risks

• Lack of market knowledge

• Cultural differences• Higher costs & investment

• Management coordination

• Economic factors

Solutions

• Detailed market research & business plan

• Work with local partners

• Seek specialist advice (e.g. from Govt agencies)

• Begin by exporting directly (lower risk)



Marketing Planning & Analysis (1)

The marketing plan provides the detail about how marketing strategies are intended to be implemented in order to achieve marketing and corporate objectives.

Key to marketing planning is having an up-to-date and detailed understanding of the market. There are various tools available for market analysis. Some are data-driven (quantitative) such as sales forecasting. Make sure you know how to calculate and interpret techniques such as moving averages, extrapolation and correlation.

Some methods of market analysis are qualitative – such as the Delphi method which seeks to build a consensus about the future of a market from a group of experts.

Components of a marketing plan

Mission statement Statement of the purpose and direction of the business

Corporate objectives Overall business objectives that shape the marketing plan

Marketing audit The existing products, resources, distribution methods, market shares, competitors etc

Market analysis Size , structure, growth

SWOT analysisAn assessment of the firm’s current position, showing the strengths & weaknesses (internal factors) and opportunities and threats (external factors)

Marketing objectives and strategies

What the marketing function wants to achieve (consistent with corporate objectives) and the intended strategies

Marketing budget Detailed for 12 months & outline for the next 2‐3 years

Benefits and drawbacks of marketing planning

Benefits Potential Drawbacks

Provides clear sense of direction for marketing management

Can be time‐consuming

Marketing options are evaluated and prioritised

Constant change in the market makes assumptions difficult

Allocates scarce resources more effectively

Danger of either being too simplistic or too complicated

Encourages coordination with other functional areas (finance, ops & HR)

The plan can be ignored as circumstances take over

Provides a basis for assessing actual results against target

Determining the size of the marketing budget

The marketing budget sets out how much money is allocated to marketing and how it intends to spend it

Financial position of the business • A business suffering from cash flow problems or low profitability will normally have to restrict its marketing budget along with cost reductions in other functional areas

Competitor actions• A business whose competitors are significantly increasing their marketing spending may need to respond to maintain market share

Responsiveness and returns from marketing spending• Hard to measure – but important if it can be. Each element of marketing spending needs to generate an acceptable return.

Where market analysis is crucial

Forecasting sales for new products or investments into new markets

Gathering evidence to support a finance‐raising exercise

To support a new marketing strategy

Support decisions about significant organisational or operational change

Test marketing

Involves launching the product in small part (usually geographic) part of the target market to gauge the viability of a product prior to a

main launch


Data provided is from actual customer spending

Danger of the competition learning about the product and coming up with a response before the full launch

Reduces the risk of a full‐scale launch – if the product fails a test then significant costs may be saved

Test market may not be representative of the full target market, leading to inappropriate decisions

Provides a way to tweak the marketing mix before full launch

Delays in full launch may limit the revenue opportunity in markets subject to rapid change

Can create a promotional “buzz” whichsupports the main launch

Costly and time‐consuming to administer

Three key methods for market analysis

• Collection of averages which “smoothe” the fluctuations in data to show to take out the extremes of data from period to period

Moving averages

• Use of past data to establish a trend which is then projected into the future

Extrapolation

• Looking for evidence of a dependent relationship between key marketing variables

Correlation


Page 9

Marketing Planning & Analysis (2)

Effective marketing planning is an essential part of marketing strategy; however it is important that planning doesn’t become too bureaucratic, costly or time-consuming. Successful marketing often comes from the instincts or hunches of management and employees. It is more important for a business to encourage creativity, innovation and flexible action rather than insist on rigidly sticking to a marketing plan which might soon become out-dated. Watch out for the methods of quantitative analysis that the case study management may have used – they may lead to unsuitable decisions. For example, extrapolation of recent marketing trends is notoriously unreliable as the basis for forecasting the future.A key point to explore in BUSS3 is whether management have a good understanding of the markets in which they want the firm to compete. Are sales and/or profit forecasts based on reliable information and realistic assumptions? Have they taken account of the competitive environment when making their forecasts? Has marketing analysis provided a sufficiently detailed understanding of customer needs and wants – this is really important if a strategy of diversification or market development is being considered. Another good evaluation point to develop is whether the marketing analysis has been generated internally or externally – does this affect its reliability?

Correlation

Correlation looks at the strength of a relationship between two variables

The factor that causes the dependent

variable to change

Independent Variable

The variable that is influenced by the independent

variable

Dependent Variable

Correlation – using scatter charts

Correlation is usually measured by using a scatter

diagram, on which data points are plotted.

The dependent variable is normally plotted on the y‐axis: the independent variable on

the x‐axis

Correlation ‐ types

Positive correlation

A positive relationship exists where as the independent variable increases in value, so does the dependent variable

Negative correlation

A negative relationship exists where as the independent variable increases in value, the dependent variable falls in value

No correlation

There is no discernible relationship between the independent and dependent variable

Correlation – line of best‐fit

Strong correlation means that there is little room between the data points and the line

Weak correlation means that the data points are spread quite wide and far away from the line of best fit

The line of best fit indicates the strength of the correlation

If the data suggests strong correlation, then the relationship might be used to make marketing predictions

Two qualitative methods of sales forecasting

Hunch

• Likely to be influenced by the experience of the forecaster, perhaps supported by market research or from discussions with competitors

• Uses insights into the sales prospects for individual products, business units

• Starting point for a hunch forecast is often the previous years’ or period data

Delphi method

• Involves getting a group of market experts to provide an opinion on the forecasting task – e.g. to estimate future sales growth in a market

• Experts first give a confidential individual opinion on the task

• Their forecasts then revised based on the submissions of each expert to the group

• Ultimately the aim of the Delphi method is to reach a “consensus” forecast

Key problems / issues in analysing market data

Can be costly and time‐consuming

Can slow decision‐making

Data can quickly become out‐of‐date

Decisions based on intuition or hunch can be just as effective as quantitative forecasts

Trends less reliable in fast‐changing markets



Operational Objectives and Influences

The BUSS3 case study may not explicitly state what the operational objectives are. However, it is still important to consider how operations can be managed to address the corporate objectives and where the focus needs to be in operations for this to be successful. Operational objectives are very closely linked to HRM objectives and strategies – so you can make some strong evaluative links between these two functions. For example, are objectives set for lean production consistent with the firm’s organisational structure? Is an objective for improved customer service or quality (operations) consistent with the recruitment and training strategies (HRM).

Operational objectives should be set to enable the business to meet the requirements of the other functional areas and achieve corporate objectives. BUSS3 focuses quite a wide range of potential objectives and related operational strategies, including cost (productivity, efficiency), quality, production flexibility, innovation and avoiding waste (lean production).

Key operational objectives

Cost & Volume

Quality

Efficiency & flexibility

Environmental

Innovation

Operational Targets & Objectives (1)

Cost & volume

• A business needs to ensure that operations are cost‐effective

• The business with the lowest unit cost has a strong potential advantage

• Examples:• Productivity & efficiency (e.g. units per week or employee)

• Unit costs per item• Contribution per unit• Number of items to produce

Quality

• A reputation for high quality, then it may be able to create an advantage over its competitors

• Examples:• Scrap / defect rates: a measure of poor quality

• Reliability• Customer satisfaction• Customer loyalty – e.g. percentage of repeat business

• Percentage of on‐time and/or correct delivery


Efficiency & flexibility

• Closely linked to cost targets

• Look at how effectively the assets of the business are being utilised

• Efficiency and flexibility are key determinants of unit costs

• Examples:• Labour productivity:• Output per time period• Capacity utilisation• Order lead times

Environmental

• Increasingly important as businesses face more stringent environmental legislation

• Targets usually closely integrated into a firm’s approach to corporate social responsibility

• Examples:• Use of energy efficiently• Recycling & waste disposal

• Sustainable sourcing


Innovation

• Development of an idea into a commercially viable product

• Two types of innovation – product and process

• Often requires significant investment in research & development

• Can the innovation be protected to maintain a competitive advantage?


The most important internal influence. An operations objective (e.g. higher production capacity) should not conflict with a corporate objective (e.g. lowest unit costs)

Finance Operations decisions often involve significant investment and cost The financial position of the business (profitability, cash flow, liquidity) directly affects the choices available

Human resources

For a services business in particular, the quality and capacity of the workforce is a key factor in affecting operational objectives. Targets for productivity, for example, will be affected by the investment in training and the effectiveness of workforce planning

Marketing issues

The nature of the product determines the operational set‐up. Regular changes to the marketing mix – particularly product –may place strains on operations, particularly if production is relatively inflexible

Internal influences on operations objectives External influences on operations objectives

Economic environment

Crucial for operations. Sudden or short‐term changes in demand impact on capacity utilisation, productivity etc. Changes in interest rates impact on the cost of financing capital investment in operations

Competitor efficiency flexibility

Quicker, more efficient or better quality competitors will place pressure on operations to deliver at least comparable performance

Technological change

Also very significant – especially in markets where product life cycles are short, innovation is rife and production processes are costly.

Legal & environmental change

Greater regulation and legislation of the environment places new challenges for operations objectives.


Page 11

Scale and Resource Mix

Don’t confuse economies of scale with a firm simply getting bigger. For economies to exist, unit costs must fall as output rises. This won’t always occur. For example, an increase in production capacity may mean higher units costs unless productivity and capacity utilisation can be maintained or improved. A switch from labour-intensive to capital-intensive operations is a popular strategy, but it is not without risk. Technology can quickly become outdated or obsolete. And has the firm considered the implications of greater capital intensity on HRM?

How big does a firm need to be to be competitive? How important are economies of scale or making intensive use of capital in the production process? This part of BUSS3 asks you to assess whether there is an optimum mix of production resources and/or scale

Average cost per unit is calculated using this formula:

Total production costs in period (£)

Total output in period (units)

AverageCost perUnit (£)

Quantity of output

CostCurve

AC1

AC2

Q1 Q2

Unit costs are falling as output increases from Q1 to Q2= economies of scale

Unit costs start to rise as output rises above Q3= diseconomies of scale

Q3

Economies of scale arise when unit costs fall as output increases

Buying economies

Buying in greater quantities usually results in a lower price (bulk‐buying)

Technical Use of specialist equipment or processes to boost productivity

Marketing Spreading a fixed marketing spend over a larger range of products, markets and customers

Network Adding extra customers or users to a network that is already established (e.g. mobile phones)

Financial Larger firms benefit from access to more and cheaper finance

Industry An external economy – all competitors benefit – e.g. specialist businesses grouped close together

Examples of economies of scale

Poor communication

More difficult to control a larger, more complex business

More frequent machinery & employee breakdown if output & capacity utilisation is too high

Loss of management focus

Diseconomies of scale

Factors which cause the average production cost per unit of a business to increase above the efficient level…for example

Labour Intensive

Production relies on using labour resources

Capital Intensive

Production relies on using capital resources

Food processing Oil extraction & refining

Hotels & restaurants Car manufacturing

Fruit farming Web hosting

Hairdressing Intensive arable farming

Coal mining Transport infrastructure

Labour intensive Capital intensive

Labour costs higher than capital costs

Capital costs higher than labour costs

Costs are mainly variable= lower breakeven output

Costs are mainly fixed = higher breakeven output

Firms benefit from access to sources of low‐cost labour

Firms benefit from access to low‐cost, long‐term financing

Key implications of industry labour or capital intensity



Innovation

Remember that innovation is not the same thing as invention. Innovation is the commercial application of a new idea – the idea itself might have many such applications, not many of which will be viable as business ideas or products. For some firms, sustaining a reputation as being innovative is crucial for maintaining a competitive advantage – but not for all firms! There are many short-term costs associated with the pursuit of innovation; are they worthwhile? Other firms are content to copy or build on other firms’ good ideas and compete on other factors such as low-cost or reliability.

Should firms invest in research & development in order to achieve successful new product development? How important is it for a firm to be innovative in order to be competitive in its chosen markets?

Innovation is about putting a new idea or approach into action. Innovation is commonly described as 'the commercially successful exploitation of ideas'

Formulation of new ideas for products or processes

Invention

Practical application of inventions into marketable

products or services

Innovation

Idea generation

Idea screening

Concept development & testing

Beta testing & market testing

Technical implementation

Commercial launch

The Research & Development (R&D) process

Product

• Launching new or improved products (or services) on to the market

• Advantages• ‘First mover advantage’• Higher prices and profitability

• Added value • Opportunity to build early customer loyalty

• Enhanced reputation as an innovative company

• Increased market share

Process

• Finding better or more efficient ways of producing existing products, or delivering existing services

• Advantages• Reduced costs • Improved quality • More responsive customer service

• Greater flexibility• Higher profits

Main types of innovation

Benefit Examples

Improved productivity & reduced costs

A lot of process innovation is about reducing unit costs. This might be achieved by improving the production capacity and/or flexibility of the business –to enable it to exploit economies of scale

Better quality By definition, better quality products and services are more likely to meet customer needs. Assuming that they are effectively marketed, that should result in higher sales and profits

Building a product range

A business with a single product or limited product range would almost certainly benefit from innovation. A broader product range provides an opportunity for higher sales and profits and also reduces the risk for shareholders

Business benefits of innovation (1)

Potential drawbacks and problems with innovationCompetition An innovation only confers a competitive advantage if

competitors are not able to replicate it in their own businesses. Whilst patents provide legal protection, many innovative products and processes are hard to protect.

One danger is that one research‐driven, innovative company makes the initial investment and takes all the risk – only for competitors to copy the innovation.

Uncertain commercial returns

Much research is speculative and there is no guarantee of future revenues and profits. The longer the development timescale the greater the risk that research is overtaken by competitors too.

Availability of finance

Like other business activities, R&D has to compete for scarce cash. Given the risks involved, R&D demands a high required rate of return. That means that for businesses that have limited cash resources, the opportunity cost of investing in R&D can be very high.

Business benefits of innovation (2)

Benefit Examples

To handle legal and environmental issues

Innovation might enable the business to reduce it carbon emissions or produce less waste. Changes in laws often force business to innovate when they might not otherwise do so

More added value Effective innovation can establish a unique selling proposition (“USP”) for a product – something which the customer is prepared to pay more for and which helps a business differentiate itself from competitors

Improved staff retention, motivation and easier recruitment

Not an obvious benefit, but often significant. Potential good quality recruits are often drawn to a business with a reputation for innovation


Page 13

Location

The choice of business location is a strategic issue that is ripe for effective analysis and evaluation in BUSS3. Why? Because it is a classic example of having to make choices. There are potential trade-offs between location factors – and strategy is about making a choice! For example, a decision to locate production overseas to take advantage of lower labour costs might reduce unit costs, but what are the implications for quality (operations) or employer motivation (HRM). A decision to operate across multi-site locations might mean greater expansion or flexibility, but what are the implications for organisational structure? Develop these links in your answers.

Many factors influence the choice of a business location. In BUSS3 you need to make a distinction between quantitative factors (e.g. relating to costs, demand) and qualitative factors (e.g. based on a firm’s culture, management preferences etc.). Issues with managing a multi-site business (e.g. retail chain) and/or international location are also addressed.

• Are cost (supply) issues more important than customers and revenues (demand)?

• Is the decision strategically important (i.e. it could affect the achievement of corporate objectives) or is it a relatively minor decision?

• Can quantitative methods be used to evaluate alternative location options (e.g. by using investment appraisal techniques?)

• Do qualitative factors, including senior management preferences, outweigh the financial considerations?

Making a balanced choice about location

• Based on data• Suitable for investment appraisal. E.g.• Costs• Customers• Size of market• Suppliers

Quantitative factors

• Harder to identify; based on opinions. E.g.• Image• Tradition• Personal preference• Quality of life

Qualitative factors

Factors that influence the choice of business location

Benefits of a good choice of business location

• Competitive unit costs: by combining productive and efficient labour supply, low overheads and cost‐effective access to inputs (raw materials, components)

• Optimal revenue opportunities: customer service is not inconvenienced by the choice of location

• An acceptable rate of return on investment – all business projects compete for scare cash resources; a business location decision is no different

• Sufficient production capacity to meet demand and future flexibility in capacity management decisions

• Access to a labour force which enables the business to achieve the objectives of its workforce planning

Industrial inertia and relocation

Industrial inertia• Where a business, once established, decides to stay in its original location even if other factors suggest a new location would be beneficial

• Potentially provides advantages from external economies of scale

• Over a long period of time, a location or region associated with a particular industry develops specialist skills and experience

• Labour force and local suppliers also likely to be specialists

Costs of Relocation• Recruiting and training staff in the new location

• Duplicated property costs –e.g. remaining periods on the original lease + upfront payments on a new lease

• Costs of physical transfer –moving production equipment, transferring stocks, lost revenues

• Intangible (but important)

Multi‐site location

Advantages• Most importantly – closer to customers; the business operates in the geographical markets when it can compete

• Greater potential for promotion amongst junior management• Marketing and management economies of scale – costly resources can be spread across more business locations, customers and revenues

• Easier to flex capacity – by adding or removing locations• Better understanding of local market cultures & conditions

Disadvantages• Potential duplication of activities (diseconomy of scale)• Harder to control operations – though IT systems can make this much easier

• Communication across the business is more challenging• Increased risk – the risk that the business does not understand the local markets in which it is operating

International location

• Exposes business to the effects of fluctuating exchange rates

Exchange rates

• Locating overseas may bypass trade barriers (e.g. quotas, tariffs on imported goods)

Trade barriers

• Most developed economies enjoy relative political stability. Other territories are less predictable.

Political stability

Increasing use of international locations

• Cross‐border mergers and acquisitions (e.g. a UK business buys US competitor)

• Organic growth overseas (e.g. Tesco opening superstores in Thailand)

• Moving production overseas – to enable faster lead times to customers or reduce costs

• Increasing use of offshoring

Key issues to consider



Lean Production

It is one thing for managers to say that they want to pursue lean production. However, in reality, it is much harder to do than you might imagine. Success with a lean production strategy requires all functions of the business to work closely together, and it is certainly not a short-term “fix” for a business that is uncompetitive. The introduction of lean production techniques requires careful planning and experienced management. In the case of JIT it also requires very close cooperation with suppliers. Successful lean production is also about creating the right quality culture in a business and it requires strong employee/employer relationships.

Lean production is all about minimising waste – which can be wasted materials as well as wasted time. Various methods & approaches are covered in BUSS3 such as simultaneous engineering, just-in-time, cell production and kaizen (continuous improvement). The key thing to remember is that waste = cost. Less waste should mean lower costs, higher profits and improved cash flow.

An approach to management that focuses on cutting out waste, whilst ensuring quality. This approach can be applied to all aspects of a business – from design, through production to distribution

Doing the simple things well

Doing things better

Involving employees in the continuous process of improvement

…and as a result, avoiding waste

What is lean production?

An general approach that recognises the importance of time and seeks to reduce the level of wasted time

in the production processes of a business

Time‐based management techniques

Benefits

• Quicker response times (reduced lead times) to meet changing market and customer needs

• Faster new product development

• Reduction in waste, therefore greater efficiency

Requirements

• Flexible production methods• Able to change products quickly

• Can change production volumes / runs

• Trained employees• Multi‐skilled staff• Trust between workers and managers

An approach to project management that helps firms develop and launch new productsmore quickly. All parts of the project are planned together. Everything is considered simultaneously (together, in parallel)

rather than separately (in series)

Simultaneous Engineering

Benefits of Simultaneous Engineering (where possible)

• New products brought to the market quicker • Business may be able to charge a premium price = better profit margin and help recoup R&D costs

• Less need to modify the product later due to unforeseen problems • Cooperation between business functions improves staff commitment to the project

• Can be a source of competitive advantage (‘first mover advantage’) for the firm if it can get a reliable new product into the market and build brand loyalty before its competitors

A form of team working where production processes are split into cells. Each cell is responsible for a complete unit of work

Cell production

Potential Benefits

• Closeness of cell members should improve communication

• Workers become multi‐skilled and more adaptable

• Greater motivation, from variety of work, team working and responsibility

• Cell has ‘ownership’ for quality on its area

Possible Drawbacks / Issues

• Culture has to embrace trust & participation

• Business may have to invest in new materials handling and ordering systems suitable for cell production

• Cell production may not allow a firm to use its machinery as intensively

• Some small scale production lines may not yield enough savings to make a switch cell production worthwhile

Just‐in‐time (“JIT”) aims to ensure that inputs into the production process only arrive when they are needed

Just‐in‐Time (JIT)

Business Benefits

Lower stock holding means a reduction in storage space which saves rent and insurance costs

As stock is only obtained when it is needed, less working capital is tied up in stock

Less likelihood of stock perishing, becoming obsolete or out of date

Less time spent on checking and re‐working production as the emphasis is on getting the work right first time

Drawbacks / Potential Problems

There is little room for mistakes as minimal stock is kept for re‐working faulty product Production is highly reliant on suppliers and if stock is not delivered on time, the whole production schedule can be delayed There is no spare finished product available to meet unexpected orders, because all product is made to meet actual orders

Kaizen (or ‘continuous improvement’) is an approach of constantly introducing small incremental changes in a business in

order to improve quality and/or efficiency

Kaizen

• Kaizen involves making many small changes to production• As the ideas come from employees, they are less likely to be

radically different, and therefore easier to implement • Small improvements are less likely to require major capital

investment than major process changes • Culture ‐ all employees should continually look for ways to

improve their own performance • Kaizen encourages employees to take ownership for their

work, can help reinforce team working and improve motivation


Page 15

Critical Path Analysis

In BUSS3 you will not be asked to complete a CPA network diagram from scratch, although you could be asked to complete some elements of a partially-finished diagram. Much more importantly, you need to consider the advantages and potential drawbacks of using CPA as part of a complex business project. How does CPA add value to the evaluation of the strategic choices? Refer to the limitations of CPA (e.g. use of estimated activity durations; dependencies. You could also consider the impact of delays in critical activities.

CPA is a planning technique used to manage complex projects. The method used in CPA is to break each project down into a series of discrete activities, identifying the estimate durations and dependencies. The ultimate aim of CPA is to reduce wasted time.

CPA is a project analysis and planning method that allows a project to completed in the shortest possible time

• Many larger businesses get involved in projects that are complex and involve significant investment and risk

• As the complexity and risk increases it becomes even more necessary to identify the relationships between the activities involved and to work out the most efficient way of completing the project

Why is CPA needed?

• A list of all activities required to complete the project• The time (duration) that each activity will take to completion• The dependencies between the activities

What information is required for CPA?

Component Description

Node

A circle that represents a point in time where an activity is started or finished. The node (circle) is split into three sections:The left half of the circle is the unique node (activity) number – the network diagram draws these in orderThe top right section shows the earliest start time (EST) that an activity can commence based on the completion of the previous activityThe bottom right section shows the latest finish time (LFT) by which the previous activity must be completed

Activities

An activity is something that takes time. An activity is shown on the network as a line, linking the nodes (circles). A description of the activity, or a letter representing the activity, is usually shown above the relevant line

Duration The length of time it takes to complete an activity – shown as a number of the relevant units (e.g. hours, days) under the activity line

Drawing the network

Drawing the network ‐ example

47

10

EST

LFT

Activity

H

8

Activity

Duration

Calculating ESTs and LFTs

Earliest Start Times

• The first node will always have an EST of zero!

• ESTs are calculated from left to right

• Add the duration of an activity to the EST of a previous node

• If more than one activity leads to a node, the highest figure becomes the new EST

Last Finish Times

•Give the last node of the project an LFT = to the EST

•Work backwards from right to left

• Subtract the duration of the activity from the LFT

The Critical Path

The float is the duration an activity can be extended or

postponed so that the project still finishes within the

minimum time

Calculated as:LFT

less Activity Duration less EST

The Network Float Spotting the Critical Path

Activities with a float of 0 (zero) cannot be

delayed without delaying the entire project

Such activities represent the “critical path”

On the critical path, activities have an equal

EST and LFT

Benefits and Drawbacks of CPA


Most importantly – helps reduce the risk and costs of complex projects

Reliability of CPA needs accurate estimates and assumptions

Encourages careful assessment of the requirements of each activity in a project

CPA does not guarantee the success of a project

Help spot which activities have some slack (“float”) and could therefore transfer some resources = better allocation of resources

Resources may not actually be as flexible as management hope when they look at the network float

A decision‐making tool and a planning tool – all in one! Links well with other aspects of business planning, including cash flow forecasting and budgeting

Too many activities may the network diagram too complicated. Activities might themselves have to be broken down into mini‐projects



HR Objectives and Influences

HRM objectives are often treated as the poor relation when compared with marketing and financial objectives. HRM is seen by some people as simply a support function. However, HRM is undoubtedly important for any business that wants to succeed and you can develop some very strong analytical and evaluative points by making the link between HRM and the achievement of other functional objectives. For example, any strategy that involves significant expansion (or contraction) in business activities will inevitably require some important changes to the way that people are managed.

BUSS3 takes your study of people management to a strategic level and asks you to consider how HRM (human resource management) can contribute to the achievement of corporate objectives. HRM is about a lot more than employee motivation (overused by students), recruitment training.

HRM as a strategy – why it is important for business

What is HRM?“The design, implementation and maintenance of strategies to manage people for optimum business performance” [CIPD]

Most businesses now provide services rather than produce goods – people are a vital part in delivering high quality & customer service

Competitiveness requires a business to be efficient and productive – this is difficult unless the workforce is well motivated, has the right skills and is effectively organised

The move towards fewer layers of management hierarchy (flatter organisational structures) has placed greater emphasis on delegation and communication

Covered in BUSS2*

Strategic tools for achieving success in HRM

Workforce planning

Recruitment

Training & development

Motivating staff (incl reward systems)

Organisational structure

***

Common HRM objectives (1)

Objective HR Actions

Ensure human resources are employed cost‐effectively

Pay rates should be competitive but not excessiveAchieve acceptable staff utilisationMinimise staff turnoverMeasure returns on investment in training

Maintain good employer / employee relations

Avoid unnecessary and costly industrial disputesTimely and honest communication with employees and their representativesSensitive handling or potential problems with employees (e.g. dismissal, redundancy, major changes in the business)Comply with all relevant employment legislation

Common HRM objectives (2)

Objective HR Actions

Match the workforce to the business needs

Workforce planning to ensure business has the right number of staff in the right locations with the right skillsEffective recruitment to match workforce needsTraining programmes to cover skills gaps or respond to changes in technology, processes & marketConsider outsourcing activitiesGet the right number and mix of staff at each location where the business operates in multiple sites and countries

Make effective use of workforce potential

Ensure jobs have suitable, achievable workloadsAvoid too many under‐utilised or over‐stretched staffMake best use of employees skills

Corporate objectives E.g. an objective of cost reduction is likely to require HR to implement redundancies, job reallocations etc

Operational strategies

E.g. introduction of new IT or other systems and processes may require new staff training, fewer staff

Marketing strategies E.g. new product development and entry into a new market may require changes to organisational structure and recruitment of a new sales team

Financial strategies E.g. a decision to reduce costs by outsourcing training would result in changes to training programmes

Internal influences on HRM objectives External influences on HRM objectivesMarket changes E.g. a loss of market share to a competitor may

require a change in divisional management or job losses to improve competitiveness

Economic changes E.g. the recession of 2009/10 placed great pressure on HR departments to reduce staff costs and improve productivity

Technological changes E.g. the rapid growth of social networking may require changes to the way the business communicates with employees and customers

Social changes E.g. the growing number of single‐person households is increasing demand from employees for flexible working options

Political & legal changes

E.g. EU legislation on areas such as maximum working time and other employment rights impacts directly on workforce planning and remuneration


Page 17

Developing & Implementing Workforce Plans

The topic of workforce planning enables you to make the vital link between HRM and Operations since almost every business has to ensure that it has the right mix of people and abilities to enable it to operate efficiently and effectively. In a complex business, particularly one operating across multiple sites or countries, this can be a real challenge. HRM managers need to work closely with their counterparts in marketing and operations to ensure that the business can meet the demand for labour. What evidence is there in the BUSS3 case study that workforce planning is carried out effectively? Analyse what the implications are for workforce planning based on the strategic options being considered.

The workforce plan aims to ensure that a business has the right number of employees, with the right skills & experience, in the right locations.

Corporate objectives set HR needs

Analyse existing

workforce

Assess future needs

(demand for

labour)

Identify gaps in the

workforce (gap

analysis)

The workforce planning process

Workforce planning is about deciding how many and what types of workers are required

How many? Numbers, location, age full/part‐time, permanent/temps etc.How do they perform? Productivity, retention etc.

How well does the existing workforce meet future needs?A skills audit should help match existing skills with those needed

Key benefits of effective workforce planning

• Most importantly, helps a business achieve its corporate objectives by ensuring the business has a workforce of the right size, with the right skills, in the right place

• Encourages managers to prepare and plan for changes rather than simply react to them – HRM is part of strategic decision making

• Businesses going through significant change are better able to handle the workforce implications

• Improved communication – staff feel that they are closer to the decision‐making process, are working for a business that takes HRM seriously


The most important influence – any significant change in, or new corporate objective will impact the workforce plan

Production and marketing objectives

The required production capacity, product quality and flexibility are significant to how much labour is needed

Financial position and objectives

Workforce plan must take account of the financial budgets in place and the cash flow forecasting. Staff remuneration is usually a major operating cost and cash flow

Strength of the current labour supply

The number, skills and experience of existing staff clearly influence workforce planning since the process examines whether the existing supply is sufficient to meet demand

Existing organisational structure

How production is organised (e.g. cells, teams, production lines) and management structure (e.g. flat, matrix) all affect existing internal supply of labour

Internal influences on workforce planning External influences on workforce planning

Market demand

The most important external influence. Demand for the firm’s products determines production output which in turn sets the requirement for labour

Labour market trends

Also very important. The strength of the overall labour market determines how easy or difficult it is to recruit staff and the market rate for paying them

Economic conditions

Closely linked to market demand. A weak economy may lower wage rages and make it easier to recruit (and vice versa). But poor economic growth may result in lower market demand

Social and political change

E.g. demographic factors may affect the supply of labour (ageing population; more single‐person households). Legislation such as the minimum wage directly affects staff costs in many industries.

Local factors Local labour market may be affected by specific factors such as changes in transport links, quality of local schools, major changes in substantial local business employers

Cost• Perhaps the most important issue. A workforce plan needs to be supported by sufficient financial resources for it to be effective.

• Every decision made as a result of the plan has a cost implication – e.g. new training, extra recruitment, redundancies

Employer / employee relations• The workforce plan inevitably affects both sides of the relationship

• e.g. a plan to offer more flexible working options would be welcomed by employees, but might place additional pressure on the workloads of line managers

• Solution is usually better communication and consultation

Key issues with workforce planning Training• The issue for most businesses (particularly small ones) is

that training is:(1) Expensive (particularly off‐the‐job training)(2) Disruptive, and(3) Difficult to measure the benefits

Business image• A business that has an effective workforce plan that has the support of employees is likely to enjoy a good brand or corporate image

• Customers recognise businesses that place HRM as a strategic priority – they see it in the higher quality of customer service and quality that they experience at each interaction with the business.



Competitive Organisational Structures

It is likely that you will be given some insights into the case study’s organisational structure. There are two key approaches to using this information effectively in the case study. One is to assess how the current structure might be improved to support the firm’s objectives. The second is to consider the implications of proposed strategies for the existing structure. A common feature of BUSS3 case studies is for a senior manager (e.g. CEO) to propose a change in organisational structure (e.g. towards decentralisation) – you should challenge the achievability of such changes.

This topic develops the introduction to organisational structures that you covered in BUSS2. In BUSS3 you look at how changes in organisational structure can help a business achieve its corporate objectives, for example through delayering or moving to greater centralisation or decentralisation.

Key factors influencing organisational structureFactor Explanation

Size of the business

Small businesses tend to have flat hierarchies. Largerbusinesses have more complicated structures with more layers of hierarchy, departments and functions

Type of business How many locations used?Service or manufacturing sector?Does it have overseas operations or outsource any significant business activities?Is the workforce mainly unskilled, semi‐skilled, highly skilled?

Management and leadership style

An autocratic leadership style will often result in a very different structure compared with one designed by a leader who prefers to delegate responsibility

Competitive environment

Structures are often influenced and changed by developments in the market – for example changes in the use of distribution channels, suppliers, competitor actions

RegionalManager

Area Manager

Shop Manager

Supervisors

Shop staff

RegionalManager

Shop Manager

Shop staff

Before After

Delayering: a popular strategy to remove one or more levels of hierarchy from the organisational structure

Is delayering the right strategy?Advantages of delayering• Lower costs ‐ as fewer (expensive) managers are required• Better delegation, empowerment and motivation: number of managers is reduced & more authority passed down the hierarchy

• Improved communication – through fewer levels of hierarchy• Can encourage innovation• Brings managers into closer contact with customers = better customer service?

Drawbacks of delayering• Not all businesses are suitable ‐ low‐skilled employees may not adapt easily• A negative impact on motivation due to job losses• A period of disruption may occur• Managers remaining will have a wider span of control which, if it is too wide, can damage communication & may increase workloads

• May create skills shortages within the business – business could lose managers and staff with valuable experience

Objective Why do it in‐house? Why outsource?

Quality Easier to ensure quality and trace problems Specialist suppliers & expertise

CostMaybe too small to obtain = economies of scaleEasier communication

Supplier likely to achieve economies of scaleMotivated to keep costs low in order to make a profit

SpeedEasier to schedule work or production to fit in with business needs

Supplier agrees to service levelsCommercial pressure should encourage good performance

Flexibility

Closest to the real needs of the businessAbility to respond may be limited by capacity

Suppliers likely to have greater capacity and flexibilityMay have to balance conflicting demands from other customers

Should a business outsource certain business functions?

Centralised organisational structures

A centralised structure keeps decision‐making firmly at the top of the hierarchy (amongst the most senior management)


Easier to implement common policies and practices for the whole business

More bureaucratic – often extra layers in the hierarchy

Prevents other parts of the business from becoming too independent

Local or junior managers are likely to much closer to customer needs

Easier to co‐ordinate and control from the centre – e.g. with budgets

Lack of authority down the hierarchy may reduce manager motivation

Quicker decision‐making (usually) –easier to show strong leadership

Customer service does misses flexibility and speed of local decision‐making

Decentralised organisational structures

Decision‐making is spread out to include more managers in the hierarchy, as well as individual business units or trading locations


Decisions made closer to the customer = better customer service?

Decision‐making is not necessarily “strategic”

Better able to respond to local circumstances

Harder to ensure consistent practices and policies at each location

Should improve staff motivation May be some diseconomies of scale –e.g. duplication of roles

Consistent with aiming for a flatter hierarchy

Who provides strong leadership when needed (e.g. in a crisis)?

Good way of training and developing junior management

Harder to achieve tight financial control – risk of cost‐overruns


Page 19

Effective Employer / Employee Relations

Look for evidence in the case study of a poor or deteriorating relationship between employees and the business. Has there been any recent industrial action or is any being contemplated? Why might this have happened? How appropriate was the management response?

For just about every successful business, the relationship between employer and employee is important. This topic looks at ways in which employees can be given formal representation in decision-making and also considers the issue of industrial relations.

Benefits Possible drawbacks

Increased empowerment and motivation of the workforce

Time‐consuming – potentially slows decision‐making

Employees become more committed to the objectives and strategy of the business

Conflicts between employer and employee interests may be a block to essential change

Better decision‐making because employee experience and insights taken into account

Managers may feel their authority is being undermined

Lower risk of industrial disputes

Allowing employees representation in decision‐making

Arises when employees are part of a formal structure for involving them in the decision‐making process of a business

Method Description

Work‐to‐rule Employees follow the strict conditions of their employment contract – no voluntary overtime, no participation in supporting activities. Staff still get their basic pay.

Overtime ban Employees refuse to work overtime. Can have a significant effect on production capacity during period of peak demand, but ineffective as a bargaining tool during quieter periods!

Go‐slow Employees work at the slowest or least‐productive pace that is allowable under their employment contracts

Strike The action of last‐resort; fraught with danger for both employer and employee and strictly policed by legislation on industrial action.

Main kinds of industrial action /dispute

Damage for the Business Damage for the Employee

Lost sales and profits from the lost output

Lost pay

Damage to customer satisfaction Potential loss of jobs if the action results in action to cut costs

An internal distraction for management and the business (worse if competitors are not affected)

Possible loss of customer and public support (depending on the reasons for the action)

Damaged relationship with staff may adversely affect motivation, productivity etc

Risk that illegal action will result in legal proceedings

The potential costs of industrial action The role of trade unions

Protect and improve the real incomes of their members

Provide or improve job security

Protect workers against unfair dismissal and other issues relating to employment legislation

Lobby for better working conditions

Provide job‐related benefits – e.g. legal advice, service discounts

Business benefits of good industrial relations

Negotiating with trade unions (ideally a single union) saves time and cost rather than dealing with all employees individually

Unions are part of the communication process between the business and employees

Employee morale and motivation may be improved if they know that their interests are being protected by a union

The trade union can be a supportive partner in helping a business undergo significant change

• Regular consultations with a trade union ‐ pick up problems before they escalate

• A staff forum or joint working group to pass on information and collect ideas from workers and consult with workers

• An employee consultative body to discuss major issues as they arise

• Team and group meetings and feedback sessions

Regular communication and honest discussion is the key

Methods of building effective employee relationships


Essential Exam Technique in BUSS3

To maximise your performance in the BUSS3 exam, you need to:

Address the context provided by the case study. Remember that the skill of application opens the way to achieve good analysis and good evaluation. Focus relentlessly on the evidence provided in the case study. Do not produce theoretical answers that are straight out of the textbook!

Make the connections between the main functional areas of the case study business. Every chosen functional strategy will have implications for other functions. Explain these connections and develop your points to explain their significance. A great way to do this is to explain “cause and effect”.

Address the corporate objectives of the case study and whether those objectives are likely to be achieved given the functional strategies being considered. Look carefully for evidence of corporate objectives and make sure that every one of your answers refers to them in a relevant way.

Consider the influences (internal and external) which are likely to affect whether the objectives of the business can be achieved. Don’t just list these – pick those that you believe are the most important and explain why.

Develop your points in depth. Don’t provide the examiner with bullet points. It is much more important to develop two or three points fully. The best way to do this is to build your paragraphs using connective phrases such as “this will mean that”, “as a result”, “a consequence of this might be” etc.

Ensure that each of your four exam answers contains good evaluation that draws reasonable conclusions based on the case study evidence that you have referred to. Don’t leave evaluation to the end of your answers. Build it into your developed paragraphs by writing about what you believe are the most important points or factors. Make sure you identify some “depends on” factors which might affect the likely success of the strategies being considered by the case study business.

Approaching the final question (usually 34 marks)

Make a decision and justify it

Prioritise your reasons

What is the most important issue affecting the decision?

What will success depend on?

Making your recommendation in the final question1 PLAN the answer

2 Be SELECTIVE

3 Stay focused on arguments “FOR” & “AGAINST”

4 Use evidence to help build a “LOGICAL ARGUMENT

5 Build paragraphs using the case study CONTEXT, linking sentences using CONNECTIVES

6 Successful conclusions involve a justified RECOMMENDATIONand recognition of the DEPENDS ON factors


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Strategies for Success - Various Opportunities - Blogstmbusiness.weebly.com/uploads/1/2/6/5/12655241/bus… · · 2013-05-14Innovation New products, better processes, using technology