IB Business and Management The answers! Derek Burton This book contains the collection of model answers to the IBBusinessandManagement.com student activities and exam practice questions. Model answers Guaranteed IBBusinessandManagement.com
The IB Business and Management Questions Answered Introduction IB Business and Management: The Answers! is an interactive digital book that is a collection of model answers to all of the student activities and exam practice questions that are included in the Schemes of Work on IBBusinessandManagement.com. Interactive! Tap, swipe or click to navigate around. Just the answers!  All exam questions in IB Business and Management (Paper 1 or Paper 2, Higher Level or Standard Level) are based on case study information which needs to be incorporated into and applied to answers. The nature of the case study approach to IB Business and Management exam questions is why IBBusinessandManagement.com chooses to focus on case study questions to better prepare the student for examinations.  The model answers here are not the standard, bullet-pointed list of possible responses a student could take in answering a question, which you will find in IBO mark schemes and textbook answers. These are exemplar answers constructed so as to be awarded full marks in examinations.  Students will inevitably approach different questions in different ways. The answers here are not definitive. The aim here is to demonstrate, especially for higher-order command terms, how full marks can be achieved and the 7 attained. The student should be trying emulate this level of answer.  The Answers! is designed to demonstrate how to use IB Business and Management terminology and concepts and then apply this knowledge with critical thinking (where required) to case study material in line with the command term requirements of the question. About the author: Derek Burton is a highly experienced, very successful and wildly passionate IB Business Management teacher and teacher mentor. He heads the Commerce and Psychology departments at a leading IB World School and is the site author of IBBusinessandManagement.com. 1|P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Interactive! Click or Tap to go Business Organisation and Environment Topic 2 Human Resource Management Topic 3 Accounts and Finance Topic 4 Just the answers! Topic 1 Marketing Topic 5 Operations Management 2|P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Business Organisation and Environment Just the answers! Answer . 3|P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Topic 1: Business Organisation and Environment Activity 1.1B Exam Practice 1.2 Types of Organisation Activity 1.2C Activity 1.2D Exam Practice 1.3 Organisational Objectives Activity 1.3A Activity 1.3C Activity 1.3D 1.4 Stakeholders Activity 1.4A Activity 1.4B Exam Practice 1.5 External Environment Activity 1.5B Activity 1.5C Exam Practice 1.6 Organisational Planning Tools Activity 1.6A Activity 1.6B Activity 1.6C 1.7 Growth and Evolution Just the answers! Activity 1.1A Activity 1.7C Activity 1.7D Exam Practice 1.8 Change and the Management of Change Activity 1.8B Exam Practice 1.9 Globalisation Activity 1.9A Exam Practice 4|P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Exam Practice Activity 1.6D Jump to START Interactive! Click or tap to jump 1.1 The Nature of Business Activity Exam Practice
The IB Business and Management Questions Answered 1.1 The Nature of Business Activity Activity 1.1A: Research Activity 1. Copy out the above table. Use the internet or other means of research to: [10 marks] a. Identify these well-known international companies b. Identify the main sector of industry that they operate in c. Explain what their main activities are Business Primary Secondary  Coca-Cola  FAW (China) Just the answers! Multinational banking and financial services company. Automotive manufacturing company  Multinational metal and mining corporation  Wyndham Worldwide BP plc Description of main activities Beverage Corporation and manufacturer  HSBC RTZ Tertiary   Operates hotel brands worldwide  Operates in all areas of the oil and gas industry – exploration, production, refining, distribution, and marketing. 5|P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Activity 1.1B: BP 1. Using examples from the above articles, explain the statement that ‘BP operates in all three sectors of industry’. [6 marks] The three sectors of industry are the primary sector, the secondary sector and the tertiary sector. The primary sector extracts and harvests raw materials such as oil. The secondary sector processes the raw materials, harvested by the primary sector, into useable products; much like an oil refinery processes and refines crude oil into useable oil. The tertiary sector provides services to customers, such as selling petrol at the gas station. Because BP extracts the oil, processes it, and then sells the oil to customers, they are involved in all three sectors of business activity. 2. Explain why the decision to open 500 new petrol stations in China will involve effective cooperation between all four business functions. [6 marks] A business must carry out several functions if it is to operate effectively; these functions are carried out by different areas or departments within an organization, the different functions are production, marketing, finance and human resources. Just the answers! The four functional areas must work together to achieve goals set by the business or organisation. To open up 500 new petrol stations will require all four functions to work closely together. The production department is responsible for converting raw materials (crude oil) into useable product (oil), with the opening of 500 more stores the production department will have to greatly increase production in order to meet the new required number of output (oil). One way for production to increase is for more staff/workers to be hired, that is one of the jobs of the human resources area. Production is also in charge of providing services to customers and more workers will be needed to work in the 500 new stations. The human resources department is responsible for managing the personnel of the business this includes hiring and training the workers. Human resources also deal with the remuneration of personnel, something that they would have to work closely with the finance department to assess and plan. When hiring so many additional employees they would have to take into account how much they would cost the company in terms of wages, salaries, benefits, perks, social insurance contributions, etc. Finance would need to factor these added costs with added revenue that the new petrol stations will provide. In order to decide how many people to hire the HR and finance departments would need to plan together. 6|P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered The finance department is in charge of managing the finances of the organisation. The marketing section is responsible for ensuring that the product sells, when opening new stations they will have to promote amongst other things, the locations and products and services available so as to inform potential customers. The additional advertising is a cost to BP so the marketing department would work with finance to decide how much to spend on promotion. In order for the opening of 500 new petrol stations in China to be successful all four of the business functions would have to work together. 3. Discuss how changes in the economic structure of Australia could impact on BP’s Kwinana refinery. [10 marks] All production can be classified into three broad types of business activity, or sectors of industry. These categories are also the three stages involved in turning natural resources, such as oil and timber, into the finished goods and services demanded by consumers. The stages are the primary, secondary and tertiary sectors of industry. Primary sector: business activity firms engaged in farming, fishing, oil extraction and all other industries that extract natural resources so that they can be used and processed by other firms. Secondary sector: business activity firms that manufacture and process products from natural resources, including computers, brewing, baking, clothing and construction. Tertiary sector: business activity firms that provide services to consumers and other businesses, such as retailing, transport, insurance, banking, hotels, tourism and telecommunications. The balance of the primary, secondary and tertiary sectors in the economy varies substantially from country to country. It depends on the level of industrialisation in each country. The balance between the sectors is often referred to as a country’s ‘economic structure’. Just the answers! It is likely that Australia, being a developed economy, has most of its business activity concentrated in the tertiary sector. This is the pattern of business activity associated with most other developed economies such as the UK, Europe and the US. There would be still be significant secondary activity and limited primary business activity. Although, in saying that this is the general trend for developed economies, Australia is very resource rich in minerals, and has much land to support farming. Changes in economic structure It is very important to recognise two features of this classification of business activity:  The importance of each sector in a country’s economic structure changes over time. Industrialisation describes the growing importance of the secondary sector manufacturing industries in developing countries. The relative importance of each sector is measured in terms either of employment levels or output levels as a proportion of the whole economy. In Australia, the relative importance of secondary sector activity such as refining is likely to be decreasing. This brings many benefits as well as problems. 7|P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Benefits:     Total national output (Gross Domestic Product) increases and this raises average standards of living. As average incomes rise more people demand cars and leisure time is freed up for travel. The demand for petrol may be increasing in Australia as a result making this venture more profitable in the long term. Decreasing demand for the output of refined goods in Australia could result in a push for export markets and the higher exports of such products. Expanding and profitable firms in the service industry will pay more tax to the government, which could invest in added infrastructure and skills and education and healthcare which will improve the productivity of BP’s workers. Australia is however, resource rich and value is added to the country’s output of raw materials rather than simply exporting these as basic, unprocessed products. Primary industry shifts into secondary industry, and clusters of firms and skilled personnel will be developed in Australia bringing external economies of scale to BP. Problems:     Contracting manufacturing businesses will result in more jobs being lost, and a general decline in the skills and productivity of these industries. BP may have to spend more on the recruitment, retention and training of staff being employed in its refinery. The chance of work in manufacturing and services can encourage urbanisation. It may also result in depopulation of rural areas where refineries are located and problems for BP in recruiting enough workers. The expansion of service industries may make it difficult for BP to recruit and retain sufficient staff. The environment may become cleaner and less polluted and tighter environmental regulations may follow as a country like Australia deindustrialises. More onerous regulations could add to the cost of refining at BP. In conclusion, the major impacts on BP’s Kwinana refinery arising from the deindustrialisation of Australian economic and business activity are: Rising incomes associated with higher living standards have led consumers to spend much of their extra income on services rather than more goods. There has been substantial growth in tourism, hotels and restaurant services, financial services and so on – yet spending on physical goods is rising more slowly. Just the answers! As the rest of the world industrialises, so manufacturing businesses in the developed countries face much more competition and these rivals tend to be more efficient and use cheaper labour. Therefore, rising imports of goods are taking market away from the domestic secondary sector firms and many have been forced to close. Employment patterns change – manufacturing workers may find it difficult to find employment in other sectors of industry. This is called structural unemployment. 8|P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 1.1 Exam Practice Question: Recession sparks new business ideas 1. Explain the following terms in the text: a. Entrepreneur [2 marks] This is someone who takes the financial risk of starting and managing a new venture. For example, Jessica Lyons wants to start a CV business. b. Tertiary sector [2 marks] This sector provides services to personal and corporate customers. It uses the products of primary or secondary sectors. For example, Jessica’s business would provide a CV service to individuals. c. Start-up finance [2 marks] Start-up finance is the money needed to fund capital investment to provide assets used to run the business and then to provide working capital. For example, Jessica would need capital to buy a computer and then working capital to pay for her daily expenses and salary until the customers paid their bills. d. Capital equipment. [2 marks] Capital equipment is the long-term machinery or assets employed by a business. These would usually be expected to last for over five years. For example, the gym instructor would need gym equipment and Jessica needs a computer. 2. Outline the factors of production needed to set up the business providing CVs to school leavers. [5 marks] The factors of production are land, labour, capital and enterprise. Factors of production needed to set up the CV business would include:  Just the answers!   Land: this general term not only includes land itself but all of the renewable and non-renewable resources of nature, such as coal, crude oil and timber. Jessica would need somewhere to work (Jessica may work at home or rent an office) Labour: manual and skilled labour make up the workforce of the business. Some firms are labour intensive, which is why they have a high proportion of labour inputs to other factors of production, e.g. house cleaning services. Jessica works for herself Capital: this consists of the finance needed to set up a business and pay for its continuing operations as well as all of the man-made resources used in production. These include capital goods such as computers, machines, factories, offices and vehicles. Some firms are capital intensive which is why they have a high proportion of capital to other factors of production, e.g. power stations. Jessica needs money to buy her computer and to pay for daily expenses such as paper and ink cartridges, heating, electricity and petrol. 9|P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered  Enterprise: this is the driving force of business, provided by risk-taking individuals, which combines the other factors of production into a unit that is capable of producing goods and services, it provides a managing, decision-making and coordinating role. Jessica’s ideas and entrepreneurial drive are evident in the business proposal. 3. Using the gym instructor’s business as an example, list the business functions involved in this business. [5 marks]      Marketing Accounting and finance Operations management Human resources Customer services 4. Explain the reasons why most of the would-be entrepreneurs were choosing to set up in businesses in the tertiary sector. [7 marks] Tertiary sector: This sector provides services to personal and corporate customers. It uses the products of primary or secondary sectors. Entrepreneurs would be targeting business in the tertiary sector for various reasons which would be different depending on the entrepreneur and the businesses they were aiming to start. Generally, these reasons could include: There is an identified customer demand/market niche. Entrepreneurs would have identified that there is a demand for a service to be provided which is not currently being met. As incomes rise and the consumption patterns in developed economies shift from goods to services, more, new and better services are going to be required by consumers. There is an opportunity to take advantage of here if the entrepreneur’s market research has been accurate and thorough.  Just the answers!  Often there is not a requirement for large amounts of start-up capital for capital equipment. Services can now often be provided relatively inexpensively. The initial start-up costs in primary and secondary industries are enormous. The cost of land for farming for example in the primary sector, or building and equipping a new factory in the secondary sector. The two example service businesses here don’t even require the rent or purchase of office space at the outset. The entrepreneurs can base their businesses from home with minimal capital equipment outlays and/or take themselves to clients. In today’s business world it is easier than ever to find, communicate and market services to potential customers through internet technologies. 10 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Entrepreneurs are relying on their own skills and interests. Often an entrepreneur’s skills and interests are about doing things, or doing things better than others, or wanting to be more involved in these activities than their current day jobs allow. This will often coincide nicely with them being excited and passionate about being able to provide a service. While there are entrepreneurs who have the interest, skills and experience to set up manufacturing and mining industries, there are many more who are good at doing something (e.g. CV writing) or passionate about an interest (e.g. exercise) which they feel they can share with others and profit at the same time. Just the answers!  11 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 1.2 Types of Organisation Activity 1.2C: Footie Ltd to stay private after ruling out float 1. Explain two differences between a private limited company and a public limited company [4 marks] Private and Public Limited Companies are incorporated businesses; meaning that there is a legal difference between the owners of the company (the shareholders) and the business itself. Limited companies are companies that have limited liability for their shareholders. There are two types of limited companies, Private Limited and Public Limited. A Private Limited Company is a company that cannot raise share capital from the general public. The shares of a Private Limited Company can only be sold to family members and friends and cannot be traded on the open stock market; and therefore are generally run as family businesses. A Public Limited Company is able to advertise and sell its shares to members of the public via that stock exchange. Unlike in a Private Limited Company, Public Limited Companies have a dilution of control; meaning that many different people own shares of the company, each of which has one vote, and this weakens the ability for the directors to control the business. Additionally Public Limited Companies are exposed to takeover bids from investors who wish to purchase a majority stake in the company. Just the answers! In conclusion, two differences between Private and Public Limited Companies are that Public Limited Companies can sell their share to the public, while Private Limited Companies cannot, and that in a Public Limited Company the shareholder has more power (voting) than the shareholders in a Private Limited Company. 2. Explain whether Footie Ltd and Footie PLC would be the private or public sector [3 marks] Public limited companies are in the private sector of industry – but public corporations are not. The term ‘public’ is used by business organisations in two different ways, and this often causes confusion. Public limited companies are owned by shareholders in the private sector of the economy. Thus, public limited companies are in the private sector. However, in every country there will be some enterprises that are owned by the state – 12 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered usually central or local government. These organisations are therefore in the public sector and they are referred to as public corporations. A public corporation is a business enterprise owned and controlled by the state – also known as nationalised industry. A public limited company (plc) such as Footie is a limited company, often a large business, with the legal right to sell shares to the general public. Its share price is quoted on the national stock exchange Footie Ltd. And Footie PLC would both be in the private sector because neither of them would be owned by the government. Instead they are owned by shareholders. The shareholders of Footie Ltd. would be the family and friends of the director of the company, and the shareholders of Footie PLC could be anyone who is willing to purchase shares via the stock market. Potentially Footie PLC could become a public-private enterprise, if the government buys enough shares to become the majority shareholder. 3. Explain which industrial sector(s) does Footie Ltd operate in? [4 marks] All production can be classified into three broad types of business activity, or sectors of industry. These categories are also the three stages involved in turning natural resources, such as oil and timber, into the finished goods and services demanded by consumers. The stages are the primary, Secondary sector business activity: firms that manufacture and process products from natural resources, including computers, brewing, baking, clothing and construction Tertiary sector business activity: firms that provide services to consumers and other businesses, such as retailing, transport, insurance, banking, hotels, tourism and telecommunications . Just the answers! The information given states that “Footie Ltd. Is now more of a retailer and wholesaler rather than a manufacturer.” Retail is part of the tertiary sector, and manufacturing is part of the secondary sector of business activity; this means that Footie Ltd., which used to operate mainly in the secondary sector, but now focuses more on the tertiary sector. 4. Examine possible reasons for the directors deciding to keep Footie Ltd a private limited company [6 marks] The strategic decision by Footie limited to remain a private limited company would have been based on an evaluation by the shareholders (and management) on the advantages and disadvantages of the current legal structure and the advantages and disadvantages of becoming a public limited company. In essence, it is likely that the disadvantages of becoming a public limited company outweigh the advantages of remaining a private limited company. 13 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Private limited companies A private limited company is a small to medium-sized business that is owned by shareholders who are often members of the same family. This company cannot sell shares to the general public shareholder a person or institution owning shares in a limited company share a certificate confirming part ownership of a company and entitling the shareholder to dividends and certain shareholder rights. The word ‘Limited’ or ‘Ltd’ (‘Pte’ in some countries) indicates that the business is a private company. Usually, the shares will be owned by the original sole trader (who may hold a majority of the shares to keep control of the company), relatives, friends and employees. New issues of shares cannot be sold on the open market and existing shareholders may only sell their shares with the agreement of the other shareholders. Legal formalities must be followed in setting up a private limited company and these can be expensive and time consuming in some countries. The advantages and disadvantages of private limited companies are summarised below. Advantages of remaining a private limited company include:       Shareholders still have limited liability. There is a separate legal personality. There is continuity in the event of a death of a shareholder. The original owner(s) is still able to retain control. They are still able to raise share capital from the sale of shares to family, friends and employees. Greater status than an unincorporated business. Public limited companies These can be recognised by the use of ‘plc’ or ‘inc.’ (incorporated) after the company name. It is the most common form of legal organisation for really large businesses, for the very good reason that they have access to very substantial funds for expansion. Converting a private limited company to public limited company (plc) status is referred to as a stock market flotation. Public limited company (plc): a limited company, often a large business, with the legal right to sell shares to the general public. Its share price is quoted on the national stock exchange Just the answers! A plc has all the advantages of private company status plus the right to advertise its shares for sale and have them quoted on the stock exchange. Public limited companies have the potential to raise large sums from public issues of shares. Existing shareholders may quickly sell their shares if they wish to. This flexibility of share buying and selling encourages the public to purchase the shares in the first instance and thus invest in the business. The other main difference between private and public companies concerns the ‘divorce between ownership and control’. The original owners of a business are usually still able to retain a majority of shares and continue to exercise management control when it converts to private company status. This is most unlikely with public limited companies, due to the volume of shares issued and the number of people and institutions as investors. These shareholders own the company, but they appoint, at the annual general meeting, a board of directors who control the management and decision-making of the business. This clear distinction between ownership and control can lead to conflicts over the objectives to be set and direction to be taken by the business. The shareholders might prefer short-term maximum-profit strategies, but the directors may aim for long-term growth of the business, perhaps in order to increase their own power and 14 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered status. Many private limited companies convert to plc status to gain the benefits but there are definite disadvantages to ‘going public’ that would weigh into this important decision by Footsie. The disadvantages of being a public limited corporation include:       Legal formalities in formation. Cost of business consultants and financial advisors when creating a plc. Share prices subject to fluctuation – sometimes for reasons beyond the businesses control (e.g. state of the economy). Legal requirements concerning disclosure of information to shareholders and the public (e.g. annual publication of detailed reports and accounts). Risk of takeover due to the availability of shares on the stock exchange. Directors may be influenced by short-term objectives of major investors. In summary, it is very likely that the disadvantages of becoming a public limited company outweighed the advantages of remaining a private limited company in the minds of Footsie’s owners. 5. Analyse the main benefits to the business and existing shareholders if the company did ‘go public’ through an IPO [8 marks] Public limited company (plc): a limited company, often a large business, with the legal right to sell shares to the general public. Its share price is quoted on the national stock exchange. Initial Public Offering (IPO): The first sale of stock by a private company to the public. A plc has all the advantages of private company status plus the right to advertise its shares for sale and have them quoted on the stock exchange. Public limited companies have the potential to raise large sums from public issues of shares. Existing shareholders may quickly sell their shares if they wish to. This flexibility of share buying and selling encourages the public to purchase the shares in the first instance and thus invest in the business. Just the answers! The other main difference between private and public companies concerns the ‘divorce between ownership and control’. The original owners of a business are usually still able to retain a majority of shares and continue to exercise management control when it converts to private company status. This is most unlikely with public limited companies, due to the volume of shares issued and the number of people and institutions as investors. These shareholders own the company, but they appoint, at the annual general meeting, a board of directors who control the management and decision-making of the business. This clear distinction between ownership and control can lead to conflicts over the objectives to be set and direction to be taken by the business. The shareholders might prefer short-term maximum-profit strategies, but the directors may aim for long-term growth of the business, perhaps in order to increase their own power and status. Many private limited companies convert to plc status to gain the benefits. The benefits to Footsie and existing shareholders if the company did ‘go public’ include:  There is limited liability - the only liability – or potential loss – a shareholder has if the company fails is the amount invested in the company, not the total wealth of the shareholder. No one can make any further claim against shareholders should the company fail. This has two important effects: Firstly, 15 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered     people are prepared to provide finance to enable companies to expand; secondly, the greater risk of the company failing to pay its debts is now transferred from investors to creditors (those suppliers/lenders who have not been paid). Creditors, as a result, are very interested in both ensuring that the word ‘limited’ appears in the company name and scrutinising the company’s accounts for signs of potential future weakness. There is a separate legal identity. A company is legally recognised as having an identity separate from that of its owners. This means, for example, that if the products sold by Footsie are found to be dangerous or faulty, the company itself can be prosecuted, not the owners, as would be the case with either a sole trader or a partnership. A company can be sued and can sue others through the courts. Continuity. In a company, the death of an owner or director does not lead to its break-up or dissolution. All that happens is that ownership continues through the inheritance of the shares, and there is no break in ownership at all. It is easier to buy and sell shares for the shareholders of Footsie – this will likely encourage investment in Footsie Plc. Access to substantial capital sources due to the ability to issue a prospectus to the public and offer shares. It is likely that that these last two advantages of chosing the Plc as a legal structure bear the most weight in the decision, as the first three reasons also apply to private limited companies. The owners of Footsie will find it much easier to buy and sell shares as it would simply become a stock market transaction and not some long negotiation between existing shareholders when dilution of control becomes more of an issue (because of the more limited amount of shares held in the company). Secondly, Footsie does have expansion plans as mentioned in the case study and these expansion plans are going to require additional capital. Vast amounts of capital can and have been raised during IPOs. The company will be able to raise capital for oits push into new markets without taking on debt financing. However, equity financing does come with a dilution of ownership control. Activity 1.2D: Waste – a good cause for public-private partnerships Just the answers! 1. Explain the terms: [10 marks] a. Public sector Organisations that operate in the public sector are under the ownership and control of the government. Traditionally public sector organisations are run to provide essential goods and services that would be inefficiently provided or underprovided by the private sector, even if this means that the government does not make any profit in doing so. b. Public-private partnership Public-Private Enterprises are created when governments create partnerships with the private sector in the provision of certain services; hence they are often called Public-Private Partnerships 16 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered c. Public limited company A Public Limited Company is a business that is owned by its shareholders, it is an incorporated business; meaning that there is a legal difference between the owners of the company (the shareholders) and the business itself. A Public Limited Company is a limited company; meaning that there is limited liability for the shareholders. There are two types of limited companies, Private Limited and Public Limited. A Public Limited Company is able to advertise and sell its shares to members of the public via that stock exchange. Unlike in a Private Limited Company, Public Limited Companies have a dilution of control; meaning that many different people own shares of the company, each of which has one vote, and this weakens the ability for the directors to control the business. Additionally Public Limited Companies are exposed to takeover bids from investors who wish to purchase a majority stake in the company. d. Private limited company The other type of limited company is a Private Limited Company. A Private Limited Company is a company that cannot raise share capital from the general public. The shares of a Private Limited Company can only be sold to family members and friends and cannot be traded on the open stock market; for this reason private limited companies are generally run as family businesses. e. Pressure group Pressure Group. Pressure groups are non-profit organisations established by their members in order to address one issue or interest of the group. They campaign for their concern. Some examples are trade unions, environmental protection groups and animal rights activists. 2. Explain two likely reasons why the city government decided to privatise this organisation [4 marks] Just the answers! One reason for privatising Capital Waste Disposal PLC is that privatisation causes organisations to become more efficient. The article states that “As a public sector enterprise, the organisation had been overstaffed and inefficient…” When inefficient private sector monopolies are exposed to the competitive market of the private sector they are forced into improving their efficiency; therefore the customers of the business will benefit from increased quality. Another reason for the government to privatise Capital Waste is that the business, in an attempt to earn more profit, will decrease their costs of production. These lower costs of production along with the, now, competitive market should bring decreased prices for customers. 3. Examine the likely impact of this privatisation, in the short run and the long run, on: [6 marks] a. Customers In the short term customers will benefit from decreased tax, as the government will no longer have to fund Capital Waste Disposal. Also, because the government now has the one-off gain of selling Capital Waste Disposal into the private sector, they are able to increase their spending in other areas that would 17 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered benefit the public. There will be many long term effects of the privatisation of Capital Waste Disposal because it now operates in a competitive market. One of the effects is that customers now have the choice as to which organisation they will use. Another is that when businesses are competing against each other they lower the prices and increase the quality of their goods and services. b. Shareholders Shareholders will benefit as they will be able to purchase shares of Capital Waste Disposal from the government, thus creating the possibility of receiving dividends in the future when the organisation makes profits. c. Workers Workers will be negatively impacted in the short term because, in attempts to lower the cost of production and therefore increase profits, Capital Waste Disposal is likely to lower the workers’ wages or lay them off. Those who are not laid off will work for less pay and will possibly be made to work longer hours or faster in order to increase productivity. However, in the long term the workers efforts are likely to result in profits meaning that they receive pay raises, or better working conditions if the profits are put back into the business to make it better. 4. Examine the advantages and disadvantages of the proposed public-private partnership for the building and operation of a new waste recycling plant [8 marks] Public-private partnership (PPP) is the involvement of the private sector, in the form of management expertise and/or financial investment, in public sector projects aimed at benefiting the public. There are three main types of PPP: Just the answers!  Government funded – these are privately managed schemes. In this type of venture, the government provides all or part of the funding, but the organisation is managed by a private business that uses private sector methods and techniques to control it as efficiently as possible. These are managed efficiently and successfully by this private sector, but non-profit making, clinic. Analysts believe that the clinic operates the health services more efficiently than a government department would with many officials becoming involved.  Private sector funded – these are government or state managed schemes. In this type of venture, which often involves large sums of capital investment, the government is released from the financial burden of finding taxpayers’ money to pay for the project. Once the assets have been paid for and constructed, they are then managed and controlled by a government department which pays rent or a leasing charge to the private sector business that constructed the project. 18 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered  Government directed but with private sector finance and management – this type of PPP encourages both private sector funding and some private sector management control of public projects. This is the type of PPC mentioned in the case study. Advantages of the PPP:    Many schools, roads, prisons and hospitals have been built through PPP schemes – it is argued that these would not have been constructed unless the private sector had been involved. It is likely that the same reasoning applies to the new scheme here. Private sector businesses aim to make profits – their managers will therefore operate services as efficiently as possible. This could mean that costs to the public sector are lower than if projects were managed or operated by government/public sector managers By using private sector business finance, the government can claim that public services are being improved, without an increase in taxes (at least in the short-run as the capital cost is not paid for by the government). Disadvantages of the PPP:    The private sector business, if asked to manage the project, could try to increase profit by cutting staff wages and benefits. In effect, workers would no longer have the security of being employed by the public sector. PPP schemes have been criticised for earning private sector businesses large profits from high rents, service and leasing charges – these must be paid for by tax payers. Private sector organisations may lack the experience needed to operate large public sector projects – such as the waste scheme here – and failure of the scheme could leave the health and well-being of the community at risk. Just the answers! One of the main advantages to of the proposed public-private partnership is that jobs would be created by the plant; meaning that there would be reduced unemployment in the economy. Also the recycling plant is helping the environment; this will keep the pressure groups happy and the government will look better for funding it. Capital Waste’s involvement will be advantageous as it prevents the government from having to pay for the capital, and costs to pay and train the managers, this will decrease the tax revenue spent on the project, allowing the government to spend more in other areas. One of the disadvantages of involving a private sector business is that Capital Waste’s main goal will be to earn profit, rather than protect the environment. This may, as the local residents fear, lead to the cutting of costs by dumping the difficult and expensive to recycle waste in the river. The advantages of capital Waste’s involvement outweigh the disadvantages to some extent and the proposal should be seriously considered. 5. Recommend to the chief executive whether she should aim to convert the business to a private limited company [10 marks] Public-private partnership (PPP) is the involvement of the private sector, in the form of management expertise and/or financial investment, in public sector projects aimed at benefiting the public. There are three main types of PPP: 19 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered  Government funded – these are privately managed schemes. In this type of venture, the government provides all or part of the funding, but the organisation is managed by a private business that uses private sector methods and techniques to control it as efficiently as possible. These are managed efficiently and successfully by this private sector, but non-profit making, clinic. Analysts believe that the clinic operates the health services more efficiently than a government department would with many officials becoming involved.   Private sector funded – these are government or state managed schemes. In this type of venture, which often involves large sums of capital investment, the government is released from the financial burden of finding taxpayers’ money to pay for the project. Once the assets have been paid for and constructed, they are then managed and controlled by a government department which pays rent or a leasing charge to the private sector business that constructed the project. Government directed but with private sector finance and management – this type of PPP encourages both private sector funding and some private sector management control of public projects. This is the type of PPC mentioned in the case study. Advantages of the PPP:    Many schools, roads, prisons and hospitals have been built through PPP schemes – it is argued that these would not have been constructed unless the private sector had been involved. It is likely that the same reasoning applies to the new scheme here. Private sector businesses aim to make profits – their managers will therefore operate services as efficiently as possible. This could mean that costs to the public sector are lower than if projects were managed or operated by government/public sector managers. By using private sector business finance, the government can claim that public services are being improved, without an increase in taxes (at least in the short-run as the capital cost is not paid for by the government). Disadvantages of the PPP:   Just the answers!  The private sector business, if asked to manage the project, could try to increase profit by cutting staff wages and benefits. In effect, workers would no longer have the security of being employed by the public sector. PPP schemes have been criticised for earning private sector businesses large profits from high rents, service and leasing charges – these must be paid for by tax payers. Private sector organisations may lack the experience needed to operate large public sector projects – such as the waste scheme here – and failure of the scheme could leave the health and well-being of the community at risk. One of the main advantages to of the proposed public-private partnership is that jobs would be created by the plant; meaning that there would be reduced unemployment in the economy. Also the recycling plant is helping the environment; this will keep the pressure groups happy and the government will look better for funding it. Capital Waste’s involvement will be advantageous as it prevents the government from having to pay for the capital, and costs to pay and train the managers, this will decrease the tax revenue spent on the project, allowing the government to spend more in other areas. One of the disadvantages of involving a private sector business is that Capital Waste’s main goal will be to earn profit, rather than protect the environment. This may, as the 20 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered local residents fear, lead to the cutting of costs by dumping the difficult and expensive to recycle waste in the river. The advantages of capital Waste’s involvement outweigh the disadvantages to some extent and the proposal should be seriously considered. 1.2 Exam Practice Question: The Google phenomenon 1. Explain the term ‘partnership’. [2 marks] A partnership is a business formed by two or more people (up to 20) to carry on a business together, with shared capital investment and, usually, shared responsibilities Partnerships are the most common form of business organisation in some professions, such as law and accountancy. Small building firms are often partnerships too. 2. Outline two benefits to Larry Page and Sergy Brin of starting Google as a partnership. [4 marks] i. A partnership is easy to set up as there are no legal formalities. As two university students without experience in the world of business or awareness of the rules and regulations of company formation, a partnership would have been an ideal legal structure to initially start with. ii. The owners of a partnership have complete control – they are not answerable to anyone else, for example, shareholders. Page and Brin would have been free to pursue their own business strategy, vision and objectives without outside interference. 3. Examine the difficulties the partners would have encountered when they set up Google. [8 marks] Entrepreneurs must be willing to take risks in order to see results. Often the risk they take involves investing their own savings in a new business. Starting a new business is not an easy activity to engage in, especially when you have no or limited experience in the business world. New business start-ups can be found in nearly all industries. However, there are some industries and sectors of industry where there is a much greater likelihood of new entrepreneurs becoming established. Just the answers! These include:    Primary sector – fishing, market gardening (producing cash crops to sell at local markets) Secondary sector – jewellery making, dress making, craft manufacture, e.g. batik cloth, building trades Tertiary/service sector – hairdressing, car repairs, cafés and restaurants, child minding. The tertiary sector is the sector where the partners chose to operate their business as a search engine provider. It would be unusual for entrepreneurs to successfully establish themselves in, say, the steel making industry or car manufacturing because of the vast amount of capital equipment and financial investment that would be required. The partners, like many Silicon Valley start-ups started very small, with little capital. 21 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered From here they would have needed to overcome several main problems that can be associated with any business start-up. Building a customer base To survive, a new business must establish itself in the market and build up customer numbers as quickly as possible. The long-term strength of the business will depend on encouraging customers to return to purchase products again and again. Many small businesses try to encourage this by offering a better service than their larger and better-funded competitors. This service might include:    Personal customer service Knowledgeable pre- and after-sales service Providing for one-off customer requests that larger firms may be reluctant to offer. In this case, the partnership had a belief that they could offer a better service based on better technology. They had a belief that they “Could organise the worlds’ information” – Google’s vision statement. Lack of record keeping Accurate records are vital to pay taxes and bills and chase up debtors. Many entrepreneurs fail to pay sufficient attention to this as they either believe that it is less important than actually meeting customers’ needs or they think they can remember everything, which they could not possibly do after a period of time. For example, how can the owner of a new, busy search engine company know:     When the next use of server time was booked for? Whether the advertising revenue had been paid? If the cheque received from an important customer has been paid into the bank yet? How many hours the programmer worked last week? Lack of working capital Running short of capital to run day-to-day business affairs is the single most common reason for the failure of new businesses to survive in the first year. Capital is needed for day-to-day cash, for the holding of stocks and to allow the giving of trade credit to customers, who then become debtors. Without sufficient working capital, the business may be unable to buy more stocks or pay suppliers or offer credit to important customers. Serious working capital shortages can usually be avoided if businesses take several important steps:  Just the answers!    Construct and update a cash-flow forecast so that the liquidity and working capital needs of the business can be assessed, month by month. Inject sufficient capital into the business at start-up for the first few months of operation when cash flow from customers may be slow to build up. Establish good relations with the bank so that short-term problems may be, at least temporarily, overcome with an overdraft. Use effective credit control over customers’ accounts – do not allow a period of credit which is too long, and quickly chase up late payers. Google was fortunate enough to find ‘seed money’ early on from a venture capitalist. The initial injection of funds enabled Google to fund their day-to-day operational expenses (overheads, salaries, etc.), providing them with a source of working capital before inflows of cash from advertising revenues became larger than their operational cash outflows. 22 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Poor management skills Most entrepreneurs have had some form of work experience, but not necessarily at a management level. They may not have gained experience of:       Leadership skills Cash handling and cash management skills Planning and coordinating skills Decision-making skills Communication skills Marketing, promotion and selling skills. Entrepreneurs may be very keen, willing to work hard and with undoubted abilities in their chosen field; for example, the two partners of Google may be excellent programmers but management skills may be lacking. Some learn these skills very quickly once the business is up and running, but this is a risky strategy. Some entrepreneurs buy in the experience by employing staff with management experience, but this is an expensive option. It is wrong to think, just because a business is new and small, that enthusiasm, a strong personality and hard work will be sufficient to ensure success. This may prove to be the case, but it often is not. Potential entrepreneurs are encouraged to attend training courses to gain some of these skills before putting their capital at risk or seek management experience through employment. Google was fortunate that they were able to bring on some very knowledgeable people early on. For example, their initial venture capitalist would not have just been a source of funds, he would have been an invaluable source of advice and guidance in the newly formed company. Changes in the business environment Setting up a new business is risky. Not only are there the problems and challenges referred to above but there is also the risk of change, which can make the original business idea much less successful. New businesses may fail if any of the following changes occur, which turn the venture from a successful one to a loss-making enterprise: Just the answers!     New competitors Legal changes, e.g. outlawing the product altogether Economic changes that leave customers with much less money to spend Technological changes that make the methods used by the new business old-fashioned and expensive. This list of changes could, no doubt, be added to, but even these four factors indicate that the business environment is a dynamic one, and this makes owning and running a business enterprise very risky indeed. Google was fortunate, but they also created their own luck. It is important to note that the reasons for business failure could apply at any stage of the development of a business, but the first few months are the riskiest of all. Google was able to survive this difficult period because the partners knew they had a better technology and were able to convince a backer that they had a viable business model that was worthy of investment. 23 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 4. Explain the term ‘public limited company’. [2 marks] A public limited company (plc) is a limited company, often a large business, with the legal right to sell shares to the general public. Its share price is quoted on the national stock exchange. Like a private limited company, the company’s owners (the shareholders) have limited liability – the only liability – or potential loss – a shareholder has if the company fails is the amount invested in the company, not the total wealth of the shareholder. Nobody can make any further claim against shareholders should the company fail. 5. Discuss the advantages and disadvantages to Google following its conversion to a PLC in 2004. [9 marks] A public limited company (plc) is a limited company, often a large business, with the legal right to sell shares to the general public. Its share price is quoted on the national stock exchange. Like a private limited company, the company’s owners (the shareholders) have limited liability – the only liability – or potential loss – a shareholder has if the company fails is the amount invested in the company, not the total wealth of the shareholder. Nobody can make any further claim against shareholders should the company fail. The advantages of forming a public limited company are:      Shareholders have limited liability. Limited liability means that the only liability – or potential loss – a shareholder has if the company fails is the amount invested in the company, not the total wealth of the shareholder Nobody can make any further claim against shareholders should the company fail. This has two important effects: - People are prepared to provide finance to enable companies to expand. - The greater risk of the company failing to pay its debts is now transferred from investors to creditors (those suppliers/lenders who have not been paid). Creditors, as a result, are very interested in both ensuring that the word ‘limited’ appears in the company name and scrutinising the company’s accounts for signs of potential future weakness. The business has a separate legal identity. There is continuity in the event of the death of a shareholder. Ease of buying and selling shares foe shareholders encourages investment in PLCs. Access to substantial capital sources due to the ability to issue a prospectus to the public and offer shares for sale. Just the answers! However, the advantages of forming a PLC much be weighed up against the disadvantages of this particular legal structure; these disadvantages include:      The onerous legal formalities in PLC formation. The cost of business consultants and financial advisors when creating a PLC. There can be considerable expense associated with Google’s initial public offering (IPO) – the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, exactly as in the case of Google. The share price of Google, like any PLC is subject to fluctuation – sometimes for reasons beyond business’s control (e.g. the state of the economy). The legal requirements concerning disclosure of information to shareholders and the public (e.g. annual publication of detailed reports and accounts). The risk of takeover is greater due to the availability of the shares on the stock exchange. 24 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered  Directors may be influenced by short-term objectives of major investors. The advantages to Google and its owners clearly outweighed the disadvantages following its conversion to a PLC in 2004 to a very large extent. The main advantage was the source of capital that allowed the rapid expansion of its services worldwide and the development of both its search engine technology and, importantly, the marketing of itself as a great form of advertising for other businesses. Just the answers! It was able to mitigate some of its disadvantages. For example, the legal requirements would likely have been handled by a specialist firm and not the initial partners themselves. The cost of business consultants and banking advisors were covered by seed capital and the costs were clearly outweighed by the substantial capital raised in its IPO. The share price of Google would have been subject to fluctuations (e.g. the ‘dotcom crash’ and the ‘great recession’) but it is unlikely that this would have affected major investors to any great extent. Early investors in Google have done exceptionally well for themselves in terms of capital gains. Serge and Brin and their major financial backers would have had sufficient control in the number of shares they held compared to the number of shares offered at IPO to keep control of the company (i.e. negating the risk of a hostile takeover) and control of the company’s objectives and business strategy. 25 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 1.3 Organisational Objectives Activity 1.3A: Corporate aims of Domestic Detergents Inc. 1. Explain what is meant by the term ‘SMART objectives’.      [4 marks] To enable businesses to assess the effectiveness of their objectives, they will use Peter Drucker’s SMART system for organisational objectives. SMART; Specific, Measureable, Agreed, Realistic, and Time constrained. Specific, in that the objective cannot be vague and therefore must be precise. Measureable; meaning that the objectives of the business are quantifiable. Agreed, is defined as the objectives being agreed upon by all within the business organisation. Realistic, implies that the business will actually be able to fulfil its objectives, and not trying to do too much with their limited resources; and Time constrained, so to ensure that there is a time frame in which the objective must be completed. 2. To what extent are the corporate objectives for Domestic Detergents SMART objectives? [8 marks] Just the answers! To enable businesses to assess the effectiveness of their objectives, they will use Peter Drucker’s SMART system for organisational objectives. SMART; Specific, Measureable, Agreed, Realistic, and Time constrained.      Specific, in that the objective cannot be vague and therefore must be precise. Measureable; meaning that the objectives of the business are quantifiable. Agreed, is defined as the objectives being agreed upon by all within the business organisation. Realistic, implies that the business will actually be able to fulfil its objectives, and not trying to do too much with their limited resources; and Time constrained, so to ensure that there is a time frame in which the objective must be completed. The corporate aims of Domestic Detergents are: i. To increase annual sales from $1 billion to $2 billion in five years. 26 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered This objective has a specific, quantifiable aim that must be achieved within five years, it is possibly unrealistic for the company as it may not be possible for the company to increase its sales by $1 billion in five years. The time frame is very long. Five years is an exceptionally long time in the world of business and many, many changes both internal and external could eventuate within this time frame. For example, there could be a new CEO (an internal change) at Domestic detergents in this time, and she may lead the company in a different direction; she may pursue an aggressive policy of expansion through acquisitions of other companies which means that this objective of doubling revenues will likely change. The economic environment could change within this time period. There could be a major recession in key markets, affecting this objective which would result in a revision of lower sales forecasts. ii. To enter a new market every 18-24 months. This is a specific, measureable objective for the business, which they are aiming to achieve every 1824 months. However, while the business would increase its revenue from selling more products, it would be costly to the business to set up the production of the products, to do so the business will be attempting to do much with their limited resources (money, time, skills) which is unrealistic. It could be made more specific with an actual list of markets that they plan to enter into, in turn. And as with the previous discussion above, by the time they have entered two markets 3-4 years will have passed and it is likely that Domestic detergent would be subject to significant change. With change comes a new set of priorities, strategies and objectives. iii. To achieve 30% of sales each year from products not in the company’s product line five years earlier. This is a quantifiable, realistic, precise aim for the business to achieve within a time frame of 5 years. It meets the criteria for SMART objectives to a large extent. iv. To be the lowest cost, highest quality producer in the household products industry. Just the answers! This is really two objectives rolled into one: a price objective and a quality objective. Quite often these two objectives conflict with each other, in that quality comes at a cost to the producer and added cost is mostly reflected in higher prices to the consumer. It may not be realistic or an achievable objective. This objective can be measured, in part. However the measurement of these objectives may be quite subjective. Price is objective and quality subjective. How would this be measured, through the company’s own market research data? Employing an outside consultant to objectively sample consumers? The objective is not time bound. In sum, to a large extent, this objective does not meet the SMART criteria listed and defined above. v. To achieve a 15% average annual growth in sales, profit and earnings per share. This is a quantifiable (15%), specific (across three different but highly related targets), and realistic objective, with a set time constraint. 27 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Overall, some of Domestic Detergents Inc.’s objectives meet the SMART objectives criteria to some extent, as outlined in the ‘SMART objectives’ system devised by Peter Drucker. 3. Analyse the benefits and limitations to a company setting specific and time-limited objectives. [8 marks] Importance of objectives A business aim helps to direct, control and review the success of business activity. In addition, for any aim to be successfully achieved, there has to be an appropriate strategy – or detailed plan of action – in place to ensure that resources are correctly directed towards the final goal. This strategy should be constantly reviewed to check whether the business is on target to achieve its objectives. Both the aims of an organisation and the strategies it adopts will often change over time. Indeed, a change of objective will almost certainly require a change of plan too. A poor plan or strategy will lead to failure to reach the target. Corporate objectives The aims and mission statements of a business share the same problems – they lack specific detail for operational decisions and they are rarely expressed in quantitative terms. Corporate or strategic objectives are much more specific. They are based upon the business’s central aim or mission, but they are expressed in terms that provide a much clearer guide for management action or strategy. Corporate or strategic objectives are defined as being important, broadly defined targets that a business must reach to achieve its overall aim. The most effective business objectives usually meet the following SMART criteria:   Just the answers!    S – Specific Objectives should focus on what the business does and should apply directly to that business. For example, a hotel may set an objective of 75% bed occupancy over the winter period – the objective is specific to this business. M – Measurable Objectives that have a quantitative value are likely to prove to be more effective targets for directors and staff to work towards, for example to increase sales in the south-east region by 15% this year. A – Achievable Objectives must be achievable. Setting objectives that are almost impossible to achieve in a given time will be pointless. They will demotivate staff who have the task of trying to reach these targets. R – Realistic and relevant Objectives should be realistic when compared with the resources of the company, and should be expressed in terms relevant to the people who have to carry them out. For example, informing a factory cleaner about ‘increasing market share’ is less relevant than a target of reducing usage of cleaning materials by 20%. T – Time-specific A time limit should be set when an objective is established. For example, by when does the business expect to increase profits by 5%? Without a time limit it will be impossible to assess whether the objective has actually been met. 28 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Advantages and Disadvantages: It’s easy for stakeholders to set ambitious goals or objectives for an organization or project, and as business analysts we can help them to define these objectives in a SMART way. However, it’s easy to forget that achieving one objective might restrict what the organization can do in other areas. For example: “Achieving x% additional market share in xyz market” might have significant advantages but it might mean that the organization gets “pigeon holed” into that particular market. It’s better to consider this up front and check that it is in line with the overarching strategy. Being a niche player is a great strategy, but it’s important to check that this is an intentional choice. Worthwhile: Goals, objectives, and indeed requirements should all be aligned to deliver business and/or customer value. It’s easy to set objectives at a high or a granular low level that sound sensible but are actually dubious when you scratch beneath the surface. An area where this can be particularly prevalent in the world of IT is in the definition of non-functional requirements. Stakeholders often have an understandable desire for 100 percent availability of systems. That is an easy target to set using the SMART framework, but it is likely to be an extremely expensive requirement to deliver, in that it may involve having a complete back up system available for when the current system is down for repairs or maintenance. In cases like this, it’s worth understanding whether it is truly worthwhile. What additional benefits are delivered if 100 percent availability is achieved over 99.9 percent? or 99 percent? Are there core hours where high availability is critical? Just the answers! In summary, senior management and key stakeholders should instinctively ask these types of questions, but having a handy acronym to remind them is beneficial in aiding their strategic thinking. When a company sets specific and time-limited objectives they are making the objectives easier for themselves to measure and therefore they will seem more achievable for the business. Also workers within the business will be more motivated if they have a specific task or objective to focus on and achieve within a certain time frame. Some limitations of specific and time-limited objectives are, that the business could rush to meet the deadline, doing a bad job to achieve the goal. Also if they are unable to complete the task within the set timeframe to employees and all who are involved in the objective, will lose the motivation to achieve the objective. Because the objective must be specific the business could possibly overly specify, resulting in the business having far too many, incredibly specific objectives that they will be unable to achieve. Activity 1.3C: Is STS Plc successful? 1. Evaluate the usefulness of the company’s new mission statement. [8 marks] A mission statement is a statement of the business’s core aims, phrased in a way to motivate employees and to stimulate interest by outside groups. 29 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered A mission statement is an attempt to condense the central purpose of a business’s existence into one short paragraph. It is not concerned with specific, quantifiable goals but tries to sum up the aims of the business in a motivating and appealing way. It can be summed up as a statement about ‘who we are and what we do’. An effective mission statement should answer three key questions:    What is it we do? For whom do we do it? What is the benefit? Mission statements outline the overall purpose of the organisation. A vision statement, on the other hand, describes a picture of the ‘preferred future’ and outlines how the future will look if the organisation achieves its mission. It is a clear statement of the future position that offers the ideal of what owners and directors want their business organisation to become. There is a link between vision statements, mission statements and strategies. Without the direction and focus brought to an organisation by vision and mission statements, planning new strategies will be like trying to steer a ship with no idea of either where it is or the direction it is meant to be heading in. Vision and mission statements give the organisation a sense of purpose and can prevent it from drifting between the tides and currents of powerful events. Evaluating mission statements      One of the potential limitations of mission statements is that they tend to be a little ‘generic’. In recent years, virtually any organisation of any size has devised a mission statement. Do they perform a useful function or are they just another management fad? Below are some arguments in favour of these statements: They quickly inform groups outside the business what the central aim and vision are. They help to motivate employees, especially where an organisation is looked upon, as a result of its mission statement, as a caring and environmentally friendly body. Employees will then be associated with these positive qualities. Where they include ethical statements, they can help to guide and direct individual employee behaviour at work. They help to establish in the eyes of other groups ‘what the business is about’. On the other hand, these statements are often criticized for being: Just the answers!     Too vague and general so that they end up saying little which is specific about the business or its future plans Based on a public relations exercise to make stakeholder groups ‘feel good’ about the organisation Virtually impossible to analyse or disagree with Rather ‘woolly’ and lacking in specific detail, so it is common for two completely different businesses to have very similar mission statements. Communicating mission and vision statements is almost as important as establishing them. There is little point in identifying the central vision for a business and then not letting anyone else know about it. Businesses communicate their mission statements in a number of ways, for example in published accounts, communications to shareholders and the corporate plans of the business. 30 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Internal company newsletters and magazines may draw their title from part of the mission statement. Advertising slogans or posters are frequently based around the themes of the mission statements – The Body Shop, for example, is most effective in incorporating its mission into its eco-friendly campaigns. STS could incorporate something similar into their promotional activities in line with their mission statement. On their own, mission statements are insufficient for operational guidelines. They do not tell managers what decisions to take or how to manage the business. Their role is to provide direction for the future and an overall sense of purpose, and in public relations terms, at least, they can prove very worthwhile. It is important that both vision and mission statements are applicable to the business, understood by employees and convertible into genuine strategic actions. The company’s new mission statement is, “To become the country’s number one waste business and to protect the environment for our children’s benefit.” This is an objective that does not entirely follow the ‘SMART objective’ system. Overall the objective is rather vague, as there I not a precise goal stated. While they are able to measure their company against other companies in the waste industry, the second half of the objective, “…to protect the environment for our children’s benefit.” is not quantifiable and therefore STS PLC will be unable to measure the effects (positive or negative) that their business will have on the environment. The text states that, “This has been explained to all shareholders in a recent letter to them, but the workers of the company were not involved in helping create the mission statement and they had not been informed of it.” This shows that the objective was not agreed upon by all within the business, the employees had no say in it and were not told about it, and the shareholders also had no input but were informed of the new mission statement. The objective is partially realistic, STS PLC could become the country’s number one waste business, but realistically they alone cannot protect the environment for their children. Also nowhere in the mission statement is there a time constraint. Overall the mission statement is not ‘SMART’. 2. Explain the problems that may arise from the company’s objectives not being completely ‘SMART’. [4 marks] Just the answers! To enable businesses to assess the effectiveness of their objectives, they will use Peter Drucker’s SMART system for organisational objectives. SMART; Specific, Measureable, Agreed, Realistic, and Time constrained.      Specific, in that the objective cannot be vague and therefore must be precise. Measureable; meaning that the objectives of the business are quantifiable. Agreed, is defined as the objectives being agreed upon by all within the business organisation. Realistic, implies that the business will actually be able to fulfil its objectives, and not trying to do too much with their limited resources; and Time constrained, so to ensure that there is a time frame in which the objective must be completed. Because the business objective set by STS PLC is not a ‘SMART objective’ the business will likely come across some problems. The main problem is that the objective was not agreed upon by all who are involved in the business; most likely it was only the board of directors who created it, without any input from the shareholders 31 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered or the employees. Also the employees were not notified of the change in mission statement; therefore, they cannot work towards it. The objective is vague, this means that the employees, if they knew about the change in mission statement, would not have a clear goal to work towards. As the objective is not quantifiable the business will not be able to track their progress and therefore will not feel as if they are making a difference, leading to a lack of motivation for employees. Because it is unrealistic that STS PLC will make a difference to the environment it is likely that, for this reason the employees will further lose motivation to work toward achieving the objective. Also because there is no set time frame in which the business aims to achieve their goal, those working towards it will feel like it will never be done and, again, will lose the motivation to work hard towards the goal. The entire business organisation would be less organised and less motivated as a result of the objectives not being ‘SMART’; this will cause production to decrease which will, in turn cause the revenue to decrease, making everyone (shareholders, employees, and directors) unhappy as they will not receive as much money. 3. Using the information provided, to what extent is the business achieving success? [8 marks] STS’s success needs to be measured against the objectives it has set for itself. The aims and mission statements of a business share the same problems – they lack specific detail for operational decisions and they are rarely expressed in quantitative terms. Corporate or strategic objectives are much more specific. They are based upon the business’s central aim or mission, but they are expressed in terms that provide a much clearer guide for management action or strategy. A corporate or strategic objective is an important, broadly defined targets that a business must reach to achieve its overall aim. Here the important company objective is in line with a profit maximisation objective, in that to maximise returns for shareholders larger net profits need to be earned by STS (unless they borrowed or sold assets to increase dividend payments). Just the answers! Profits are essential for rewarding investors in a business and for financing further growth, and are necessary to persuade business owners and entrepreneurs to take risks. Profit maximisation means producing at the level of output where the greatest positive difference between total revenue and total costs is achieved. Using the information provided in the text, it can be seen that the business is achieving success to some degree. In 2009 STS earned $20 million in sales revenue, this was increased by 100%, in 2012 the business earned $40 million in sales revenue. The net profit increased dramatically, from $3 million in 2009 to $20 million in 2012. However, in 2009 STS was spending $17 million on the costs of running their business, it would make sense that the costs should increase at the same rate as the profits (or maybe just under because it is managing to achieve economies of scale, falling average costs as output has increased), but instead the costs rose only to $20 million. This means that the business must have been cutting costs somewhere to enable them to progress from keeping only 15% of their revenue to keeping 50%. Further, as the total market has increased year-on-year from $120m to $180m, STS has managed to capture an ever increasing market share. It is possible that the growth strategy of aggressive acquisitions has enabled it to achieve its objective of “Maximising returns for shareholders through a strategy of aggressive growth. Our objectives are to expand year on year.” But without further analysis of the accounts this is impossible to determine from the provided information. 32 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered For example, aggressive growth through the acquisition of other competing and complementary businesses would take significant capital expenditure. Capital expenditure is not included in the profit and loss account and therefore does not figure in the determination of net profit. If significant capital expenditure was needed for its expansion objective perhaps additional shareholder equity would have needed to have been found through the issue of additional shares. This would dilute the dividend returns to shareholders (i.e. earnings per share would be less if significant new share capital had been raised and net profit distributed as dividends). The only other information we have about STS and objectives is around the company’s mission statement, which is not the same thing as an objective. A mission statement is a statement of the business’s core aims, phrased in a way to motivate employees and to stimulate interest by outside groups. It is unlikely to be able to be assessed against SMART objectives, and this is certainly the case for STS’s mission statement. To enable businesses to assess the effectiveness of their objectives, they will use Peter Drucker’s SMART system for organisational objectives. SMART; Specific, Measureable, Agreed, Realistic, and Time constrained.      Specific, in that the objective cannot be vague and therefore must be precise. Measureable; meaning that the objectives of the business are quantifiable. Agreed, is defined as the objectives being agreed upon by all within the business organisation. Realistic, implies that the business will actually be able to fulfil its objectives, and not trying to do too much with their limited resources; and Time constrained, so to ensure that there is a time frame in which the objective must be completed. To some extent we can probably conclude that STS has succeeded or partially succeeded in achieving its profit and growth goals. Beyond this, we cannot determine if STS is achieving success; for example is it ‘protecting the environment’? Activity 1.3D: Corporate social responsibility Just the answers! 1. Explain the terms: [8 marks] a. Socially Responsible Business. Socially responsible businesses are businesses that act morally towards their stakeholders, such as their employees, and the local community. b. Ethics. Ethics are moral guidelines that determine decision making and strategy. c. Corporate Social Responsibility. Corporate social responsibility is a concept that applies to businesses that consider the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities and the environment. d. Social Audit. A social audit is an independent assessment of how a firm’s actions affect society. The audit can include a review of the firm’s environmental impact, staff management, and contributions to society. 33 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2. Analyse two factors given in the article which could encourage a business to adopt ethical and socially responsible objectives and strategies. [6 marks] Corporate social responsibility is a concept applies to those businesses that consider the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities and the environment. Objectives that focus on meeting social responsibilities are increasingly important for most business organisations. Two reasons for this and the consequences for businesses are considered below. i. ii. It is far easier and more cost effective to retain and recruit good, skilled and motivated employees, as they are likely to be more willing to work for a business that is responsible. Being socially responsible will enable the organisation’s employees to feel good about their work because they will be making a positive difference in the world (they’re not just working to enrich the already rich shareholders). Also the better reputation that the business would have if it was socially responsible and ethical would lead to positive implications for its financial performance; this is because reputation is a large part of the valuation of companies, and when a company has a higher stock market valuation it is likely that it would be easier to raise increased share equity through selling additional shares, increasing the share market valuation of the company, and enabling it pursue a strategy of growth or new investment in green technology for examples. However, both of these advantages would be weighed very carefully because there are also costs to becoming ethical and socially responsible. 3. Discuss the likely costs and benefits for Shell, of the company working towards being seen as ‘the leading multinational in economic, social and environmental responsibility.’ [8 marks] Evaluating ethical objectives by looking at the costs and benefits to Shell of being a socially responsible corporation. Just the answers! Adopting and keeping to a strict ethical code in decision-making can be expensive for Shell in the short term. For example:      Using ethical and Fairtrade suppliers can add to a business’s costs. Not taking bribes to secure business contracts can mean losing out on significant sales. Limiting the advertising of petroleum, CO2 producing products, may result in lost sales. As to could the adoption of greener forms of energy production because these could well be more expensive to the consumer resulting in decreased demand or a cannibalisation of its more profitable petroleum products. Accepting that it is wrong to fix prices with competitors might lead to lower prices and profits. Paying fair wages – even in very low-wage economies – raises costs and may reduce a firm’s competitiveness against businesses that exploit workers. However, in the long term there could be substantial benefits from acting ethically. For example: 34 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered      Avoiding potentially expensive court cases can reduce costs of fines. While bad publicity from being ‘caught’ acting unethically can lead to lost consumer loyalty and long-term reductions in sales, ethical policies will lead to good publicity and increased sales. Ethical businesses attract ethical customers and, as world pressure grows for corporate social responsibility, this group of consumers is increasing. Ethical businesses are more likely to be awarded government contracts. Well-qualified staff may be attracted to work for companies that have ethical and socially responsible policies. Corporate social responsibility: this concept applies to those businesses that consider the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities and the environment. This is what Shell is an objective that Shell now appears to be taking seriously. CSR addresses the question to Shell and its managers and key stakeholders: To whom is this business answerable? Should Shell’s business activity be solely concerned with making profits to meet the objectives of shareholders and investors or should business decisions also be influenced by the needs of other stakeholders? If Shell fully accepts its legal and moral obligations to stakeholders other than investors, it is said to be accepting corporate social responsibility (CSR). One important measure of a firm’s attitude to its social responsibility is the way in which it deals with environmental issues. Our environment can be greatly affected by business activity. Air and noise pollution from manufacturing processes, road congestion caused by heavy trucks, business expansion into country areas, emissions of gases that can lead to global warming and the use of scarce non-renewable natural resources are all environmental issues that are of increasing concern to people and governments all over the world. If Shell is serious about its CSR then it will be seriously addressing many of these issues. How should business managers react to these concerns? Should they respond by adopting environmentally safe or green policies, even if these are expensive and, let’s face it, very difficult for a big oil company who basically specialises in producing CO 2!, or should they always take the cheapest option no matter what the consequences for the environment might be? Just the answers! If a firm like Shell adopts a CSR approach and promotes its CSR approach, customers and other key stakeholders may well (and justifiably) ask the question: Is the action being taken because trade and reputation might be lost if it is not or because such action is increasingly profitable? Might businesses be criticised for paying lip service to CSR rather than praised for their genuine concern for society and the environment? Conceivably, firms are being ethical or environmentally conscious because they have an objective that Peter Drucker, a famous writer on management, calls ‘public responsibility’, because they want to behave in these ways. However, many consumer groups and pressure groups are still dubious as to whether these objectives are based on genuinely held beliefs. This is likely the case with one of the world’s largest greenhouse gas producing companies. Thus, importantly, Shell Oil, even if it invests heavily in a CSR approach to doing business, may have difficulties in ‘selling’ this as being genuine and could find it very difficult to reap the benefits of a CSR approach. Shell will be weighing up the following advantages of CSR with the disadvantages. Benefits to CSR: 35 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered     The image of the business and its products can be imporved with a green or a socially responsible approach. This could become a major competitive advantage, attracting new customers and loyalty from existing customers. Attracting the best motivated and most efficient employees may become easier as many workers will prefer to work for and be associated with socially aware businesses. Bad publicity and pressure group activity resulting from socially irresponsible behaviour could lead tom better relations with workers, suppliers, customers and the local community. Higher long-term profitability for Shell should result from all of the factors above. However, there are costs and major limitations that Shell needs to consider in a CSR approach, and these include:      Short-run costs increase, e.g., investing in new capital intensive renewable energy production, paying workers above poverty wage levels, paying suppliers promptly, not exploiting vulnerable groups in advertising. Shareholders may be reluctant to accept lower short-run profits (even though long-term profitability may increase). Loss of cost and price competitiveness if rival business (e.g. BP) do not accept social responsibilities and have lower costs as a result. Customers may be prepared to pay higher prices for products made in a socially responsible manner, but during economic recession, they may just prefer low prices and concern themselves less with how products are made. There could be a considerable social backlash against a business that claims to be socially responsible but is discovered to operate in socially irresponsible ways; for example, all of the costly investment in CSR may be pointless if there is an oil spill catastrophe (e.g., and oil tanker sinking at sea, an oil platform and drilling operation exploding and flooding pristine environmental areas in heavy, dirty oil. In my opinion, and because of the nature and reputation of oil companies. The costs of serious CSR for Shell are likely to outweigh the benefits for the foreseeable future. All oil major oil producers have a terrible reputation. This will be difficult to turn around, and even more difficult to convince others of their sincerity in doing so. Just the answers! 4. Discuss whether businesses should change their strategies of corporate responsibility over time. [8 marks] Corporate social responsibility: this concept applies to those businesses that consider the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities and the environment. This is what Shell is an objective that Shell now appears to be taking seriously. CSR addresses the question to Shell and its managers and key stakeholders: To whom is this business answerable? Should Shell’s business activity be solely concerned with making profits to meet the objectives of shareholders and investors or should business decisions also be influenced by the needs of other stakeholders? If Shell fully accepts its legal and moral obligations to stakeholders other than investors, it is said to be accepting corporate social responsibility (CSR). 36 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered One important measure of a firm’s attitude to its social responsibility is the way in which it deals with environmental issues. Our environment can be greatly affected by business activity. Air and noise pollution from manufacturing processes, road congestion caused by heavy trucks, business expansion into country areas, emissions of gases that can lead to global warming and the use of scarce non-renewable natural resources are all environmental issues that are of increasing concern to people and governments all over the world. If Shell is serious about its CSR then it will be seriously addressing many of these issues. How should business managers react to these concerns? Should they respond by adopting environmentally safe or green policies, even if these are expensive and, let’s face it, very difficult for a big oil company who basically specialises in producing CO2!, or should they always take the cheapest option no matter what the consequences for the environment might be? If a firm like Shell adopts a CSR approach and promotes its CSR approach, customers and other key stakeholders may well (and justifiably) ask the question: Is the action being taken because trade and reputation might be lost if it is not or because such action is increasingly profitable? Might businesses be criticised for paying lip service to CSR rather than praised for their genuine concern for society and the environment? Conceivably, firms are being ethical or environmentally conscious because they have an objective that Peter Drucker, a famous writer on management, calls ‘public responsibility’, because they want to behave in these ways. However, many consumer groups and pressure groups are still dubious as to whether these objectives are based on genuinely held beliefs. This is likely the case with one of the world’s largest greenhouse gas producing companies. Thus, importantly, Shell Oil, even if it invests heavily in a CSR approach to doing business, may have difficulties in ‘selling’ this as being genuine and could find it very difficult to reap the benefits of a CSR approach. Shell will be weighing up the following advantages of adopting or strengthening its CSR approach over time with the disadvantages. Benefits to CSR:    Just the answers!      The image of the business and its products can be improved with a green or a socially responsible approach. This could become a major competitive advantage, attracting new customers and loyalty from existing customers. Attracting the best motivated and most efficient employees may become easier as many workers will prefer to work for and be associated with socially aware businesses. Bad publicity and pressure group activity resulting from socially irresponsible behaviour could lead tom better relations with workers, suppliers, customers and the local community. Higher long-term profitability for Shell should result from all of the factors above. However, there are costs and major limitations that Shell needs to consider in a CSR approach, and these include: Short-run costs increase, e.g., investing in new capital intensive renewable energy production, paying workers above poverty wage levels, paying suppliers promptly, not exploiting vulnerable groups in advertising. Shareholders may be reluctant to accept lower short-run profits (even though long-term profitability may increase). Loss of cost and price competitiveness if rival business (e.g. BP) do not accept social responsibilities and have lower costs as a result. 37 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered   Customers may be prepared to pay higher prices for products made in a socially responsible manner, but during economic recession, they may just prefer low prices and concern themselves less with how products are made. There could be a considerable social backlash against a business that claims to be socially responsible but is discovered to operate in socially irresponsible ways; for example, all of the costly investment in CSR may be pointless if there is an oil spill catastrophe (e.g., and oil tanker sinking at sea, an oil platform and drilling operation exploding and flooding pristine environmental areas in heavy, dirty oil. In my opinion, and because of the nature and reputation of oil companies. The costs of serious CSR for Shell are likely to outweigh the benefits for the foreseeable future. All oil major oil producers have a terrible reputation. This will be difficult to turn around, and even more difficult to convince others of their sincerity in doing so. Changing business objectives. Businesses can change their corporate objectives over time. These changes will be in response to internal factors, such as resource constraints, or external factors, such as changes in the social and economic environment. Some of the most significant reasons for businesses changing their objectives include the following:     A business may have satisfied the survival objective by operating for several years and now the owners wish to pursue objectives of growth or increased profit. The internal resources of the business might have increased which will allow the objective of growth to be realistically established. An important senior manager responsible for international expansion might leave the business which leads to focusing on growing the business in domestic markets until an effective replacement can be found. The external competitive and economic environment may change. The entry into the market of a powerful rival or an economic recession may lead a firm to switch from growth to survival as its main aim. The UK airline, BA, has responded to the dual impact of increased low-fare competition and the recession by focusing less on its objectives to increase business class and first-class market share and more on cost cutting and low fares. This has led to serious disputes with trade unions representing BA cabin staff. A short-term objective of growth in sales or market share might be replaced by a longer-term objective of maximising profits from the higher level of sales. Business objectives need to be flexible enough to be adapted to reflect internal and external changes, but they should not be changed too dramatically or frequently as this may result in the loss of many of the benefits of setting SMART targets, including a loss of focus, sense of direction and specific measures to judge present performance. Before making a significant change to objectives, senior managers need to consider: Just the answers!     Is the internal or external change significant and long lasting enough to make a change in objectives necessary? What would be the risks of not adapting objectives to meet the new situation? What would be the cost and other consequences of new business objectives for the business and its staff? How can changed objectives – and the strategies needed to achieve them – be effectively managed within the business? Ethical objectives. Ethical objectives are targets based on a moral code for the business, for example ‘doing the right thing’. The growing acceptance of corporate social responsibility has led to businesses adopting an ‘ethical code’ to influence the way in which decisions are taken. 38 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Over time businesses would have to change their corporate social responsibilities (CSR) strategies, as they develop. Over time the CSR strategy that a company is using will no longer be relevant to the economic and environmental position at the time. For example, at the moment Shell’s CSR strategy may be to minimise the environmental damage that they do; but as technology develops and viewpoints change Shell will need to, and therefore should, change their strategy to something more relevant to the times such as providing new methods of transport, to the public, that are better for the environment. 1.3 Exam Practice Question: Peugeot Citroen’s road ahead laid out 1. Analyse whether Peugeot Citroen’s objectives fit the SMART criteria. [8 marks] To enable businesses to assess the effectiveness of their objectives, they will use Peter Drucker’s SMART system for organisational objectives. SMART; Specific, Measureable, Agreed, Realistic, and Time constrained.      Specific, in that the objective cannot be vague and therefore must be precise. Measureable; meaning that the objectives of the business are quantifiable. Agreed, is defined as the objectives being agreed upon by all within the business organisation. Realistic, implies that the business will actually be able to fulfil its objectives, and not trying to do too much with their limited resources; and Time constrained, so to ensure that there is a time frame in which the objective must be completed. The overall aim that Lovell has set for the company is not very specific – “becoming the most competitive car maker in Europe by 2018.” However, an aim is different to an objective. Corporate or strategic objectives are important, broadly defined targets that a business must reach to achieve its overall aim. Just the answers! Then, following the hierarchy of objectives (see diagram below), tactical or operational objectives are those short- or medium-term goals or targets which must be achieved for an organisation to attain its corporate objectives. 39 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Peugeot Citroen’s aim is supported by more specific objectives.   Just the answers!  The profit margin for each car sold is targeted to increase from two to seven per cent by 2018. This is specific, measurable, and if agreed upon by other directors and key managers should be realistic. The time-frame is specific but the time frame is very long. Five years is an exceptionally long time in the world of business and many, many changes both internal and external could eventuate within this time frame. For example, there could be a new CEO (an internal change) at Peugeot Citroen in this time, and she may lead the company in a different direction; she may pursue an aggressive policy of expansion through acquisitions of other companies which means that a new objective of doubling revenues could be introduced instead. The economic environment could change within this time period. There could be a major recession in key markets, affecting this objective as prices are often reduced in difficult economic times. This would result in a revision of lower sales forecasts. In Europe, one of the most competitive car markets in the world, the target is to increase sales by 300 000 cars a year by the same date. The same analysis apples to this objective. It meets the SMART criteria, with concerns over the timeframe the company is working towards. Departmental operating targets have also been established. For example, the human resources department must prepare for up to 8000 job losses and operations must aim to cut fixed manufacturing costs by 30% and costs of purchasing car parts by four to six per cent a year. These targets supporting the objectives are again specific and measurable. It would be difficult to conclude that 8000 job losses would be being agreed upon by all key stakeholders (e.g. the workers at Peugeot Citroen). There is no time associated with the job losses and the year-to-year cost reductions in manufacturing are unlikely to be sustained into the long term. This again raises questions about the time constrained component of SMART objectives. 40 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2. Analyse the importance of the chairwoman not only setting an overall aim for the company but also establishing departmental objectives. [8 marks] It is important to have an overall aim for the company, such as that expressed in a mission statement (I will use this as my key example of a business’s aim, as all large companies such as Peugeot Citroen will have one), and it also very important to set departmental objectives and targets to help support the overall aim. This answer will address both points, in turn. A mission statement is a statement of the business’s core aims, phrased in a way to motivate employees and to stimulate interest by outside groups. A mission statement is an attempt to condense the central purpose of a business’s existence into one short paragraph. It is not concerned with specific, quantifiable goals but tries to sum up the aims of the business in a motivating and appealing way. It can be summed up as a statement about ‘who we are and what we do’. An effective mission statement should answer three key questions:    What is it we do? For whom do we do it? What is the benefit? Mission statements outline the overall purpose of the organisation. It is a clear statement of the future position that offers the ideal of what owners and directors want their business organisation to become. Evaluating mission statements      One of the potential limitations of mission statements is that they tend to be a little ‘generic’. In recent years, virtually any organisation of any size has devised a mission statement. Do they perform a useful function or are they just another management fad? Below are some arguments in favour of these statements: They quickly inform groups outside the business what the central aim and vision are. They help to motivate employees, especially where an organisation is looked upon, as a result of its mission statement, as a caring and environmentally friendly body. Employees will then be associated with these positive qualities. Where they include ethical statements, they can help to guide and direct individual employee behaviour at work. They help to establish in the eyes of other groups ‘what the business is about’. Just the answers! On the other hand, these statements are often criticized for being:     Too vague and general so that they end up saying little which is specific about the business or its future plans Based on a public relations exercise to make stakeholder groups ‘feel good’ about the organisation Virtually impossible to analyse or disagree with Rather ‘woolly’ and lacking in specific detail, so it is common for two completely different businesses to have very similar mission statements. 41 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered The overall aim that Lovell has set for the company is not very specific – “becoming the most competitive car maker in Europe by 2018.” However, an aim is different to an objective. Corporate or strategic objectives are important, broadly defined targets that a business must reach to achieve its overall aim. Then, following the hierarchy of objectives (see diagram below), tactical or operational objectives are those short- or medium-term goals or targets which must be achieved for an organisation to attain its corporate objectives. Tactical or operational objectives are short-to-medium-term goals or targets which must be achieved for an organisation to attain its corporate objectives Divisional, operational objectives are set by senior managers to ensure:    Co-ordination between all divisions – if they do not work together, the focus of the organisation will appear confused to outsiders and there will be disagreements between departments Consistency with strategic corporate objectives Adequate resources are provided to allow for the successful achievement of the objectives. Just the answers! Objectives, strategies and tactics and tactics are all related. Corporate objectives relate to the whole organisation. They need to be broken down into specific tactical or operational objectives for separate divisions. Once divisional objectives have been established, these can be further divided into departmental objectives and finally budgets and targets for individual workers. This process is called management by objectives (MBO). Setting aims and objectives is and extremely important part of Peugeot Citroen’s business, especially as they are operating in a very competitive market where large investment and economies of scale are the norm. Having goals to work towards will motivate the employees to work harder; increasing production. The business will be able to measure their progress in completing their goals which will further motivate employees. Everyone will have a specific task to do and a given time frame in which to complete it. Having departmental goals as well as goals for the entire business is a good thing because it means that instead of having the entire company completing a goal that is focused on marketing or production, the departments will each have a goal that is 42 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered relevant to their function within the business. Having aims and objectives for both the company as a whole and the individual departments is important to Peugeot Citroen as they will help the business to run more efficiently and cohesively in the pursuit of the overall aim. 3. Miscopy Question – Do Not Do 4. To what extent do you believe Peugeot Citroen’s Shareholders would be pleased by Mrs Lovell’s new objectives for the company? [8 marks] It is likely that PC’s shareholders will be pleased to the extent that the market capitalisation of PC increases and/or the earnings per share and associated dividend payout increases. Some shareholders will be after shortterm gains and others, longer term returns on their investment. With this in mind we can look at the new objectives for PC, which have been developed to support the overall aim of becoming the ‘most competitive car maker in Europe by 2018’. The overall aim that Lovell has set for the company is not very specific – “becoming the most competitive car maker in Europe by 2018.” However, an aim is different to an objective. Corporate or strategic objectives are important, and these are the broadly defined targets that a business must reach to achieve its overall aim. Then, following the hierarchy of objectives (see diagram below), tactical or operational objectives are those short- or medium-term goals or targets which must be achieved for an organisation to attain its corporate objectives. Tactical or operational objectives are short-to-medium-term goals or targets which must be achieved for an organisation to attain its corporate objectives     Divisional, operational objectives are set by senior managers to ensure: Co-ordination between all divisions – if they do not work together, the focus of the organisation will appear confused to outsiders and there will be disagreements between departments Consistency with strategic corporate objectives Adequate resources are provided to allow for the successful achievement of the objectives. Objectives, strategies and tactics and tactics are all related. Corporate objectives relate to the whole organisation. They need to be broken down into specific tactical or operational objectives for separate divisions. Just the answers! Once divisional objectives have been established, these can be further divided into departmental objectives and finally budgets and targets for individual workers. This process is called management by objectives (MBO). The aims are supported by objectives that would appear on the surface to please shareholders in that these look to maximise profits for PC and thus, shareholder value. Shareholders will be able to assess the degree to which these objectives are actually achievable though, and in this they may consider whether the company’s objective meet the SMART criteria on which company objectives are often evaluated. To enable businesses to assess the effectiveness of their objectives, they will use Peter Drucker’s SMART system for organisational objectives. SMART; Specific, Measureable, Agreed, Realistic, and Time constrained.  Specific, in that the objective cannot be vague and therefore must be precise. 43 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered     Measureable; meaning that the objectives of the business are quantifiable. Agreed, is defined as the objectives being agreed upon by all within the business organisation. Realistic, implies that the business will actually be able to fulfil its objectives, and not trying to do too much with their limited resources; and Time constrained, so to ensure that there is a time frame in which the objective must be completed. Using these criteria, individual shareholders may conclude that:    The profit margin for each car sold is targeted to increase from two to seven per cent by 2018. This is specific, measurable, and if agreed upon by other directors and key managers should be realistic. The time-frame is specific but the time frame is very long. Five years is an exceptionally long time in the world of business and many, many changes both internal and external could eventuate within this time frame. For example, there could be a new CEO (an internal change) at Peugeot Citroen in this time, and she may lead the company in a different direction; she may pursue an aggressive policy of expansion through acquisitions of other companies which means that a new objective of doubling revenues could be introduced instead. The economic environment could change within this time period. There could be a major recession in key markets, affecting this objective as prices are often reduced in difficult economic times. This would result in a revision of lower sales forecasts. In Europe, one of the most competitive car markets in the world, the target is to increase sales by 300 000 cars a year by the same date. The same analysis apples to this objective. It meets the SMART criteria, with concerns over the timeframe the company is working towards. Departmental operating targets have also been established. For example, the human resources department must prepare for up to 8000 job losses and operations must aim to cut fixed manufacturing costs by 30% and costs of purchasing car parts by four to six per cent a year. These targets supporting the objectives are again specific and measurable. It would be difficult to conclude that 8000 job losses would be being agreed upon by all key stakeholders (e.g. the workers at Peugeot Citroen). There is no time associated with the job losses and the year-to-year cost reductions in manufacturing are unlikely to be sustained into the long term. This again raises questions about the time constrained component of SMART objectives. Just the answers! In conclusion, setting these aims and objectives is an extremely important part of Peugeot Citroen’s business, especially as they are operating in a very competitive market where large investment and economies of scale are the norm. I believe that the shareholders in Peugeot Citroen will be rather pleased with Lovell’s objectives for the company as they are mostly focused on increasing profit, growing the business, and increasing its popularity, all of which benefit the shareholders. The by decreasing the costs of production Peugeot Citroen will increase its profits which will result in higher dividends for shareholders, and both increasing popularity and growing the business will result in further profit increases. The shareholders should be pleased with the objectives for the company as they; the shareholders are, not only, not negatively affected, but are positively affected. The timeframe of these objectives may be the only real concern among shareholders. Those shareholders who are investing for the long-term may be more relaxed about the timeframe than investors (speculators?) interested in quickly adding shareholder value. 44 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 5. To what extent might these objectives have to be changed before the 2018 target date is reached? [10 marks] Some stakeholders will be after short-term gains and others, longer term returns on their investment. With this in mind we can look at the new objectives for PC, which have been developed to support the overall aim of becoming the ‘most competitive car maker in Europe by 2018’. Conflicts between objectives may be a real issue here. Conflicts between objectives can often occur. These conflicts will need to be resolved by senior managers and decisions taken on the most significant objective for the next time period. The most common conflicts that can occur are:    Growth versus profit – achieving higher sales by raising promotional expenditure and by reducing prices will be likely to reduce short-term profits Short term versus long term – lower profits and cash flow may need to be accepted in the short term if managers decide to invest heavily in new technology or the development of new products that might lead to higher profits in the longer term Stakeholder conflicts Conflicts between objective, and especially conflicts between key stakeholders may impact on CP’s ability to achieve its corporate objectives by 2018. Objectives may well change to accommodate the conflict, or perhaps a key group of stakeholders will become stronger and more powerful and better able to influence aims and objectives. Changes in objectives will follow and the present ones may fall by the wayside.. The overall aim that Lovell has set for the company is not very specific – “becoming the most competitive car maker in Europe by 2018.” However, an aim is different to an objective. Corporate or strategic objectives are important, and these are the broadly defined targets that a business must reach to achieve its overall aim. Then, following the hierarchy of objectives (see diagram below), tactical or operational objectives are those short- or medium-term goals or targets which must be achieved for an organisation to attain its corporate objectives. Tactical or operational objectives are short-to-medium-term goals or targets which must be achieved for an organisation to attain its corporate objectives Just the answers!     Divisional, operational objectives are set by senior managers to ensure: Co-ordination between all divisions – if they do not work together, the focus of the organisation will appear confused to outsiders and there will be disagreements between departments Consistency with strategic corporate objectives Adequate resources are provided to allow for the successful achievement of the objectives. Objectives, strategies and tactics and tactics are all related. Corporate objectives relate to the whole organisation. They need to be broken down into specific tactical or operational objectives for separate divisions. Once divisional objectives have been established, these can be further divided into departmental objectives and finally budgets and targets for individual workers. This process is called management by objectives (MBO). The aims are supported by objectives that would appear on the surface to please key stakeholders such as shareholders in that these look to maximise profits for PC. Others will not be so pleased, and will push back 45 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered against the changes associated with PCs objectives, for example the workers who will lose a large number of jobs (and the French government may react too). We are better able to assess the degree to which these objectives are actually achievable though, and in this they may consider whether the company’s objective meet the SMART criteria on which company objectives are often evaluated. To enable businesses to assess the effectiveness of their objectives, they will use Peter Drucker’s SMART system for organisational objectives. SMART; Specific, Measureable, Agreed, Realistic, and Time constrained.      Specific, in that the objective cannot be vague and therefore must be precise. Measureable; meaning that the objectives of the business are quantifiable. Agreed, is defined as the objectives being agreed upon by all within the business organisation. Realistic, implies that the business will actually be able to fulfil its objectives, and not trying to do too much with their limited resources; and Time constrained, so to ensure that there is a time frame in which the objective must be completed. Using these criteria, we may conclude that:   Just the answers!  The profit margin for each car sold is targeted to increase from two to seven per cent by 2018. This is specific, measurable, and if agreed upon by other directors and key managers should be realistic. The time-frame is specific but the time frame is very long. Five years is an exceptionally long time in the world of business and many, many changes both internal and external could eventuate within this time frame. For example, there could be a new CEO (an internal change) at Peugeot Citroen in this time, and she may lead the company in a different direction; she may pursue an aggressive policy of expansion through acquisitions of other companies which means that a new objective of doubling revenues could be introduced instead. The economic environment could change within this time period. There could be a major recession in key markets, affecting this objective as prices are often reduced in difficult economic times. This would result in a revision of lower sales forecasts. In Europe, one of the most competitive car markets in the world, the target is to increase sales by 300 000 cars a year by the same date. The same analysis apples to this objective. It meets the SMART criteria, with concerns over the timeframe the company is working towards. Departmental operating targets have also been established. For example, the human resources department must prepare for up to 8000 job losses and operations must aim to cut fixed manufacturing costs by 30% and costs of purchasing car parts by four to six per cent a year. These targets supporting the objectives are again specific and measurable. It would be difficult to conclude that 8000 job losses would be being agreed upon by all key stakeholders (e.g. the workers at Peugeot Citroen). There is no time associated with the job losses and the year-to-year cost reductions in manufacturing are unlikely to be sustained into the long term. This again raises questions about the time constrained component of SMART objectives. The extent to which Peugeot Citroen will have to change their objectives before 2018 depends largely on initial targets and objectives being met, and this is dependent on the situation of the business and of the European economy at the time. It is possible that by 2018 customers will no longer be buying cars, they may prefer to take public transport or, if there have been new advances in environmentally friendly transportation technology, they may choose that option. In which case, Peugeot Citroen will have to reevaluate its objectives in accordance with the situation, one such objective may be, to make newer, better, greener cars more readily available to the public. In conclusion there are many factors to take into account when considering the extent to which Peugeot Citroen will have to change their business objectives by 2018. 46 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 1.4 Stakeholders Activity 1.4A: Potential conflicts of interest between stakeholder groups 1. In the three examples in the above table, ‘Potential conflicts of interest between stakeholder groups’ analyse the likely positive and negative effects on two other stakeholder groups. [6 marks] The table given in the text shows how the expansion of a business, the takeover of a competing firm, and the introduction of new IT, would all impact on different stakeholder groups; the employees of the business, the local community, and the customers. Just the answers! Some other stakeholder groups that would also be affected by these business decisions or activities are competitors (rivals) and shareholders. Competitors would face many impacts following the business decisions or activities above. If a business (business X) expands then the competitors (business Y) would be negatively affected as business X now has a larger share of the market, this means that the customers will more readily go to the business X as it is larger, therefore, business Y will suffer lower profits. A competitor could also benefit however, as their business is smaller, there is less risk involved in decision making. This means that business Y could make a risky business decision that could massively benefit them, without as much fear of failure as business X would if they made the same decision. Another activity or decision that business X could make that would impact on business Y, the competitor, is if business x chose to take over a competing firm, this would have both positive and negative effects on business y. One of the costs to business Y if business X takes over a competing firm, is that now two of business Y’s competitors have joined together which will mean that they are able to benefit from economy of sale, which would lead to lower, more competitive prices, that business Y would have to compete with. A benefit to business Y is that again as the smaller of the businesses they can take more risks that could pay off in the long term. There will be both advantages and disadvantages to the competitor (business Y) when business X introduces new IT to its production methods. A benefit is that if the IT fails or has problems the customers will quickly become fed up with business X and move to business Y, as their products will be more reliable. A disadvantage to business Y is that if the new IT could, and likely will increase both the quality and production of goods at business X. 47 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered There will also be costs and benefits of all of these for the shareholders. A cost to the shareholders of expanding the business is that it will cost money which will possibly decrease the divided that they receive. A benefit is that it will ultimately draw in more customers meaning that more profit will be made, which could lead to increased dividend for the shareholders. An advantage to the shareholders if the business takes over another business is that they will receive more (higher) dividends as the profits earned from the business that they took over will go towards the costs of production; and therefore the dividends of the shareholders. A disadvantage of this is that the shareholders will not have as much say in the decisions made in the company that was taken over, but they will still be affected by the decisions that are made. A cost to the shareholders of introducing new IT, is that it is a capital investment (capital good) which will be part of the cost of production, which means that there are less profits (increased costs of production subtracted from the sales revenue), therefore the dividends would decrease. And finally the benefit to the shareholders from introducing new IT is that it will increase production, which will increase profits, and the shareholders main goal is to increase profits, so as to increase the dividends that they receive. 2. Analyse the potential conflicts of interest between any three stakeholder groups in the two headlines above. [8 marks] The first headline in the text says “KFC moves to install self service kiosks” three stakeholders in KFC that would have conflicting opinions about this are; the employees, the shareholders, and the customers. The employees at KFC would be unhappy with this decision because it is replacing their jobs with technology; therefore many jobs would be lost as a result of the introduction of the new technology. The shareholders would be happy with this as, in the short term it would cost them, but in the long term the potential wages of the employees would make up for the amount spent on the new technology and more. In short the shareholders would be happy because the profits are increasing, and the dividends are likely to also increase. Just the answers! The customer would be able to see both views as on the one hand they are losing the personal aspect of the transaction, and so might want to go to a different restaurant that does not use machines to order. But they would also be happy with the increased productivity of ordering their food, as there will be fewer and shorter queues. The customers are more likely to have the second opinion as it is ultimately what benefits them. Also the lower costs of production may be reflected in lower prices, which would also please the customers. The conflict of interest here is between those against the self-service kiosks (employees) and those for them (the shareholders and the customers). In the second headline “KiwiRail staff ‘shocked’ over job cuts” there are also stakeholders who would have differing opinions. The employees at KiwiRail would obviously disagree with the job cuts as they face losing their jobs because of them. The local community would be greatly affected as many of them use trains as a mode of transport, and they would notice the lack of (decreased number of) staff. Also the local community would suffer as the unemployment rates would increase and the economy would suffer. Another stakeholder that would be affected by the laying off of staff and have an opposing viewpoint are the shareholders. The laying off of staff will cause the costs of production to decrease, as there are fewer wages to be paid; therefore, the profits of the business increase. The main goal of a shareholder is for the business to increase profits so as to be able to give out more dividends to the shareholders. As a result of the job cuts, the 48 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered shareholders are likely to receive more dividends which will please them. The conflict in this situation is between those against the job cuts (the employees and the local community) and those for them (the shareholders). 3. Research two current business decisions and analyse the potential conflicts of interest between any three stakeholder groups. [10 marks] Just the answers! The first of the above headlines is a headline for an article about how Telecom, will start to charge its customers if they wish to continue receiving paper bills in the mail. This business decision made by Telecom will affect all of the stakeholders in Telecom, and they will have varying opinions of the decision. Certain pressure groups, as a part of the local community, would likely be happy with this decision. If the group is environmentally conscious, then they would be pleased as the charges would lead to more customers receiving their bills by email; therefore reducing the amount of paper used by Telecom, which is better for the environment. Some customers however, would not be pleased with this decision as they now have to pay for a service that has previously been provided to them for free. Additionally some customers may be unable to access or use an email and therefore they would have no choice in whether or not they pay the fee; if they want to receive their bills they will have to pay $1.50. Another stakeholder with an opinion on the matter would be the shareholders. The shareholders are also likely to be pleased with this decision as it is cutting the cost of sending paper bills in the mail to Telecom’s customers, this cost cutting will increase the profits, therefore; the dividends received by the shareholders have a chance of increasing. Telecom will not be able to please all of its stakeholders at once; therefore, any decision that they make will result in stakeholder conflict, such as the example above. The second of the above headlines is for an article about Fonterra’s Milk for Schools programme, and how it is now running in Stewart Island. Fonterra made the decision, not only to provide the schools with the milk for free, but also to cover the costs of getting the milk to Stewart Island. This decision would create stakeholder conflict as some stakeholders would be for this and others against it. One of the stakeholders that would definitely be for this decision is the local community. This is because the costs to the community to have the milk shipped to Stewart Island would likely be more than it is worth; forcing them to miss out of the programme. Also the local community will benefit from the health benefits that the 49 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered children are receiving because of the milk that they are able to enjoy, free of charge, thanks to Fonterra. A stakeholder group that would be against the decision is the shareholders. Fonterra is paying the shipping fee to get the milk for the school onto Stewart Island; this will increase the costs of production, possibly decreasing the dividends that the shareholders receive. The suppliers of Fonterra’s products (i.e. the farmers) will likely be for this decision, as they will be comforted in knowing that their products are being put to good use and are being used to make the next generation a healthier one. Whenever a business decision is made some of the stakeholders will be unhappy with the result, this is one example of a stakeholder conflict within Fonterra. Activity 1.4B: Global behemoth created by airline merger 1. To what extent are the two airlines focused on shareholder interests or other stakeholder interest? [10 marks] Stakeholders are people or groups of people who can be affected by, and therefore have an interest in, any action by an organisation. A shareholder is any person, company or other institution that owns at least one share in a company. The two airlines are focused mainly on the interests of their shareholders, the government, and their customers. This is shown in the text through the statements, “…resulting in annual savings of over $10 million.”, “The merger has the support of both governments as low airfare will keep inflation down and boost South American tourism to the benefits of Brazil and Chile.”, and “The long term plans are to offer more routes and cheaper prices to passengers.” Reasons for why the companies would want to please these stakeholders are: Shareholders. Shareholders may be willing to buy new issues of shares to invest further capital in the company. To keep them investing money in the business, the business will do this by increasing profits, and increasing dividends. Shareholders will be reluctant to sell shares and this will help avoid share price falls. ii. Just the answers! i. Government. When the government is pleased with a business they will not interfere with it (eg. imposing extra regulations which cost the business to comply), so businesses such as TAM Plc and LAM Plc will try to keep the government happy by making decisions that benefit the nation’s economy. iii. Customers. In a world of increasing free trade and international competition, it is essential to satisfy customers’ demands in order to stay in business and prosper in the long-term. Consumer loyalty will lead to repeat purchase and increased revenues and profits. There will be good promotion when customers give ‘word of mouth’ recommendations; positive customer feedback helps to improve the service provided by the airlines. Ultimately without customers a business cannot exist as there would be no one to purchase the goods or services, therefore businesses try to keep their customers relatively 50 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered happy, in order to secure their customer loyalty, in that they will return to the business and purchase its goods or services again. Businesses keep their customers happy by offering good quality, low priced goods. LAM Plc and TAM Plc, are not focused on the employees’ interests, as they are laying off more than 500 employees. iv. Suppliers are also not taken into account, as is shown in the text, “…are very worried about the impact on local suppliers of fuel and food to the airlines…” Supplier loyalty can be gained, this will help the meeting of deadlines and requests for special or out of the ordinary orders. The airlines are more likely to receive supplies of high quality. Reasonable credit terms may be more likely to be offered. It is possible that ‘payment holidays’ may be offered if the company finds itself struggling, if this means keeping them as customers. v. Also the businesses are not focused on the interests of the local community as they are closing “Unprofitable routes to small regional airports…” this will severely impact on the local communities around these small regional airports, as they will have more unemployment and less visitors coming to the area, and therefore the local businesses will suffer as well. The two airlines are focused, to some extent, on the interests of certain stakeholders (some of those with the most power) but do not seem to care about the impacts of their decision on other (less influential) stakeholders. As Gabriella Christie said, “Sure, there will be losers from this merger, but there will also be many more winners…” 2. Analyse why it is difficult in this case for the two merging companies to meet their responsibilities to all stakeholder groups. [6 marks] Stakeholders are people or groups of people who can be affected by, and therefore have an interest in, any action by an organisation. A shareholder is any person, company or other institution that owns at least one share in a company. Just the answers! Business decisions and activities can have both positive and negative effects on stakeholders, but it is rare for all stakeholders to be either positively or negatively affected by any one business activity. It is also possible for any one stakeholder group to experience both negative and positive effects from the same business decision. This is why conflicts of interest between stakeholder groups, with different objectives and interests, can arise. In the case of TAM Plc and LAM Plc, along with any other businesses, when they make decisions they will be unable to please all of the stakeholders in the business. This results in stakeholder conflict, as many of the stakeholders will have conflicting opinions about the decision.    The shareholders are likely pleased, because the increased profits may result in increased dividends. The local communities are likely displeased as their economies will suffer due to increased unemployment and less visitors (tourists) to the area. The employees will also be likely displeased as many of them will be laid off as a result of job cuts to decrease the costs of production. 51 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered   The customers will be likely pleased, as the prices will be lower and there will apparently be more routes, presumably to cities and other tourist destinations, while other, less profitable, routes are being cancelled. The governments of Chile and Brazil are likely pleased with this decision as it will hopefully increase the overall tourism in their countries. It is almost impossible to please all stakeholders at once and a business has to make a decision, based on the level of power and interest that the stakeholder has in the business, on which stakeholders to satisfy. It is difficult for a business to meet all of its responsibilities to all stakeholders at any one time. Compromise might be necessary – meeting as many stakeholder objectives as possible or meeting the needs of the most important group in each situation. 3. Examine the negative effects the proposed merger will have on some stakeholders for the expected overall profitability for the new company. [6 marks] Merger is an agreement between shareholders and managers of the two airlines to bring both firms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business. Profitability will be determined by the sales revenue of the newly merged company and the costs of providing the service it provides. The merger is expected to bring greater profitability through, for example, better marketing and greater sales reach, and by finding cost savings such as economies of scale which will enable the newly merged company to deliver an average flight seat less expensively than two smaller airlines could. Stakeholders are people or groups of people who can be affected by, and therefore have an interest in, any action by an organisation. Just the answers! A shareholder is any person, company or other institution that owns at least one share in a company. The proposed merger of LAM Plc and TAM Plc will have both positive and negative effects on different stakeholders. Those who are pleased with the decision made by the airlines will be positively affected, for example shareholders will receive higher dividends, customers will pay lower prices etc. The stakeholders who are against the merger will be negatively affected, such as the local communities whose economies will suffer, and the employees who will be laid off. The negatively affected stakeholder groups are likely to become unhappy with the business. In the case of employees, those who are unhappy with the off-handed manner in which their workmates were laid off, may become unhappy with the business, or fear the security of the job; therefore they may leave the business. This would cause production to decrease; and then profits would decrease, which would make the shareholders unhappy. This would mean that the business will receive less money in investments etc. Another negatively affected stakeholder is the local community, the local community’s economy is suffering as a result of the merger and the decisions to cancel flights, and lay off workers; this would cause the community to become unhappy with the business and they may boycott the business, choosing to fly or travel with other companies. This would lead to decreased profits for LAM Plc and Tam Plc, which would lead on to other negative effects on the business. Depending on the how well the stakeholders deal with the decisions made by LAM Plc and TAM Plc and how easily they are able to recover, the stakeholders who are negatively impacted on will react in different ways, which could possibly (unlikely) lead to the failure of the business due to lack funds. 52 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 4. Discuss how the newly merged business could attempt to meet some of its responsibilities to the stakeholder groups worst affected by this decision. [10 marks] The traditional view of business is often referred to as the shareholder concept. As the shareholders are the owners of the company, the firm has a legally binding duty to take decisions that will increase shareholder value. Since directors and managers ultimately owe their position to shareholders, it is important to keep them satisfied. In recent times, this limited view of business responsibility has been extended to include the interests not just of the investors/owners but also of suppliers, employees and customers. This approach to business responsibilities does not end with these four groups, however. The stakeholder theory or concept is that there are many other parties involved and interested in business activity and that the interests of these groups – local communities, the public, government and pressure groups such as environmental lobbyists – should be considered by business decision-makers. Stakeholders are people or groups of people who can be affected by, and therefore have an interest in, any action by an organisation. The stakeholder concept is the view that businesses and their managers have responsibilities to a wide range of groups, not just shareholders. There are three main internal stakeholders, each with their own set of interests in the business’s activities. They include:  Employees – employment security, wage levels, conditions of employment, participation in the business. This stakeholder group will be the worst affected. For the employees that remain after the merger the new company must adhere to the laws of the country’s it is operating in and has employees in. These employment laws outline the business responsibility to workers and will include redundancy and severance packages which the new company should honour (even though it will be a significant expense). Managers – employment security, salary and benefits offered, responsibilities given. Many management positions (especially middle management positions) will likely be lost in the merger as it does not make financial sense for there to be two heads of the Marketing Department, for example. The company’s responsibilities here are as above for employees. Shareholders – annual dividends, share price, security of investment. This group will likely see positive benefits from the merger.   Just the answers! The external stakeholders and their interests include:  Suppliers – speed of payment, level and regularity of orders, fairness of treatment. Some suppliers will gain with larger orders accommodating the larger firm. Margins may be squeezed but volume is likely to compensate for this. Many suppliers will lose an important customer in the rationalisation of supply chains. The company could establish effective two-way relationships that are of benefit to the business and suppliers. It could avoid excessive pressure on smaller or weaker suppliers to cut prices. Pay fair prices and pay invoices promptly. Most importantly, the company should signal and communicate any big 53 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered     changes well in advance to enable the suppliers worst affected by the merger some time to adjust and respond to the change. Customers – value for money, product quality, service levels. Customers should benefit from the merger through lower prices and a less disjointed service (for example having to use multiple airlines to arrive at their destinations). Government – jobs created, taxes paid, value of output produced, impact on wider society. Jobs will be lost so unemployment transfers could increase and income tax could be lost; added company profitability may compensate this to some extent. Special interest groups. Banks, for example, may do very well out of advising, consulting and implementing the share merger of the newly formed company. Competitors – fairness of competitive practices, strategic plans of the business. Competitors will likely be heavily and negatively impacted by the creation of a new airline behemoth to compete against. This is a cut throat industry to be competing in. As long as the new company is competing within the law, all is fair in love, war and business! 1.4 Exam Practice Question: Fury at Bangladesh mine scheme 1. Using examples from the case study, explain the differences between internal and external stakeholders. [4 marks] A stakeholder is a person or a group of people who can be affected by and therefore take an interest in any actions or decisions that are made by an organisation. Just the answers! An internal stakeholder is a member of the organisation, for example some of the internal stakeholders in GCM are the shareholders, the employees, and the managers or directors of the business (the spokeswoman is likely to be a director). The external stakeholders are those that do not form a part of the organisation but do have a direct interest in the actions of the organisation. Some of the external stakeholders mentioned in the case study are; the local community (the people of Phulbari), and the special interest groups (pressure groups) that are concerned about the environment and the welfare of the community (The World Development Movement and other international campaign groups). These external stakeholders are not a part of the organisation but they would definitely feel the effects of the decisions and actions that are made. 54 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2. Differentiate between ‘stakeholders’ and ‘shareholders’ in regards to GMC’s decision to pursue its controversial mining decision. [4 marks] Shareholders are the part owners of a private or public limited company, GMC is a public limited company. They have a direct interest in the activities and performance of the business and are, therefore, stakeholders of an organisation. However, there are also other stakeholders of an organisation other than the shareholders, for example the local community of Phulbari, the employees of GMC, and the special interest groups (The World Development Movement and other international campaign groups). 3. Explain the benefits of any two stakeholder groups arising from this mining project. [6 marks] Two stakeholders that would benefit from the mining project are the shareholders and the customers. The shareholders benefit because the business is mining 570 trillion tonnes of coal in a relatively affordable place, in which they can exploit workers who are in need of the wages to support their families. This low cost mining would keep the costs of production low, and selling all of the coal would bring in a lot of revenue. These combined creates a lot of profit, and therefore the shareholders would benefit from increased dividends. The customers also benefit from the mining project, as the low costs of production could be reflected in lower prices for the customers. 4. Explain the disadvantages to any two stakeholder groups resulting from this mine project. [6 marks] Just the answers! Many stakeholders will be disadvantaged by this project. Some of which are the local community and the special interest groups. The local community of Phulbari is massively disadvantaged as the residents are being forced out of their homes, also GCM plans to demolish the mangrove forest which is a heritage site, and a river will have to be diverted. These combined will mean that the locals will have to completely start over in a new part of the country, it will also prevent the locals from ever wanting to return, the homes that they once had would have been destroyed by GCM. This is social, mental, and environmental damage. Another stakeholder that is at a disadvantage are the special interest groups (SIGs), because they will be happy when there is nothing wrong, unethical, about the practices of the business that they are interested in. The SIGs could be concerned about any number of aspects of the GCM mining plan, the effect to locals who are being displaced, the environmental impact, the historical (cultural) impacts on the area, and the damage done in general. None of these have yet been resolved and so the SIGs are at a disadvantage. An extra possible stakeholder, that would be at a disadvantage is the Asian Development Bank, they will be seen as guilty by association and therefore will possibly be boycotted by customers, leading to the bank having to close. 55 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 5. Discuss the ways in which GCM could reduce the impact of the disadvantages it has created for the stakeholder groups negatively affected by the mine. [7 marks] The traditional view of business is often referred to as the shareholder concept. As the shareholders are the owners of the company, the firm has a legally binding duty to take decisions that will increase shareholder value. Since directors and managers ultimately owe their position to shareholders, it is important to keep them satisfied. In recent times, this limited view of business responsibility has been extended to include the interests not just of the investors/owners but also of suppliers, employees and customers. This approach to business responsibilities does not end with these four groups, however. The stakeholder theory or concept is that there are many other parties involved and interested in business activity and that the interests of these groups – local communities, the public, government and pressure groups such as environmental lobbyists – should be considered by business decision-makers. Stakeholders are people or groups of people who can be affected by, and therefore have an interest in, any action by an organisation. The stakeholder concept is the view that businesses and their managers have responsibilities to a wide range of groups, not just shareholders. There are three main internal stakeholders, each with their own set of interests in the business’s activities. They include:  Employees – employment security, wage levels, conditions of employment, participation in the business. This stakeholder group will likely benefit in terms of security of employment, new jobs, etc. For the employees at the new mine the company must adhere to the laws of Bangladesh, the country’s it is operating in. If the laws in Bangladesh are weakly enforced or just plain poor compared to European or American standards, then the company can do significantly better by not exploiting the poverty of the community. Employment laws outline the business responsibility to workers and will include redundancy and severance packages which the new company should honour (even though it will be a significant expense). The business could also provide training, job security, pay more than the minimum wage, offer good working conditions and involve staff in some decision-making. Just the answers! In return for accepting these responsibilities the company could see employee loyalty and low labour turnover. Motivated staff more committed to the success of the organisation. Easier to recruit and fill vacancies – they will be attracted by the responsibility the business shows to its employees. Less costly industrial unrest, stoppages and disputes.   Managers – employment security, salary and benefits offered, responsibilities given. Shareholders – annual dividends, share price, security of investment. This group will likely see positive benefits. The external stakeholders and their interests include:  Suppliers – speed of payment, level and regularity of orders, fairness of treatment. Suppliers may be negatively affected. In a poor country suppliers may be willing to take unacceptable risks with their working conditions and exploit their own local labour in an effort to reduce prices to GCM to win 56 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered     contracts. The company should establish effective two-way relationships that are of benefit to the business and suppliers. It could avoid excessive pressure on smaller or weaker suppliers to cut prices. Pay fair prices and pay invoices promptly. Most importantly, the company should signal and communicate any big changes well in advance to enable suppliers’ time to adjust and respond to changes. In return the benefits of accepting this responsibility, GCM will gain supplier loyalty – meeting deadlines and requests for special orders. They will more likely receive supplies of high quality. Reasonable credit terms may be offered. Perhaps even ‘payment holidays’ may be offered if CGM finds itself struggling. Customers – value for money, product quality, service levels Government – jobs created, taxes paid, value of output produced, impact on wider society. Special interest groups and communities. Here the responsibility to the local community is to avoid pollution and other damaging operations, support for local groups should be considered. Here the company is falling far short of acceptable responsibilities to this stakeholder group. The company must be looking for ways to negate the environmental damage they are unleashing, perhaps through underground rather than open-cast mining operations. NGOs should be listened to and concerns that have been expressed should be seriously considered and acted upon. Competitors – fairness of competitive practices, strategic plans of the business. Competitors will likely be heavily and negatively impacted by the creation of a major new source of coal. Prices are likely to fall in response to increased market supply; especially as coal is a commodity and undifferentiated, price elasticity will be very high. They will have a major new source of supply to compete against. This is a cut throat industry to be competing in. As long as the new company is competing within the law, all is fair in love, war and business! Just the answers! From the one-sided information presented in the case study it is my considered opinion that to meet its responsibilities here, the company should abandon this project in its present form. It is wreaking too much social harm and environmental destruction. 57 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 1.5 External Environment Activity 1.5B: Ikea to invest $1.9B in India to open 25 stores     Political and economic reforms to encourage better trade relations with other nations Less constraining legislations in place, therefore fewer constraints on business activity. Not very politically stable (compared to other countries) Less protection for patents and copyrights       Huge potential for growth in financial and stock markets Significant economic growth, suggesting increasing disposable incomes Improved infrastructure and market opportunities Relatively low costs of production, low minimum wage Infrastructure and economic stability are less attractive than other countries Poor population      Large potential market (over 1.1 billion) Well-educated workforce with English proficiency Large and increasing discrepancies in income and wealth distribution Language barriers Clash of Indian and western cultures   Growing number of technologically aware population Technology is easily copied due to lack of appropriate legislation (last point in the political section) Technological Just the answers! Social Political [10 marks] Environmental 1. Prepare a PEST analysis for IKEA’s to consider their expansion into India. 58 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2. Explain how each of the PEST components can represent either opportunities or threats for IKEA. [5 marks] Political     Environmental       Social     Technological Just the answers!    Political and economic reforms to encourage better trade relations with other nations Less constraining legislations in place, therefore fewer constraints on business activity. Not very politically stable (compared to other countries) Less protection for patents and copyrights  Easier to set up IKEA  Easier to run IKEA   Change in government might force IKEA to leave Not good for developing products Huge potential for growth in financial and stock markets Significant economic growth, suggesting increasing disposable incomes Improved infrastructure and market opportunities Relatively low costs of production, low minimum wage Infrastructure and economic stability are less attractive than other countries Poor population  Good to set up and sell shares  Money to be spent on IKEA products  Good for business  Results in higher profits   Economy could fail easier than other countries Less money to be spent Large potential market (over 1.1 billion) Well-educated workforce with English proficiency Large and increasing discrepancies in income and wealth distribution Language barriers Clash of Indian and western cultures   Possible customers Good potential workers   Cause social unrest Harder to find workers  Workforce conflicts Growing number of technologically aware population Technology is easily copied due to lack of appropriate legislation (last point in the political section)  Workers able to use technology  Not good for developing technology 59 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Activity 1.5C: Profile of Country X’s labour force 1. Calculate the forecasted percentage increase in the labour force between 2000 and 2020. [2 marks] In 2000 in country X 65.3% of the labour force was participating in labour, it has been estimated that by 2020 this percentage will have increased by 2.8%, bringing the percentage of the population in country X that is working to 68.1%. 2. Identify two changes to the structure of the labour workforce forecast over this period. Explain how these changes might have an impact on the human resources strategy of a business. [10 marks] Over this 20 year period there will have been some demographic changes. The first is that the percentage of working women is predicted to increase by 4.9% from 44.1% in 2000 to 49.0% in 2020. And the second is that the percentage of people going to study at university (receive a tertiary education) is estimated to increase by a massive 26.2% from 8.8% in 2000 to 35.0% in 2020. These changes in the labour workforce would mean that the human resources departments of businesses will also have to change. With more women entering the labour force, the total workforce will grow. Businesses will need to change their human resource strategies by becoming more welcoming and receptive to the recruitment and promotion of female staff. With more of the proportion and numbers of country X receiving tertiary education the workforce would be temporarily lower in the ages of the age distribution model; however this also means that when the younger generation has completed their tertiary education they will be more educated and therefore, more qualified and skilled for the jobs being offered. Businesses would need to adapt their business strategies to suit this, as they would be hiring an older age group (25+) that are more qualified, these people are also more likely to be starting families which the businesses would also have to adapt to. Just the answers! 3. Evaluate whether a business should provide more than the basic legal minimum in terms of conditions of employment and health and safety at work. [10 marks] Herzberg’s two factor theory looked at the factors that motivate employees, namely motivation and maintenance (hygiene) factors. Hygiene factors are parts of a job that Herzberg referred to that do not increase satisfaction but help to remove dissatisfaction, such as reasonable wages and working conditions. Motivators are the factors that Herzberg considered to increase job satisfaction and motivation levels, such as praise, recognition and responsibility. It is reasonable to assume that the basic legal minimum in terms of conditions of employment and health and safety at work are hygiene factors. Hygiene factors cause job dissatisfaction if they fall below a level considered to be acceptable by the workforce. It also is likely that this question is referring to that segment of the workforce that is not highly skilled, trained and sought after. Offering the basic legal minimum in terms of conditions of employment and health and safety 60 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered at work are likely to only apply to these workers, who need to be recruited and retained by the firms that they work for. Highly skilled and experienced staff with specific, in demand skills, need much, much more to be recruited into firms and effectively retained. Firms will need to do much, much more to recruit and retain these essential highskilled workers. Motivators then become key. Usually, firms have no difficulty in hiring the lowest skilled of their workers. Of course, if an economy is booming, unemployment low and wages rising then additional incentives beyond the bare minimum will be required. Recruitment is not usually an issue. Retaining staff, especially once they are trained and skilled in the job they do for their firms could be an issue. It is expensive to up skill and train staff, whether this is on-the-job training or offsite training. Offering staff who meet performance targets and standards of engagement and efficiency increased remuneration is likely to be a win-win situation for both the company and staff. For staff, hygiene factors are more likely to be perceived as being met. For the company, the time, effort and cost of training workers will be reduced. As will be the cost of recruiting new workers as more of their current workers will be retained and not lured away by other firms offering better employment conditions. Through such things, it can be taken note by businesses that in a work environment, hygiene factors should be at acceptable levels, to preserve job satisfaction. Examples would include reasonable wages, good relationships with peers subordinates and supervisors, and also appropriate company policies, rules and regulations. The main hygiene factors are financial. A firm can offer potential and existing staff remuneration above basic levels. Financial methods of motivation are the way in which businesses keep workers satisfied by using some form of monetary reward. Many firms attempt to motivate their employees through financial means. Monetary bonuses are the extra rewards of money that are given to employees for a pre-determined reason. This could be something like a bonus given due to good performance, loyalty or a sales bonus, based on the number of sales made by an employee. Monetary bonus can also include overtime payments, where money is given to workers who work overtime. Financial methods of motivation are the ways that businesses can motivate workers by using some form of monetary rewards, such as profit-related pay. In the case study, we can see that most incentive schemes at Value Added Retailers are based on salaries, monetary bonuses and fringe payments. Just the answers! Salaries are set at a fixed annual rate but paid at the end of each month. Salaries help improve a firm’s cash flow since workers are only paid once a month; usually directly into the worker’s bank account. This provides a safer and more convenient method of monetary reward compared to wages, as there is no need to pay the workers in cash. Also salaried workers usually work more than their contracted hours, however, are not paid overtime for their work. Monetary bonuses are a form of time-based payment systems where rewards are usually given in regards to the time an employee has spent working at the particular firm (for loyalty bonuses), or how long the employee has spent working on a particular project (overtime bonus). Fringe payments have also been used as financial rewards in the case study. Fringe payments, also known as perks, are the payments and benefits to an employee in addition to his or her wages or salary. These can vary from one firm to another and depend on the position of the employee in the organisation. In the case study, we can see that a fringe benefit of offering a trip to Hawaii was given to the top performing VAR employees. Therefore, it can be seen that different rewards can be used to attract and retain staff. 61 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered However, recruitment and retention of the best staff – the most motivated, productive and efficient and highly skilled; i.e., those workers in high demand would, according to Herzberg, be determined by motivators. Motivators are not factors that will be influenced by basic legal minimum in terms of conditions of employment and health and safety at work. Motivation, due to achievement, recognition, responsibility and advancement of workers can lead to increased worker satisfaction. To increase worker satisfaction, retain valuable staff, and attract better workers, motivators can be used in the workplace to increase motivation in a work environment and ‘sell’ the firm and job as something that a potential ‘in demand’ worker should choose over other options available to him or herself. Examples of motivators would include giving opportunities for promotion, job enrichment, job enlargement and empowerment. However, despite the usefulness of Herzberg’s two factor theory, it can also be seen that Herzberg’s motivators would not work in a business environment with low-skilled and low-paid jobs. Also, the role of team working is ignored in Herzberg’s theory as well. For example, a worker may value her social needs (Maslow’s Hierarchy of Needs), and quit her job if this need was not being met (e.g. team working provided). Therefore, we can see that while Herzberg’s theory can to some extent be effectively applied to a work environment, a consideration of the conditions of the work environment and the organisational culture should be made as well. Just the answers! Businesses are becoming increasingly competitive over their employees, each business want the most qualified in order to receive the most profits in the end. This means that prospective employees would be looking at and comparing the benefits and costs of working with each business. In this case it would greatly benefit the businesses to provide more than the basic legal minimum in terms of conditions of employment and health and safety at work. However, providing employees with more than the bare minimum will also cost them. Increasing employee benefits and wages will cost the businesses (increase the costs of production), which will decrease the profits of the business. When the profits are decreased the shareholders become unhappy and will stop investing in the business, in this case it would be most beneficial for the business to only provide the bare minimum to its employees. Also if the health and safety requirements are only just being meet it is more likely for an accident to occur, if this happens the injured party may take the business to court for not having the sufficient health and safety requirements in place, once again, in this case it would be best for the business if they were to provide more than the legal minimum when it comes to their staff. Overall it would most benefit businesses to provide more than the legal minimum in terms of conditions of employment and health and safety while at work, this is because overall the benefits outweigh the costs. The money saved (and good reputation retained) from not going to court, and the increased profits due to more qualified employees will outweigh the costs of providing more than the legal minimum in terms of staff. 62 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 1.5 Exam Practice Question: China to take action against inflation 1. Outline two reasons for the increase in inflation in China. [2 marks] Inflation is defined as a rise in the general price level of a country. Usually, it is the consumer price index that is a country’s most watched measure of inflation. One reason for the increase in inflation in China is the increased petrol prices, which is a commonly used input into the production process. This may lead to a rise in prices so that firms can maintain their profit margins. Another reason is the rising demand for food, excess demand. 2. Explain whether these causes of inflation arise from cost-pull or demand-pull pressures. [4marks] Increased petrol prices are an example of cost-push inflation because cost-pull inflation is caused by higher costs of production leading to increased prices so that firms can maintain their profit margins. The excess demand for food is an example of demand-pull inflation because demand-pull inflation is caused by excessive aggregate demand in the economy. 3. If the Chinese government increased interest rates again, explain what impact this could have on: [9 marks] a. Consumer spending on luxury goods If the base interest rate is increased it will impact on customers as they will have to spend more of their limited income on interest payments. This means that the customers’ disposable income will decrease, leading to a decrease in spending on luxury goods. Just the answers! b. Spending on new expansion projects by Chinese businesses Businesses are also affected by these interest rates. High interest rates make it better to save rather than spend; this is for both businesses and customers. Much business investment, the purchase of capital goods and even acquisitions are funded through long-term bank lending. Interest is charged on loans and the higher the interest rates charged for firms to borrow, the less likely they are to do so. Spending on new expansion projects will decrease, all things being equal. It would be wiser for businesses to wait until the interest rate decreases before starting a new expansion project. c. The exchange rate of China’s currency. If the RMB operated as a freely floating currency, subject to the forces of supply and demand in the currency markets, then higher interest rates increase the value of the Chinese ¥ (exchange rates increased) due to money flows investors are more likely to save in Chinese banks in Chinese rates are higher than other currencies. A stronger Yuan makes Chinese exports less competitive reducing exports and increasing imports. 63 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered However, the Chinese government only allows the RMB to ‘float’ within a very tightly limited band. If interest rates in China increased, the government would likely have to sell additional RMB in the foreign currency market to keep the RMB within its peg. 4. Examine possible changes to the long-term objectives set by Chinese businesses if inflation is not bought under control. [8 marks] Inflation is a sustained increase in the general level of prices. Cost-push inflation is caused by rising costs forcing businesses to increase prices. Demand-pull inflation caused by excess demand in an economy, e.g. an economic boom, allowing businesses to raise prices. Firms will respond to each type of inflation differently, especially in the long-term. Firms will need to expand output to increase the production of the goods and services they make in order to meet the extra demand being created by strong Chinese economic growth. If firms can successfully expand and increase output then they will likely be able to capitalise on increased sales revenue and increased market share. When demand is high, it is unlikely that extra output will be unsold and stock-piled, nor will prices need to be reduced to increase demand. Long-term expansion plans to grow the size of the firm and the amount of product or products it is currently producing would be a logical company objective when demand is an economy is high for goods and services. The objective may be to make an acquisition or series of acquisitions to quickly grow the size of the company and meet increased demand this way. Or, new factories, shops, etc. could be built, purchased or opened to increase output. This would be beneficial to firms that manage to successfully expand and meet increased demand. Not only would revenues increase, but it would likely mean that additional economies of scale can be reaped, and the average cost of production would decrease. Thus, a firm could doubly increase its profits in these times of inflation. Just the answers! However, expanding output in times of high economic growth and strong consumer demand is likely to be costly. Asset prices, including land and capital (high interest rates) are likely to be high. Firms will be paying higher than normal prices to expand production. Further, when economic growth is strong and factors of production (e.g., land and labour) are becoming scarce then variable costs (wages and electricity, for example) begin to rise too. To attract workers into a new factory, higher than usual wages may need to be offered to lure workers away from their present jobs and into the new factory. The positives for China, is that it has a large rural population that can readily move to urban factories and companies, and this ready supply of labour should keep wage costs down. Businesses are also affected by the higher interest rates associated with central bank intervention to control inflation. High interest rates make it better to save rather than spend; this is for both businesses and customers. Much business investment, the purchase of capital goods and even acquisitions are funded through long-term bank lending. Interest is charged on loans and the higher the interest rates charged for firms to borrow, the less likely they are to do so. Spending on new expansion projects will decrease, all things being equal. It would be wiser for businesses to wait until the interest rate decreases before starting a new expansion project. 64 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered If wage costs are seen to be rising, then firms may well implement objectives related to investing in capital goods, increasing the capital intensity of the firm, reducing labour intensity and reducing rising costs associated with higher wages and salaries. Multi-product firms may well find themselves rationalising production. Shifting resources out of producing products that have increasing labour and raw material costs and into their products (or new products) that have lower input costs. This is likely where the firm’s objectives are in line with a profit-maximising aim, or maximising shareholder value aim. Fortunately, the one thing Chinese exporting firms do not need concern themselves with is decreased profitability due to an appreciating currency. If the RMB operated as a freely floating currency, subject to the forces of supply and demand in the currency markets, then higher interest rates increase the value of the Chinese ¥ (exchange rates increased) due to money flows investors are more likely to save in Chinese banks in Chinese rates are higher than other currencies. A stronger Yuan makes Chinese exports less competitive reducing exports and increasing imports. However, the Chinese government only allows the RMB to ‘float’ within a very tightly limited band. If interest rates in China increased, the government would likely have to sell additional RMB in the foreign currency market to keep the RMB within its peg. In sum, firms will try to capitalise on the increased demand in the Chinese economy in inflationary times, while, at the same time, minimising costs by shifting resources into the production of products less affected by the rising price level in the Chinese economy. 5. China has experienced rapid economic growth in recent years. Discuss the likely effects of this on the strategies adopted by Chinese car manufacturers. [10 marks] Just the answers! Rapid economic growth in China will lead to higher incomes, on average, for the Chinese consumer. Higher incomes are going to lead to an increased demand for all goods and services, and this applies equally in the Chinese car market. The most likely strategy that Chinese car manufacturers are likely to adopt in response to and in anticipation of this increase in demand, is to increase the scale of operations. The scale of operations for car manufacturers refers to the maximum output that can be achieved using the available inputs (resources) – this scale can only be increased in the long term by employing more of all inputs. Chinese car manufacturers are going to have to find and finance extra land, labour and capital to expand their scale of operations in the Chinese market place. Increasing the scale of operations. There are risks and costs involved in increasing the scale of production – purchasing land, buildings, equipment, employing more staff – and the capital used for this will always have alternative uses. Firms expand capacity by increasing the scale of production to avoid turning business away and to increase market share, but they also benefit from the advantages of large-scale production – these are called economies of scale. This is not to confuse ‘producing more’ with increasing the scale of operation. More can be produced from existing resources by increasing capacity utilisation. Changing the scale of operation means using more (or less) of all resources, for example opening a new factory with additional machines and workers. One of the likely 65 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered strategies of Chinese car manufacturers when increasing the scale of operations is to achieve economies of scale. Economies of scale are reductions in a firm’s unit (average) costs of production that result from an increase in the scale of operations. These cost benefits can be so substantial in industries such as car manufacturing that smaller car firms will be unlikely to survive due to lack of competitiveness. The cost benefits arise for five main reasons:  Purchasing economies These economies are often known as bulk-buying economies. Suppliers to Chinese car manufacturers should offer substantial discounts for large orders. This is because it is cheaper for them to process and deliver one large order rather than several smaller ones.  Technical economies There are two main sources of technical economies. Large firms are more likely to be able to justify the cost of flow production lines. If these are worked at a high capacity level, then they offer lower unit costs than other production methods. The latest and most advanced technical equipment – such as computer systems and robotics – is often expensive and can usually only be afforded by big firms. Such expense can only be justified by larger car firms with high output levels – so that average fixed costs can be reduced.  Financial economies Large organisations have two cost advantages when it comes to raising finance. First, banks often show preference for lending to a big business with a proven track record and these firms are often lower than the likely rate charged to smaller car manufacturers in China. Secondly, further public issues of shares for existing public limited car companies is very expensive. Therefore, the average cost of raising the finance will be lower for larger car firms selling many millions of dollars’ worth of shares. This may well be how Chinese car manufacturers choose to finance  Marketing economies Marketing costs obviously rise with the size of car firms, but not at the same rate. Even a smaller car manufacturer will need a sales force to cover the whole of the sales area. It may employ an advertising agency to design adverts and arrange a promotional campaign. These costs can be spread over a higher level of sales for the bigger firm and this offers a substantial economy of scale. 5 Managerial economies Just the answers! As a firm expands, it should be able to afford to attract the very best specialist functional managers who should operate more efficiently than general managers, helping to reduce average costs. Chinese car manufacturers will be keen to pursue growth strategies to achieve these economies of scale. However, they must be wary and plan expansion carefully so as not to end up with diseconomies of scale. Diseconomies of scale arise from factors that cause average costs of production to rise when the scale of operation is increased. If there were no disadvantages to large-scale operations, nearly all industries would be dominated by one or two huge corporations. Diseconomies of scale are those factors that increase unit costs as a firm’s scale of operation increases beyond a certain size. These diseconomies are related to the management problems of trying to control and direct an organisation with many thousands of workers, in many separate divisions, often operating in several different 66 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered countries. There are three main causes of management problems: communication problems, alienation of the workforce, and poor co-ordination and slow decision-making. The problems for senior management are to co-ordinate these operations and take rapid decisions in such a complex organisation. At present, with smaller car firms in China they would have much tighter control over operations and much quicker and more flexible decision-making may benefit from lower average production costs as a result. It is often impossible to state at what level of output a car manufacturer will swing from EOS into DOS and when this process occurs, which is why the car manufacturers in China may continue to expand their business unaware that the forces causing diseconomies are building up significantly. In assessing whether to pursue a growth strategy, the owners of Chinese car companies must weigh up and assess:      Shareholder’ objectives – they may wish to keep the business smaller and easier to manage. Capital available – if limited, growth is less likely. Larger car companies would typically have good access to capital. Size of the market the firm operates in – large scale markets like China will need large-scale production. Number of competitors – the market share of each firm may be small if there are many rivals. In the Chinese market, there is a lot od competition. Scope for scale economies – these are likely to be substantial, and each car company is likely to develop a strategy or strategies to expand, grow and operate on a large scale. To pursue a growth strategy in the Chinese market, car manufacturers would consider a strategy of internal and/or external growth. Internal growth Business growth can be achieved in a number of ways and these forms of growth can lead to differing effects on stakeholder groups, such as customers, workers and competitors. Internal growth expansion of a business by means of opening new branches in different Chinese cities, car showrooms or factories (also known as organic growth). External growth Just the answers! External growth is business expansion achieved by means of merging with or taking over another business, from either the same or a different industry. There are three types of integration a car manufacturer in china may consider:    Horizontal integration – integration with firms in the same industry and at same stage of production. Forward vertical integration – integration with a business in the same industry but a customer of the existing business. Backward vertical integration – integration with a business in the same industry but a supplier of the existing business. If an external growth strategy is to be pursued by Chinese car companies then this is likely to be effected through either a merger or a takeover. A merger is an agreement by shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owning 67 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered shares in the newly merged business. For example, BMW could agree to merge with Geely, a Chinese car company. This would enable the newly formed larger company to reap EOS and perhaps synergies with German manufacturing excellence and Chinese local knowledge. The same result could be achieved through a takeover. This strategy of external growth is when a company buys over 50% of the shares of another company and becomes the controlling owner – often referred to as ‘acquisition’. The Chinese government is quite interventionist and protective of local firms, it is quite possible that a takeover strategy would fail as a result. Evaluation of growth strategies Internal growth can be quite slow with, perhaps, only a few branches or shops opening each year. However, it can avoid problems of external growth such as the need to finance expensive takeovers, offer new share issues or expensive additional loans. Also, management problems associated with bringing together very different businesses (e.g. culture clash could be a real problem between western and Chinese car companies) with their own attitudes and cultures are avoided. External growth can lead to rapid expansion, which might be vital in a competitive and expanding market. However, takeovers can be very expensive and may result in management problems caused by the need for different management systems to deal with a bigger organisation. There can also be conflict between the two teams of managers – who will get the top jobs? – and conflicts of culture and business ethics. Just the answers! In sum, rapid economic growth in China would lead to car companies operating in the Chinese market, and those car companies wishing to break into the Chinese market would lead to growth strategies being employed. Growth would lead to greater EOS and increased market share and revenues. The particular growth strategy or strategies employed in the Chinese market would be entirely dependent on the objectives of the directors and shareholders of these large car companies. 68 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 1.6 Organisational Planning Tools Activity 1.6A: Expansion decision Prepare a decision tree based on the above options, adding the payoffs and probabilities. [6 marks] 2. Calculate the expected value of both investments and recommend which option should be taken. [6 marks] Just the answers! 1. 69 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 3. Outline three other factors that might influence the business owner’s final decision. [3 marks] A decision tree only shows the quantitative (numeric) financial data that is relevant to making a decision; however, there are other factors that will also impact on Peckham Ltd. therefore they will also have an influence on which decision made. Some examples of these factors are if the manager wants to achieve one outcome then, as the manager has one of the most powerful roles, the decision made will be influenced by the managers wants. Another potential factor is that the staff may not be motivated enough about one of the choices, possibly leading to the decision made being the choice that the staff are most motivated about to insure maximum productivity. Just the answers! Also some new developments in technology effecting one of the choices by increasing productivity would influence the decision; this is because businesses would want to be as productive as possible to get the maximum amount of output from their inputs into the production of their product to be as profitable as possible. 70 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Activity 1.6B: Which market? 1. Prepare a decision tree based on the data for the options Sarah has and add the probabilities and forecasted returns. [6 marks] 2. Calculate the expected values of the four options that Sarah has. Which town market should Sarah visit on Saturday on the basis of the quantitative data alone? [10 marks] Just the answers! 3. Explain three factors that could influence the accuracy of Sarah’s forecasts. [6 marks] Three factors that could influence the accuracy of Sarah’s forecasts are; the truthfulness of the other stallholders. Sarah consulted with other stall-holders at the markets in the different towns; it is possible that the stall-holders supplied Sarah with misinformation, telling her that the stalls were less successful than they really are, in order to put Sarah off visiting their town market as that would increase the competition at the market. Sarah may or may not have already factored in the costs of visiting each of the different towns; depending on the distance from her own home, travel costs will vary. Towns closer to her home will be relatively less expensive to travel to and conduct business in. 71 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Also Sarah’s forecasts may be inaccurate due to a popular unexpected event on at the same time as the market in the town that Sarah chooses to visit; this would cause the number of potential customers at the market to decrease, decreasing the revenue that Sarah earns. Activity 1.6C: Strategic Analysis of LVM Ltd 1. Prepare a SWOT analysis based on your assessment of the internal and external factors that influence LVM’s success. [10 marks] Strengths     Weaknesses Excellent staff relationships Continued expansion No jobs were lost recently Steady profits Opportunities        Too little factory capacity Shortages of skilled labour Cash flow problems Threats Extending into Asian market when trade barriers are lifted Production of lighter, faster computers Grants available for business relocating to high unemployment areas Exchange rate movements     Competitors may have a breakthrough Increased interest rates Grants available for business relocating to high unemployment areas Exchange rate movements Just the answers! Excellent staff relationships This is a strength because it is an internal factor that is currently occurring. Having excellent staff relationships is an advantage for LVM because it could lead to higher productivity and staff morale. Continued expansion This is a strength for LVM because it is currently occurring. It is an internal factor because they have initiated the expansion themselves. 72 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered No jobs were lost recently This is a strength because the case study states there is a shortage of skilled labour. This would mean that other competitors would be finding it difficult to maintain their workforce too, and staff would be in high demand to obtain, meaning some businesses may need to lift their wages to entice staff. Therefore not losing jobs is a strength for LVM - it is internal and currently occurring. Steady profits This is a strength for LVM because it is an internal factor and is currently occurring. Maintaining steady profits is definitely preferable over not having steady profits as it means they may have some money under their belt if another business risk fails. Too little factory capacity This is a weakness for LVM as it is internal and currently occurring. It meant that they could not accept an order from a big name brand last month, which could have brought they a great profit, which is definitely disadvantageous as another company could have accepted the client’s offer. Shortages of skilled labour This is a weakness because it is an internal factor for LVM and is currently occurring. It could potentially be a threat also, depending on whether there is a shortage all over the industry, in which case it would be an external factor. Cash flow problems This is a weakness for LVM because they have spent too much on automated machines and research costs, and are internally struggling and requiring bank loans. Extending into Asian market when trade barriers are lifted Just the answers! This is an opportunity for LVM because it as an external factor that has changed and now means they can expand into the Asian market, potentially increasing revenue because their market has a higher growth potential than Europe, where most of their computers are currently marketed. Production of lighter, faster computers LVM has an opportunity to start production of lighter, faster computers after their research stage is complete. This could bring them more revenue. 73 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Grants available for business relocating to high unemployment areas This is an external change that could either be an opportunity or threat for LVM. It could be an opportunity as they could move to high unemployment areas and obtain a loan, lowering their cost of production and meaning they can pass this onto consumers in the form of lower prices, making their goods more competitive. However, it could also be a threat if competitors choose to do this and be able to lower their prices as consumers would purchase computers from them instead. Exchange rate movements The exchange rate movements could either be an opportunity or threat for LVM depending on how they move. They are an external factor. If the currency depreciates, it increases LVM’s international competitiveness and means they can sell their computers for relatively more. If the currency appreciates, it decreases their international competitiveness and opens the market for international companies potentially taking advantage of their currency rate. Competitors may have a breakthrough This is definitely a threat for LVM as it is an external factor beyond their control and could occur in the near future. If competitors have a breakthrough with the technology they decided not to develop two years ago, the competitors could increase their revenue and market share, being disadvantageous for LVM. Increased interest rates This could be a threat for LVM as the case study states that recently their borrowing from the bank has increased to finance their factory extension, and the increased interest rates mean it becomes relatively more expensive to borrow from the bank, decreasing the chance they will continue to expand and develop their business. 2. Evaluate two potential strategic options available for LVM Ltd by using the SWOT diagram prepares in Question 1. [10 marks] Just the answers! One strategic option available to LVM based upon an opportunity identified in the SWOT analysis is to expand into Asian markets when trade barriers are lifted. Advantages:    According to market research, their market has higher growth potential than Europe, where most of LVM’s computers are currently marketed. They may be able to take advantage of this and increase revenue. Asian consumers may be very interested in purchasing these computers as it brings variety into their consumer lives as they have only been able to purchase specific brands until now. 74 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Disadvantages:    Many other companies may be interested in this new market as well. This could mean that the influx of computers increases competition and forces business to lower prices, decreasing their revenue. The costs of moving distribution to Asia; e.g. shipping, finding new staff, new buildings. The market research may not have taken into account the cultural views of the society. For example, they may not believe in LVM’s specific type of computers as it could conflict with their values of personal contact. One other strategic option available to LVM based upon an opportunity identified in the SWOT analysis is to produce lighter and faster computers. The advantages and disadvantages of starting production of lighter, faster computers are as follows. Advantages:    Could be an advantage over competitors who have not had this opportunity Could increase revenue and brand awareness as more customers are prepared to purchase these lighter, faster computers. Could be considered a technological breakthrough, meaning customers now regard their brand name with more respect as they believe them to be at the forefront for technological advancements. Disadvantages:     The costs associated with going from research to production. Customers may not actually want these new computers. The production may not actually work and LVM has wasted money on the previous stages. They need to get more loans from the bank, meaning they must pay greater interest. Just the answers! Activity 1.6D: The Great Walmart of China 1. Explain why it is important to analyse the existing strengths and weaknesses of a business before taking a major strategic decision. [8 marks] It is important to analyse the existing strengths and weaknesses of a business before taking a major strategic decision is undertaken because it allows the business to see if the decision is the best option for them. 75 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered They may discover that they can use their strengths to undertake an opportunity to counteract their threats. It is important for them to know their weaknesses so they can better themselves and minimise their downfalls. For Walmart specifically, it is very important for them to carry out a SWOT analysis. If they had simply entered into the Chinese market without researching the economy and competitors, they may have invested millions into new stores, without realising they Carrefour may hold significant market share. It was also useful for them to be able to identify China’s large population and fast growing economy as an opportunity for them to enter the new market and potentially generate more revenue. Another advantage of generating a SWOT analysis is the foresight and proactive thinking it encourages, and discourages the important decisions made by intuition. This is an important note to consider for Walmart because they will need to be at the top of their game to ensure they make the right decisions. A limitation of only carrying out a SWOT analysis is that it could be considered too simplified and not detailed enough. Business environments also change frequently and Walmart will need to be continuously analysing themselves and the external factors to ensure they continue making the best, most profit maximising, decisions. Therefore, Walmart should also be using other decision-making frameworks, such as decision-making trees, which can help assess the financial risks in making a decision. 2. Explain from Walmart’s point of view, the strengths, weaknesses, opportunities, and threats in the case of its expansion into China. [8 marks] Strengths   Already has a successful formula  for businesses Huge economies of scale Opportunities Just the answers!   Weaknesses Being seen as a mainly US retailer Threats Chinese retail market has the  world’s largest population and  fastest growing economy  Technological change  Carrefour has a significant proportion of market share Carrefour’s expansion plans Legal and political differences between both markets Technological change 76 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Already has a successful formula for businesses This is an advantage for Walmart because they already know the basic outline of how to create a successful business and can potentially use it for their expansion into China. It is a current internal factor. Huge economies of scale This is an advantage for Walmart because they have such a large buying power that the relative price for each good decreases, and so they can pass this cheaper price onto consumers. It is a current internal advantage. Being seen as a mainly US retailer This is disadvantageous for Walmart as consumers in China won’t be as willing to shop at the new Walmarts as they could believe it is out of touch with their community. This is a weakness and a threat because it is an internal problem of theirs, but also the social views of the community are an external factor beyond their control. Chinese retail market has the world’s largest population and fastest growing economy This is definitely an opportunity for Walmart as these are external factors beyond their control, yet could work to their advantage because of the ability this brings to maximise revenue. Carrefour has a significant proportion of market share This is a threat for Walmart as they may find it difficult to enter the Chinese market because Carrefour already has such a large market share. It is an external factor because they cannot control it. Carrefour’s expansion plans If Carrefour expanded its business, it could regain even more market share which would leave Walmart in an even harder position to start shops in China. This means it would be a disadvantage, and is an external factor, which makes it a threat. Just the answers! Legal and political differences between both markets This could be a threat for Walmart as they will need to adapt their practises so they can comply with the Chinese Government for their Chinese stores, as well as the American laws when they are operating in the USA. This could be frustrating for Walmart as they have two different sets of rules they must attend to and comply with. The laws the Governments make are beyond Walmart’s control and are therefore an external factor. 77 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Technological change This could be a threat or an opportunity for Walmart as it could make the cost of starting stores in China more expensive as they have to purchase technology to keep up with competitors, or they could purchase it to be a step ahead of their competitors and gain customers. Technological change is an external factor. 3. Explain why it would have been important to consider the major differences between China and the USA before going ahead with its expansion. [8 marks] “Walmart is being outmaneuvered by Carrefour because its executives have taken too long to understand the Chinese market and add stores” - Strategic Resource Group Legal and political differences Since China and the USA have such different political and therefore legal differences, it will be important for Walmart to be aware of these so they can ensure they are complying with the rules in the given country. If they were found in breach of these laws, their reputation could be seriously damaged and they could incur a huge fine. Walmart must know the differences in each market before they enter it to avoid the two problems mentioned above. Yuan exchange rate If Walmart enters the Chinese market in a time when the Yuan is appreciating against the USD, it will be advantageous for Walmart as they will be able to import their goods at a relatively cheaper price. However if it is depreciating, it will cost relatively more and their goods will have to be priced more expensive for the consumer. This is why it will be important for Walmart to analyse the currency rate before they enter the Chinese market. Just the answers! Social and cultural factors Some social and cultural values can influence demand for certain goods, which is why Walmart will need to adjust the quantities of particular goods they will sell in their Chinese stores compared to their American stores. For example, Americans celebrate July 4th with many flags and special costumes, so American Walmart will sell many celebratory goods, whereas Chinese Walmart would not sell these as the demand would be so much lower for these goods. This is why it is important for Walmart to be very aware of the social and cultural values of the market for which they are entering into. 78 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Impact of technological change on retailing practices and consumer buying habits This will need to be taken into account for Walmart because some countries have greater access to technologies such as online shopping, which could be a threat to Walmart in that country. This means it could impact on consumer buying habits. 1.6 Exam Practice Question: Four Seasons Leisure 1. Prepare a SWOT analysis for Four Seasons Leisure’s position. [8 marks] The following is a table outlining the strengths, weaknesses, opportunities, and threats, or SWOT, for Four Seasons’ current position. Strengths    Weaknesses  Fairly good economic position One of the most prestigious brands in the Caribbean Effective management team Concentration in the Caribbean Opportunities Threats - Expand into; Dubai or Thailand, or upgrade the existing resorts in the Caribbean - Economic slowdown → decreased demand - New completion in Dubai Reasonably good economic position Just the answers! This is a strength because it is an internal advantage for them over another company. It is a current situation. One of the most prestigious brands in the Caribbean This is a strength because it is an internal advantage for them over another company, and it is their current situation. 79 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Effective management team This is a strength because it means their management, internally, can help motivate staff and carry out needed tasks efficiently, thus raising profit and making the business more competitive. It is a current situation. A big contraction in demand due to recession Less people are willing and able to demand hotel services in general, which is why it is a threat. It would not be a weakness because it affects all hotel service providers in the industry - not just them specifically. Plans to expand into other countries This could be an opportunity for Four Seasons as they notice the availability of competition in other countries’ hotel markets. This is affected by external forces. Concentration of business in the Caribbean This is a risk to the company as there is at present no diversification into other holiday destinations. Thus, if the Caribbean suffers a decrease in demand, for example if there is unrest and political problems or a corruption scandal, tourists will stay away. Competition from new holiday destinations in Dubai Just the answers! This could be a threat for them because new competitors are entering the market and are bound to obtain some of their market share, decreasing their revenue and forcing them to lower prices to gain back consumers. It is an external force. 80 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2. Construct a fully labelled decision tree showing Four Seasons’ options. [5 marks] 3. Calculate the expected grounds for each option. [6 marks]    Dubai: $30m Thailand: $85m Caribbean: $40m Just the answers! 4. On financial grounds which option should Four Seasons choose? [2 marks] Based on the above data, Four Seasons should choose to open a resort in Thailand. 5. Analyse one weakness for Four Seasons of using decision trees as a basis for making this business decision. [4 marks] A weakness of Four Seasons using decision trees as a basis for making this business decision 81 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Just the answers! The probabilities are only estimates and could have been made slightly biased by someone within the business who preferred one outcome over the other. These estimates are in no way guaranteed to be correct and are subject to many different internal and external constraints, which is why other factors should be considered when Four Seasons makes a decision 82 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 1.7 Growth and Evolution Activity 1.7C: Mergers and Acquisitions 1. Explain the type of integration used in both of these case studies. [6 marks] In the first case study, that of Jet Airways and Air Sahara is a takeover or an acquisition. An acquisition occurs when a company buys a controlling interest in another company; Jet Airways completely bought out Air Sahara. The type of integration in this case study is horizontal integration as both companies operated within the same industry. The second case study, looking at Mercedes Benz and Chrysler, was a merger. A merger occurs when two companies come together to form a new company; Mercedes Benz and Chrysler made a merge between their two companies that was not successful. The type of integration in the case of Mercedes Benz and Chrysler is lateral integration. This is because the two companies had similar operations but did not directly compete with each other as their products had different target markets. 2. If Jet Airways were now to merge with an aircraft manufacturer: [3 marks] Just the answers! a. Explain how this merger would be classified. If Jet Airways were to merge with an aircraft manufacturer the integration would be classified as backward vertical integration. The businesses are in different stages of production; the aircraft manufacturer operates is the secondary sector of business activity and Jet Airways operates in the tertiary sector, because it is a tertiary sector company that would be merging with a company in an earlier sector of production it is classed as backwards. b. Analyse two potential benefits to Jet Airways of this merger. [6 marks] A merger is an agreement by shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business. 83 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered This merger of the two airline companies is an example of horizontal integration – integration with another firm in the same industry (airline industry) and at same stage of production. Increasing the scale of operations and achieving further economies of scale are two of the potential benefits to Jet Airways of this merger. Scale of operation is the maximum output that can be achieved using the available inputs (resources) – this scale can only be increased in the long term by employing more of all inputs. The newly merged company not only eliminates a competitor, but it brings together additional resources (inputs) into the new company quickly without having to pursue the same growth organically, which can take considerably longer to achieve. Increasing the scale of operations is not without risk. There are risks and costs involved in increasing the scale of production – additional land, buildings, equipment, and employing more staff – and the capital used for this will always have alternative uses (the opportunity cost of the decision). Firms like Jet Airways expand capacity by increasing the scale of production to avoid turning business away and to increase market share, but they also benefit from the advantages of large-scale production – these are called economies of scale. Economies of scale is the second potential benefit to Jet Airways of the merger. Economies of scale are reductions in a firm’s unit (average) costs of production that result from an increase in the scale of operations. These cost benefits can be so substantial in some industries that smaller firms will be unlikely to survive due to lack of competitiveness, international air carriers are a likely example here. There is no such thing as a competitive and profitable small international airline. In this industry mergers, acquisitions and strategic alliances are the norm because scale need to be achieved. The cost benefits of scale in the airline industry arise for five main reasons. i. Purchasing economies These economies are often known as bulk-buying economies. Suppliers often offer substantial discounts for large orders. This is because it is cheaper for them to process and deliver one large order rather than several smaller ones. ii. Technical economies Just the answers! There are several sources of technical economies. In this case, larger airlines are more likely to be able to justify the cost of the latest and most advanced technical equipment – such as computer systems – is often expensive and can usually only be afforded by big firms. Such expense can only be justified by larger firms with high output levels – so that average fixed costs can be reduced, allowing the merger airline to be more price competitive and/or more profitable. iii. Financial economies Large organisations have two cost advantages when it comes to raising finance. First, banks often show preference for lending to a big business with a proven track record and these firms are often lower than the rate charged to smaller, less established airline companies (Sahara Air?). Secondly, raising finance by ‘going public’ or by further public issues of shares for existing public limited companies is very expensive. Therefore, the average cost of raising the finance will be lower for the larger airline company in selling many millions of dollars’ worth of shares if they choose to finance additional expansion this way.. iv. Marketing economies 84 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Marketing costs obviously rise with the size of a business, but not at the same rate. Even a small firm will need a sales force to cover the whole of the sales area. It may employ an advertising agency to design adverts and arrange a promotional campaign. These costs can be spread over a higher level of sales for a big firm and this offers a substantial economy of scale. v. Managerial economies As a larger firm, the new airline company should be able to afford to attract better specialist functional managers who should operate more efficiently than perhaps more general managers, helping to reduce average costs, and increase airline profitability. 2. Examine the likely impact of the Jet Airways takeover of Air Sahara on any two stakeholder groups. [10 marks] Stakeholders are people or groups of people who can be affected by, and therefore have an interest in, any action by an organisation. Shareholders are the people who won shares in Jet Airways – they are the part owners of the company. A takeover is when a company buys over 50% of the shares of another company and becomes the controlling owner – often referred to as ‘acquisition’. This takeover of Air Sahara is an example of horizontal integration – integration with another firm in the same industry (airline industry) and at same stage of production. Increasing the scale of operations and achieving further economies of scale are two of the potential benefits to Jet Airways of this merger, and this is likely to benefit shareholders in Jet Airways. A merger is an agreement by shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business. This merger of the two airline companies is an example of horizontal integration – integration with another firm in the same industry (airline industry) and at same stage of production. Increasing the scale of operations and achieving further economies of scale are two of the potential benefits to Jet Airways of this merger. Just the answers! Scale of operation is the maximum output that can be achieved using the available inputs (resources) – this scale can only be increased in the long term by employing more of all inputs. The newly merged company not only eliminates a competitor, but it brings together additional resources (inputs) into the new company quickly without having to pursue the same growth organically, which can take considerably longer to achieve. Increasing the scale of operations is not without risk. There are risks and costs involved in increasing the scale of production – additional land, buildings, equipment, and employing more staff – and the capital used for this will always have alternative uses (the opportunity cost of the decision). Firms like Jet Airways expand capacity by increasing the scale of production to avoid turning business away and to increase market share, but they also benefit from the advantages of large-scale production – these are called economies of scale. Economies of scale is the second potential benefit to Jet Airways of the merger. Economies of scale are reductions in a firm’s unit (average) costs of production that result from an increase in the scale of operations. 85 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered These cost benefits can be so substantial in some industries that smaller firms will be unlikely to survive due to lack of competitiveness, international air carriers are a likely example here. There is no such thing as a competitive and profitable small international airline. In this industry mergers, acquisitions and strategic alliances are the norm because scale need to be achieved. The cost benefits of scale in the airline industry arise for five main reasons. i. Purchasing economies These economies are often known as bulk-buying economies. Suppliers often offer substantial discounts for large orders. This is because it is cheaper for them to process and deliver one large order rather than several smaller ones. ii. Technical economies There are several sources of technical economies. In this case, larger airlines are more likely to be able to justify the cost of the latest and most advanced technical equipment – such as computer systems – is often expensive and can usually only be afforded by big firms. Such expense can only be justified by larger firms with high output levels – so that average fixed costs can be reduced, allowing the merger airline to be more price competitive and/or more profitable. iii. Financial economies Large organisations have two cost advantages when it comes to raising finance. First, banks often show preference for lending to a big business with a proven track record and these firms are often lower than the rate charged to smaller, less established airline companies (Sahara Air?). Secondly, raising finance by ‘going public’ or by further public issues of shares for existing public limited companies is very expensive. Therefore, the average cost of raising the finance will be lower for the larger airline company in selling many millions of dollars’ worth of shares if they choose to finance additional expansion this way.. iv. Marketing economies Marketing costs obviously rise with the size of a business, but not at the same rate. Even a small firm will need a sales force to cover the whole of the sales area. It may employ an advertising agency to design adverts and arrange a promotional campaign. These costs can be spread over a higher level of sales for a big firm and this offers a substantial economy of scale. v. Managerial economies Just the answers! As a larger firm, the new airline company should be able to afford to attract better specialist functional managers who should operate more efficiently than perhaps more general managers, helping to reduce average costs, and increase airline profitability. With an increased scale of operation and increased revenues from the expansion, combined with economies of scale, airline profitability should increase. With increased profitability, shares should increase in value and dividend pay-outs to shareholders would likely increase. In sum, the takeover is likely to benefit shareholders to a great extent. The shareholders of Jet Airways would benefit from the takeover of Air Sahara due to the increased profits that the takeover, as a strategy of growth, will bring. With the increased profits the shareholders are likely to receive an increased amount in dividends. The shareholders would, however, also suffer from reduced dividends before 86 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered and shortly after the purchase of Air Sahara due to the amount of money spent on the takeover. The customers of both airlines will receive benefits such as lower prices and a larger variety of air routes. Using the above analysis, it is likely that the customers of the newly expanded airline will benefit from the takeover for the same reasons: scale of operations and economies of scale. It is very likely that existing customers and new and potential customers of the two airlines will benefit from an increased range of destinations being made available. The flight destinations offered by one larger airline company will be expanded. This could also bring advantages to customers using the airline for multi-destination flights. However, it is also possible that some of the less profitable routes could be cut. This is especially likely where capacity utilisation per flight is not as high (i.e., planes flying with empty seats) as management would like. If this were to happen, some customers would need to find alternative travel arrangements. If hoped for economies of scale were to be achieved, then this could result in the newly expanded airline offering lower prices to customers while still maintaining profitability. Lower costs lead to greater profit margins if prices are not decreased. And decreased prices to customers would lead to increased demand and greater revenues as it is expected that airline flights would have low price elasticity of demand – mostly because of the wide availability of substitute travel alternative available to customers. Thus, for customers, an increased range of destinations and lower prices are likely to be welcomed. 4. Using the Mercedes Benz/Chrysler case study and any other researched examples, e.g. AOL and Time Warner, discuss why mergers and takeovers fail to give shareholders the benefits originally predicted. [10 marks] A merger is an agreement by shareholders and managers of two businesses (e.g. Mercedes Benz and Chrysler) to bring both firms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business. A takeover is when a company buys over 50% of the shares of another company and becomes the controlling owner – often referred to as ‘acquisition’. These two methods of company growth are classified as external growth, where business expansion achieved by means of merging with or taking over another business, from either the same or a different industry. It is different to internal growth where business expansion is by means of opening new branches, shops or factories (also known as organic growth). An example of internal growth would be BMW’s retailing business opening more showrooms in cities where it previously had none. Just the answers! External growth is often referred to as integration as it involves bringing together two or more firms. And integration can take four different forms, each with their own advantages and disadvantages:     Horizontal integration – integration with firms in the same industry and at same stage of production. Forward vertical integration – integration with a business in the same industry but a customer of the existing business. Backward vertical integration – integration with a business in the same industry but a supplier of the existing business. Conglomerate integration – merger with or takeover of a business in a different industry. 87 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered While the merger of Mercedes Benz with Chrysler is a classic example of horizontal integration, the question asks about mergers and takeovers more generally. Further, looking specifically at shareholders and why mergers and takeovers often fail to give shareholders the benefits originally predicted, we need to examine the disadvantages to these forms of external growth. I will focus on each type of integration, in turn. i. ii. iii. Just the answers! iv. Horizontal integration (e.g., the Mercedes/Chrysler merger):  Rationalisation may bring bad publicity as factories are closed and jobs shed, this could result in decreased sales, profits and shareholder value and/or dividend returns.  If extreme, this may lead to monopoly investigation if the combined business exceeds certain size limits, this would result in increased costs and decreased profits and shareholder value and/or dividend returns.  Consumers may find themselves with less choice and reduce their spending in this industry.  As workers lose job security as a result of rationalisation it may be difficult for the company to recruit and retain their most skilled, productive and motivated staff. This increases costs and reduces profitability. Forward vertical integration:  Consumers may react negatively if they suspect uncompetitive behaviour and sales and profitability may fall.  A lack of experience in a new sector of industry – a successful manufacturer does not necessarily make a successful retailer, for example. Backward vertical integration:  The firm may lack experience managing a supplying company. For example, a successful steel producer will not necessarily make a good manager of a coal mine. Costs could increase, sales may fall, both of which would reduce profitability.  The supplying business may become complacent having a guaranteed customer. With complacency comes ‘bloat’ and unnecessary and inefficient expenditure and management of operations. Profitability would be reduced. Conglomerate integration (e.g., Berkshire Hathaway – Warren Buffet):  Lack of management experience in the acquired business sector could reduce profitability as less than optimal management decisions are made.  There could be a lack of clear focus and direction now that the business is spread across more than one industry.  In fact, conglomerates are usually less profitable based on the value of capital than companies more specialised in one area (e.g., just the car industry) In summary, mergers and takeovers can be extremely successful, but they can also fall short of the expectations that are set for them by the shareholders and other stakeholders in a business. Some of the benefits that are expected of mergers and acquisitions are; greater market share, large economies of scale, synergy, increased chances of survival, and diversification leading to increased profits. However, companies also need to take into consideration the disadvantages and the ways in which a merger or takeover could go wrong, leaving them without the desired result. Mergers and takeovers often lead to a loss of control, this is because the original owners of the businesses will loss much of the control of the business to the new board of directors formed. Culture clash can occur, and is one of the reasons why the Mercedes Benz/Chrysler merger failed, due to people and processes changing (or failing to do so) in order to adapt to the new merged business, this includes differing values and mission statements of the businesses, and the difficulty experienced by employees who are failing 88 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered to adapt to a new management style. Mercedes Benz and Chrysler faced the problem of “Culture clashes between the two management approaches…” Another reason for the failure of a merger is conflict, the individual businesses are possibly going to argue and disagree over the course of the merger or takeover. Due to there being more than the required number of staff, e.g. one person for each job from each of the individual businesses, therefore there will be redundancies. Also, large scale operations do not always work. The merged business could suffer from increased bureaucracy and slow communication, leading to less efficient decision making and production, this is known as diseconomies of scale. Mercedes Benz and Chrysler suffered from this due to their distance from each other. Activity 1.7D: Sally goes it alone 1. Explain what is meant by a ‘franchise agreement’. [4 marks] A franchise agreement is a legal contract in which a well-established business consents to provide its brand, name, logo, and trading systems to another party for them to set up and operate a franchise of the established business in exchange for a fee and some share (percentage) of the turnover generated. The franchise agreement sets out the rules and details of the agreement outlining the duties of each role and what is required of and promised to them. 2. Explain three potential drawbacks to Sally of agreeing to the terms of the franchise contract. [6 marks] The initial capital investment required by Sally to buy the franchise is very significant – purchasing a good and well run franchise is generally expensive. However, Sally could use the money that she inherited to buy a Pizza Delight franchise. Sally would have to give a large percentage of her profits to Pizza Delight, leaving her with less profit than would otherwise be the case. Just the answers! The flexibility for Sally as a franchisee, is extremely limited, she would not be able to use much of her own initiative, and would not be able to decide things for herself, instead going with what Pizza Delight wants. 3. Explain why the risks of failure might be greater if Sally decided to open her own restaurant, under her own name, rather than use the franchise option open to her. [4 marks] There is much less risk to Sally by operating a Pizza Delight franchise than there would be if she ran her own restaurant. This is because Pizza Delight is already well-established and successful, and it has a large established customer base and is well-known in the industry. It has economies of scale that Sally will automatically tap into, and its supply chain management should be efficient and low cost. 89 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered If Sally were to open her own restaurant then it would be far riskier as success is not guaranteed. Initially, customer awareness of her business would be extremely limited and significant expense in promotion would need to be carefully invested and integrated into her overall marketing mix and marketing strategy. Essentially, if Sally were to open her own restaurant she would be starting from scratch. Also Sally is lacking in business experience, and therefore it is likely to end badly if she tries to open her own business. 2. Advise Sally as to whether she should take out a franchise with Pizza Delight. [10 marks] A franchise is a business that uses the name, logo and trading systems of an existing successful business, in this case – Pizza Delight is the franchisor. A franchise contract allows the franchisee to use the name, logo and marketing methods of the franchiser. The franchisee can, separately, then decide which form of legal structure to adopt. Franchises are a rapidly expanding form of business operation. They have allowed certain multinational businesses, for example McDonald’s and The Body Shop, to expand much more rapidly than they could otherwise have done. Why would a business entrepreneur like Sally want to use the name, style and products of another firm like Pizza Delight? There are clear advantages to opening a franchised business (Pizza Delight) to the franchisee (Sally). Advantages:    Just the answers!   There are fewer chances of the business failing as an established brand and product are being used. New businesses have a tremendously high rate of failure within their first year or two of operations. This reduces the risk of failure to Sally. Advice and training is likely to be offered or even made compulsory as part of the franchise agreement contract. It is in the best interest of the franchise operation to have their local owners as well trained and adept in the newly opened business as possible – the success of the franchisor depends on the success of their individual franchisees. National advertising is paid for by the franchisor. The franchisor is likely to have a specialist marketing manager who will be skilled and experienced in her job and have good industry knowledge. Sally will be indirectly paying for this advertising and promotion, but the costs will be shared between the franchisees and therefor marketing and managerial economies of scale make this an efficient form of business arrangement. Pizza and other consumable supplies, and equipment, are likely to be obtained from established and quality-checked suppliers. Supply chains will be well-established, efficient and well managed. This takes the risk out of purchasing decisions for Sally. It also enables her to tap into purchasing economies of scale. For example, the flour for pizza dough may be purchased centrally by head office and distributed at cost to franchisees. It is likely that the franchisor will be contractually obligated to not open another branch in the local area. This affords Sally some protection from competition, in a very competitive market. However, these benefits must be examined in the light of the disadvantages of operating a franchise business. The disadvantages include: 90 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered      A share of the profits or sales revenue needs to be paid to the franchisor on a regular basis, usually annually. This is almost an added cost of doing business for Sally, and she would need to hope that the Pizza Delight franchise brings enough value-added to her business to make these regular payments worthwhile. The initial franchise license fee can be expensive. This adds to the cost of setting up a new pizza shop. The capital investment required by Sally is now shop and equipment plus license fee. If local pizza promotions still need to be paid by the franchisee, then this will negate some of the marketing economies of scale explained previously. There is often no choice of supplies and suppliers to be used; i.e., Sally will be contractually obliged to use the tomatoes purchased by head office rather than locally sourced, organically grown tomatoes that customers demand and competitors may use in their products. There are often strict contractual rules over pricing and layout of the outlet. This reduces Sally’s control over her own business. For example, if Sally opened a pizza shop in an area with little competition, she could have more control over her price as there would be less substitute pizza shops for customers to turn to. Bringing these points together, there are many things that Sally has to take into consideration before making her choice as to whether or not she should purchase a franchise of Pizza Delight as opposed to opening her own business. Pizza Delight has security, but is also limiting, this means that it would be the less risky option for Sally but it would not satisfy her want for independence. Also it would be cheaper for Sally to buy a franchise than it would be for her to open her own restaurant, and as Sally has limited funds she may be forced to seek outside sources of finance. Overall it rationally makes more sense for Sally to take out a franchise with Pizza Delight, but Sally does not like “…taking orders…and always hoped to use her talents in preparing food for customers in her own restaurant.” Just the answers! If Sally finds a business partner who has the business experience and some personal funds to put towards the set-up of the restaurant, who would be happy to take care to the business, management, marketing roles while Sally does the cooking, then that is the option that I would recommend for Sally. People do better and are more motivated when they are doing what it is that they want to do. Sally would be better off not taking a franchise of Pizza Delight as she would eventually get bored again due to the lack of independence and would quit like she did at her old job. If Sally commits to her restaurant and is motivated enough, she could make it succeed, with the help of someone who has business experience. 1.7 Exam Practice Question: Growth strategy in dispute at Traffic Clothing Plc 1. Explain the difference between internal and external growth. [4 marks] There are two methods of growth that are used by businesses; the first is internal (organic) growth. Organic growth occurs when a business grows internally, using its own resources to increase the scale of its sales revenue and operations, and is generally funded by the profits of the business. 91 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered An example of internal growth would be a retailing business opening more shops in towns and cities where it previously had none. The second method of growth is external (inorganic) growth, which occurs through dealing with outside businesses and organisations. This growth occurs via takeovers (acquisitions) of and mergers (alliances) with other businesses. A merger is an agreement by shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owning shares in the newly merged business A takeover is when a company buys over 50% of the shares of another company and becomes the controlling owner – often referred to as ‘acquisition’. 2. Explain how the business increased sales revenue, yet gained no increase in profits for the last five years. [5 marks] Traffic Clothing Plc. uses the growth strategy of organic growth, they use their own resources (the money from profits) to fund the growth of its operations, and therefore sales revenue, this partially explains why no profit increases have been seen. TC’s sales revenue is determined by the number of products sold multiplied by the price of each product. TC’s profits are (largely) determined by the amount of revenue generated through sales, less the costs of production. The most likely explanation that could account for increased sales revenue but lower profitability for TC is that their products are price elastic. If TC decreases prices then increased customer demand for their products will increase total revenues. However, as increased production is needed then total costs are likely to increase. A lower unit price leads to a lower unit contribution, and if the unit contribution is not compensated by a large enough increase in sales, then profits at TC may be unchanged or even decrease. Just the answers! The case study refers to several other reasons for why Traffic Clothing Plc. has not increased its profits; the first is that there have been many new competitors entering the clothing manufacturing and producing market. This has led to competitive prices driving down the price paid by consumers, therefore, decreasing the profits made. The second factor addressed by the case study is that raw material prices have been rising; this would cause the Traffic Clothing Plc.’s costs of production to increase, decreasing their profits. The last element considered by the case study is that horizontal integration mergers have been made between large clothing retailers. This negatively impacts on the profits made by Traffic Clothing Plc. because the merged firm was then able to pool their resources (funds) which enabled them to purchase much more product from Traffic Clothing. These are some of the reasons for why Traffic Clothing has not seen any increases in profits despite the increased sales revenue. 3. Evaluate a cost leadership strategy for this business. [8 marks] Cost leadership is one of Porter’s Generic Strategies for being able to successfully compete within a market or markets for their goods and services. Porter’s generic strategies are shown in the table below. 92 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Advantage Target scope Low cost Product uniqueness Broad (industry wide) Cost leadership strategy Differentiation strategy Narrow (market segment) Focus strategy (low cost) Focus (differentiation) strategy Table 1: Porter's generic strategies Cost leadership is a business strategy that was developed by Dr Michael Porter that can be used to enable firms to maintain their competitive advantage. Cost leadership means to become the lowest cost supplier of a product within the market; basically it means to have the lowest cost of operations in the industry to be able to offer to customers a lower priced product than your competitors. There are advantages and disadvantages to using this strategy that Traffic Clothing Plc. will have to take into consideration. The Cost leadership strategy: Being the lowest-cost producer in the industry for a certain level of product quality will allow the firm to make higher profits than rivals or, if it lowers its prices below the average of competitors, to increase market share. Ryanair, one of Europe’s largest and most profitable airlines, is also the lowest average cost airline. This is the strategy being proposed by the finance director and her proposed strategy of rapid external growth. She argued that this could be achieved by aggressive takeovers of either clothing producers or material suppliers to achieve cost leadership. Businesses adopting this strategy either sell products at average industry prices to earn higher profit than rivals or below industry average prices to gain market share. Ryanair adopts the second of these pricing strategies. The cost leadership strategy usually targets a broad rather than a niche market. Cost leadership often stems from the following internal strengths:   Just the answers!  High levels of investment in advanced production methods, requiring access to much capital. There is no indication that TC has this capital or cost effective access to a significant source of new finance. Efficient production methods, e.g. low stock levels and low numbers of components used to shorten the production process. Operations at TC’s factories may need to move to a just in time stock management system for this strategy to work effectively. Efficient distribution channels, e.g. supply chain management and distribution needs to be very, very efficient for this strategy of TC to be effective. Traffic Clothing has already open low-cost factories in developing countries this is an example of cost leadership as the factories in the less economically developed countries will be cheaper to run than factories in more developed countries. It is easy to see why cost leadership is beneficial because your profits are what is left of your revenue after the costs have been subtracted, therefore, the lower the costs, the more profit which is beneficial to the company. There is also the possibility of competitive pricing in the market of clothing manufacturing. This is when the rivals of Traffic Clothing lower their prices in order to be relatively more affordable to the customers, however, Traffic Clothing would respond by lowering their prices further. This 93 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered would continue until intervention by the government or until one business stops lowering their prices as they still need to make a profit and to do this the price of the product must be greater than the cost per unit to produce it. In this case having cost leadership would also be beneficial as it would allow Traffic Clothing to lower its prices more competitively to increase market share. Some of the methods used by clothing manufacturers to lower costs, such as sweat shops, are objected to by customers, Traffic Clothing has used this method by opening low-cost factories in less developed countries, to lower costs which could possibly damage its reputation, leading to an overall decrease in profits. In conclusion, if cost effective and sufficient sources of finance could be found, cost leadership may be a good method for Traffic Clothing Plc. to sustain their competitive advantage; however, they will have to be cautious of how they cut their costs and achieve the efficiencies required. 4. Evaluate a differentiation or a focused strategy for this business. [8 marks] A differentiation focus strategy is one of Porter’s Generic Strategies for being able to successfully compete within a market or markets for their goods and services. Porter’s generic strategies are shown in the table below. A focus strategy should be pursued by TC if it has a unique product and a narrow market segment. This is the strategy being proposed by the Marketing Director. The marketing director suggested focusing on a smaller, higher-income market segment with TC’s own stores. She believes that this will allow differentiation in a crowded market. Advantage Target scope Low cost Product uniqueness Broad (industry wide) Cost leadership strategy Differentiation strategy Narrow (market segment) Focus strategy (low cost) Focus (differentiation) strategy Table 2: Porter's generic strategies Just the answers! The focus strategy This concentrates on a narrow market segment, aiming to achieve either a cost advantage or differentiation. This can lead to a high degree of customer loyalty within the market segment. For example, Princess Boats has a loyal consumer following for its uniquely designed luxury motor boats – some models costing millions of dollars. Discount retailers, on the other hand, focus on low-income market segments through a strategy of low costs leading to low prices. As the focus strategy can lead to imitation by rivals, continued success will depend on continuing to tailor a broad range of products to a relatively narrow market segment that the business knows very well. It would appear that TC is in a position to do this, however there must be major uncertainties about positioning the company as a clothing retailer. Management will need to quickly learn a whole new skill set for a merger strategy to successfully achieve a growth objective. 94 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Focus will be successful if TC can target a niche or single segment of the market; e.g. the high-end fashion segment. This is what the marketing director is suggesting, “…focusing on a smaller, higher-income market segment.” Focus can be extremely beneficial to a business as it allows them to change the prices as they please, generally increasing the prices, and also there is little competition in focused markets. It would be fairly simple for Traffic Clothing Plc. to focus their business on higher earning customers as all of the equipment and many of the resources that are required are the same. Therefore, there would be little cost involved to make this change to their business. Just the answers! There is, however, always risk involved in changing market strategies, it is entirely possible that Traffic Clothing’s products would not be wanted by high income earners, and therefore, retailers aiming their products at high income earners will not want to purchase the products. In this case traffic clothing has to make the decision as to whether they want to take the risk and move into a focused market that they have little to no experience in, or stay in their current market where they are fairly successful. 95 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 1.8 Change and the Management of Change Activity 1.8B: Constant change a feature of modern industry 1. Explain why it is likely that will be almost constant change occurring within businesses such as Britax. [6 marks] Causes of change can be both external and internal, incremental or dramatic.  External causes: Today, change in business is not the exception but the rule – it has become an accelerating and ongoing process. ‘Business as usual’ will become increasingly rare as global, economic and technological upheavals necessitate a business response. This has been particularly true of the music and entertainment industry with new technologies (think MP3, music sharing and new competitors such as ‘Spotify’ and ‘Pandora’) driving much of the change associated with these businesses. New products and new processes now abound in industries and existing companies such as Britax must change and adapt themselves in order to survive and prosper.  Internal causes: Just the answers! Internal causes of change are common. Businesses are always seeking ways to improve their competitive competition and improve on strategic goals, such as maximising shareholder returns. Cost cutting to improve competitiveness would be a classic example of an internal cause of change within an organisation. This is where a firm may seek to use more capital intensive rather than labour intensive production methods, or rationalise their operations, for example by closing some operations.  Incremental change Evolutionary or incremental change occurs slowly over time. The trend towards more and more music being delivered to the consumer over the internet through services such as iTunes has been gradually taking place over the last few years. Such change can be either anticipated or unexpected. The decision by Spotify to stream music to the consumer was signaled well in advance but a new court ruling on ‘net neutrality’ or digital rights management may not have been expected. Incremental changes that are expected tend to be the easiest to manage. 96 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered In extreme cases, dramatic change might lead to a total rethink of the operation of an organisation – this is called business process re-engineering. Business process re-engineering fundamentally rethinking and redesigning the processes of a business to achieve a dramatic improvement in performance. 2. Outline two ways in which Britax reduced resistance to change. [6 marks] Britax has done two things that are usually effective in reducing the resistance to change. Firstly they have communicated the changes well and have signaled that there will be a focus on staff training. The vital importance of communicating effectively with the workforce is a feature of all the stages. The focus on training allows staff to feel that they are able to make a real contribution to the changed organisation. Secondly, project teams have been set up, whereby problem solving through team building is a structured way to make a breakthrough in a difficult change situation. It uses the power of a team. Project groups created by an organisation to address a problem that requires input from different specialists. When a difficult problem arises during implementation of a major change in a business’s strategy or structure, a project group may be set up to analyse it and recommend solutions. Project groups work with the manager responsible for introducing the change. A team meeting of experts should involve a rigorous exchange of views leading to the development of an appropriate action. The responsibility for carrying out the plan lies with the original manager, but he or she will be better equipped to solve the problem that was preventing change from being implemented effectively. 3. Analyse how force-field analysis and project champions could have helped during this change. [10 marks] Force Field analysis: Force-field analysis, first developed by Kurt Lewin, provides a framework for looking at the factors (forces) that influence change. These forces can either be ‘driving forces for change’ that help the organisation towards a goal or ‘restraining forces against change’ that might prevent an organisation reaching its goal. Just the answers! Force-field analysis is an analytical process used to map the opposing forces within an environment (such as a business) where change is taking place. Steps in force-field analysis: 1. Outline the proposal for change; for example in the Britax case, introducing the new IT system – insert in the middle of a force-field diagram 2. List forces for change in one column and forces against change in the other. 3. Assign an estimated score for each force, with 1 being weak and 5 being strong. 97 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Forces for change (Driving forces)  Forces against change (Restraining forces)  Increased administrative efficiency (3)  Improved customer service (3) New IT system Cost of IT system and training (4)  Improved internal communications  Staff losses (3) (2)   Staff concern about new technology (2) Improved supplier communication (2) Total: 10  Environmental impact of new technology (2) Total: 11 The numerical scores indicate whether the forces are weak (e.g. 1) or strong (e.g. 5). Once the analysis has been carried out, the process can help management improve the probability of success of this major change. For example, by training staff (which might increase cost by +1), their concern about new technology could be reduced (reducing staff concern by -2). Using Lewin’s model has several benefits for Britax:     The force-field diagram helps managers weigh up the importance of these two types of forces. It helps identify the people most likely to be affected by the change. Examination of how to strengthen the forces supporting the decision and reduce the forces opposed to it. The use of a leadership style that reduces opposition and resistance to change is highlighted as being more effective than forcing through unpopular changes in an autocratic manner. Project champions: Just the answers! A project champion may be appointed by senior management of Britax to help drive a programme of change though a business, such as the IT change being considered in the case study. A project champion is a person assigned to support and drive a project forward. Their role is to explain the benefits of change and assist and support the team putting change into practice. They will be appointed from within the organisation and will be either a middle or senior manager as they must have sufficient influence within the organisation to smooth the path of the project team investigating and planning the change. The project champion will represent the project at board level or other meetings of senior managers and will try to ensure sufficient resources are put in place to be involved in day-to-day planning. 98 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered A project champion is responsible for setting up project groups and teams. The aim is problem solving through team building is a structured way to make a breakthrough in a difficult change situation. It uses the power of a team. Project groups created by an organisation to address a problem that requires input from different specialists. When a difficult problem arises during implementation of a major change in a business’s strategy or structure, a project group may be set up to analyse it and recommend solutions. Project groups work with the manager responsible for introducing the change. A team meeting of experts should involve a rigorous exchange of views leading to the development of an appropriate action. The overall responsibility for carrying out the plan lies with the original project manager and not the project champion and his or her project team, but he or she will be better equipped to solve the problem that was preventing change from being implemented effectively. 4. Evaluate the most important stages in the process of implementing and managing large-scale changes within a business. [10 marks] Business and Management puts business change at the core of much business decision-making. When decisions are made, change more than often results. Change is the continuous adoption of business strategies and structures in response to internal pressures or external forces. Change happens whether businesses encourage and welcome it or not. To take control of change and to ensure it is a positive process, businesses must have a vision, a strategy and a proven and adaptable process for managing change. Change management is the planning, implementing, controlling and reviewing the movement of an organisation from its current state to a new one. It is an important concept because often change is not welcomed and embraced by all within an organisation. There are many factors that can case resistance to change and these factors should be considered when implementing and managing large scale change within a business. Factors causing resistance to change: This is one of the biggest problems faced by organisations when they attempt to introduce change. The managers and workforce of a business may resent and resist change for any of the following reasons: Just the answers!     Fear of the unknown – change means uncertainty, which worries some people. Not knowing what may happen to your job or the future of the business leads to increased anxiety – this results in resistance. Fear of failure – change may require new skills and abilities that, despite training, may be beyond a worker’s capabilities. People know how the current system works, but will they be able to cope with the new one? Losing something of value – workers could lose income, status or job security as a result of change and they will want to know precisely how the change will affect them. False beliefs about the need for change – to allay their fears and to avoid the risks of change, some people fool themselves into believing that the existing system will continue to work without the need for radical change. 99 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered   Lack of trust – perhaps because of past experiences, there may be a lack of trust between workers and managers who are introducing the change. Workers may not believe the reasons given to them for change or the reassurances from managers about the impact of it. Inertia – many people suffer from inertia or reluctance to change and try to maintain the status quo. Since change often requires considerable effort, the fear of having to work harder to introduce it may cause resistance. The importance of resistance factors will vary from business to business. In those firms where previous change has gone well, where workers are kept informed and even consulted about change and where managers offer support and training to the staff involved, resistance to change is likely to be low. Resistance to change is likely to be greatest in businesses where there is a lack of trust and little communication. Authoritative leaders may communicate the reasons for change less well than a democratic leader, but may be more certain and clearer in communicating the requirement for the change. There are certain accepted strategies in change management practice that should reduce impact of, and resistance to, change. This is change management. Managing and leading change successfully is the mark of a good manager. Before setting the change process in motion, managers need to ask four questions:     Is the change anticipated or unexpected? Is the change likely to have a dramatic or less significant impact on the business? Have managers planned for change? To what extent can management control the change process? Without knowing what the change entails, it is difficult to specifically evaluate the four questions above. Nevertheless, it could be assumed that we are considering anticipated change, it is likely to have a significant impact on the business, mangers have planned for the change and, to some degree, and management believes they can control the process. If this is indeed the case then the stages of successful change management need to be considered. Key stages in successful change management: Here is a checklist of essential points that managers should consider before attempting to introduce significant changes in an organisation:  Just the answers!      Where are we now and why is change necessary? It is important to recognise why a business needs to introduce change from the situation it currently finds itself in. New vision and objectives. For substantial changes a new vision for the business may be needed – and this must be communicated to those affected by the change. Ensure resources are in place to enable change to happen. Starting a change and then finding there is too little finance to complete it could be disastrous. Give maximum warning of the change. Staff in particular should not be taken by surprise by change – this will increase their resistance to it (see section above on ‘Factors causing resistance to change’). Involve staff in the plan for change and its implementation. This will encourage them to accept change and lead to proposals from them to improve the change process. Communicate. The vital importance of communicating effectively with the workforce is a feature of all the stages. 100 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered      Introduce initial changes that bring quick results. This will help all involved in the change to see the point of it. Focus on training. This will allow staff to feel that they are able to make a real contribution to the changed organisation. Sell the benefits. Staff and other stakeholders may benefit directly from changes – these need to be explained to them. Always remember the effects on individuals. A ‘soft’ human resource approach will often bring future rewards in terms of staff loyalty when they have been supported and communicated with during the change process. Check on how individuals are coping and remember to support them. Some people will need more support than others – a ‘sink or swim’ philosophy will damage the business if it leads to low quality output or poor customer service because staff were poorly supported during the change period. As can be seen above, change management is really an evaluation of how it affects people within the organisation. The best way to ensure that change management is successful lies in the nature of the change itself and art of communicating the new changes within the organisation. 1.8 Exam Practice Question: HMV buys MAMA Group in live music takeover deal 1. Define the term change management. [2 marks] This involves planning, implementing, controlling and reviewing the movement of an organisation from its current state to a new one. 2. Explain the role a project team may have in changing the direction of HMV. [4 marks] Project team: a group of employees entrusted with managing a defined project (this may be a change management project). The team may consist of specialist employees required for the success of the new project. Identified role responsibilities may include: Just the answers!  Identification of areas for change, e.g. change by acquisition, Pure HMV loyalty card scheme, 50% stake in 7digital, pilot HMV Curzon-branded cinema in Wimbledon  Establishment of new vision and objectives  Ensuring resources are in place  Planning change, e.g. timing, HR hiring, firing, and/or retraining needs, finance, legal requirements  Implementing processes relating to the change  Controlling and monitoring the new processes 101 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered  Reviewing the effect of the processes  Conflict avoidance measures, for example:  Education of major stakeholders, e.g. shareholders, who must approve the MAMA offer  Communication  Involving major stakeholders in the decision-making process  Supporting staff  Negotiating  Manipulating or threatening where there is still resistance to change. 3. Analyse two driving forces and two restraining forces which are influencing HMV’s ‘transformation plan’ as it tries to change the direction of the organisation. [8 marks] Driving and restraining forces: these are the opposing factors which may help or hinder HMV’s transformation change and affects the plan’s chance of success. Driving forces may include:  Falling sales and growth of illegal downloads, which may make internal stakeholders more willing to co-operate. There can be no doubt that as traditional music sales continue to decline, HMV’s sales revenues and profitability are going to be negatively affected. This may be used as a selling point for change within the organisation, because without a change in strategic direction the company will inevitably fail and shareholder and worker job losses will ensue.  Management enthusiasm for expanding into live music as a new market. As much of stakeholder interest in HMV will derive from an intrinsic love of music, this may be effectively communicated as a selling point in the associated change. Perhaps staff and shareholders could be offered special rates at concerts, corporate boxes, etc. Restraining forces may include: Just the answers! Conflict arising from resistance to change  HMV may not be recognised as a significant player in the live music market which may be detrimental in being able to attract the big names in music (e.g. Arctic Monkeys) to their venues.  Finance – this is a significant acquisition for HMV and its shareholders and if bank loans are used to fund the acquisition interest payments may be burdensome and affect HMV’s cash flow position. If additional shareholder equity is required for the financing, then there will be a dilution of ownership and control of the company for those not willing to invest additional equity at the expense of those who do. And, of course, if the venture fails then major financial losses will ensue. 102 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 4. Using an appropriate business model, analyse how HMV’s takeover of the MAMA Group will give it a competitive advantage in the industry. [6 marks] Forces for change (Driving forces)  Forces against change (Restraining forces) Need for a new area of operation to compensate for problems in traditional areas (5)    Cost of convincing shareholders to approve the takeover (1)  Differences in corporate Takeover of MAMA Group Enthusiasm of management (3) cultures (3) Wider market (spreads operational risk) (3)   Improved profitability (3)  subsume MAMA into HMV (4)  Access to new expertise in MAMA Group (1) Total: 15 Time and costs required to Potential staff redundancies (3)  Training costs (1) Total: 12 Just the answers! One method to aid the managers of HMV to assess the change taking place is force field analysis. It is a framework for helping managers to understand the pressures for and against any change situation such as the proposed takeover of MMA Group. By identifying these forces, managers are able to assess the effects that the forces may have and to decide on a course of action. By carrying out a FFA, managers at HMV can then plan to strengthen the forces supporting the decision for change, and reduce the impacts of opposition to it. In the FFA business model above, the driving forces are those factors that push for change. The restraining forces act against a proposal for change. The relative strengths of the forces will determine whether change takes place. As can be seen above the driving forces of taking over the MMA Group outweigh the restraining forces by a ratio of 15:12. Thus, factors such as new areas of operation and improved profitability and reduced risks from diversification are likely to give HMV an improved competitive position in the music industry, even though the changes are likely to cause problems for HMV and its competitiveness. Identifying different driving forces enables management to work on improving the strength of these forces for change. For example, perhaps new opportunities may manifest themselves to management as they consider the new expertise that will be gained from the takeover. If something significant is identified this can be communicated and used to drive the change process more strongly. Likewise, by identifying specific restraining forces such as differences in corporate culture, strategies can be put in place from the outset that could minimise any disruption that could be caused from this factor, thus reducing the weighting and the effect of any 103 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered disruption this particular factor may produce. This is likely to make the change more effective, and the overall competitiveness of HMV in the industry should be further improved. This model does not solve the problems of change management, but it helps the managers of HMV to assess the forces more clearly. In fact, it can be argued that the improvements in HMV would not necessarily be the result of this one-off change but that small adjustments to the forces can result in many small improvements and changes, thus further strengthening its competitive position. However, the main disadvantages of FFA include:   Weightings attached to the forces may be subjective rather than referring to facts or evidence. Not all of the relevant forces may be considered, perhaps to deliberately over-emphasise the need for change. Just the answers! In the HMV case study, it would appear that on the basis of the above FFA, the takeover of the MMA group should strengthen the competitiveness of the company. 104 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 1.9 Globalisation Activity 1.9A: South Africa accelerates car production 1. Define multinational company and outline examples of companies in the case study that meet this definition? [4 marks] Multinational companies are business organisations that have their headquarters in one country, but with operating branches, factories and assembly plants in other countries. South Africa is said to be the production and export base for some of the world’s biggest auto manufacturers. Japanese automobile firms such as Nissan and Toyota and American firms such as GM and Ford are unlikely to be headquartered in South Africa. 2. Using the case study as well as your own knowledge, explain three reasons for the manufacturers setting up factories in South Africa. [6 marks] There are several reasons why businesses start to operate in countries other than their main base. Closer to main markets – this will have a number of advantages:  Lower transport costs for the finished goods.  Better market information regarding consumer tastes as a result of closeness to them.  May be looked upon as a local company and gain customer loyalty as a consequence. ii. Just the answers! i. Lower costs of production – apart from lower transport costs of the completed items, there are likely to be other cost savings:  Lower labour rates due to much lower demand for local labour compared to developed economies  Cheaper rent and site costs, again resulting from lower demand for commercial property – these cost savings can make the ‘local’ production very efficient in terms of the market in the rest of the world and can lead to substantial exports  Government grants and tax incentives designed to encourage the industrialisation of such countries. 105 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered iii. Access to local natural resources – these might not be available in the company’s main operating country, this is particularly true in South Africa where information in the case study specifically cites “massive platinum and palladium deposits”. 3. Analyse the benefits South Africa appears to be gaining from such investment. [8 marks] There are a range of potential benefits:  The investment will bring in foreign currency and, if output from the plant is exported, further foreign exchange can be earned. As foreign investment from firms such as large, multinational car manufacturers pours into a developing country such as South Africa, Japanese Yen and American dollars are traded for the South African rand to set up mining, manufacturing and production facilities which can constitute billions of dollars of investment. This improves a country’s balance of payments and enables the country to afford to purchase more imports than it previously could. Likewise, if products (such as cars) are produced in a developing country and exported overseas then much of these revenues will be returned to the producing country. Again, better enabling a country to ‘pay its way’ in the world.  Employment opportunities will be created and training programmes will improve the quality and efficiency of local people. Developing, expanding and opening new mining and production facilities in a developing country logically brings a lot of new jobs and employment that benefits households in these countries. More local people are employed and the average income of the country rises. This is especially true of low wage countries such as South Africa, where labour intensive production may make better financial sense for these companies than heavily capital intensive industries. It may well reduce manufacturing costs for Toyota to use people on the production line in South African factories rather than expensive robotics. Training programmes and on the job training will raise the average skills and productivity (output per worker) in the industries where this investment takes place. Multinational firms will often need to invest heavily in skills and training programmes to develop staff to meet the demands of production processes that have been developed and refined for efficiency and high productivity. Just the answers!  Local firms are likely to benefit from supplying services and components to the new factory and this will generate additional jobs and incomes. If car manufacturers set up and expand production and manufacturing facilities in South Africa then local firms are going to profit from supplying these firms with goods and services. For example, a car manufacturer will need electricity to run its plant and equipment, food for workers, roads, transport services, etc. It is likely that local firms will gain these contracts, profit and hire additional workers.  Local firms will be forced to bring their quality and productivity up to international standards either to compete with the multinational or to supply to it. For local firms to be contracted to supply international firms, then productivity of these firms must be very high to be competitive in their contract bids. Firms will look to invest in capital goods and training 106 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered programmes to raise their efficiency, productivity and become price competitive. Economic growth is inherently linked to productivity gains in a country.  Tax revenues to the government will be boosted from any profits made by the multinational. Profits from multinational and subsidiaries, as well as from the expansion of domestic firms supplying the multinationals will be taxed – company tax. Additional workers employed will contribute added income tax. As incomes rise so too will the income tax take, but so too will goods and services (VAT) taxes – or consumption taxes – as more is consumed in the South African economy from workers in new employment and on higher wages. Further, unemployment benefits and transfer payments in general, may well be reduced. This frees the South African government up to spend this money on other goods and services (e.g. education and health).  Management expertise in the community will slowly improve when and if the ‘foreign’ supervisors and managers are replaced by local staff, once they are suitably qualified. This will add to the overall talent pool in the South African economy. Newly skilled and experienced managers will then be able to transfer these skills into other firms in the South African economy increasing productivity, competitiveness and profitability of South African firms.  The total output of the economy will be increased and this will raise Gross Domestic Product (GDP). Economic growth will ensue. With economic growth comes an increase in the nation’s standard of living – especially if redistribution policies (e.g. progressive taxation, free health and schooling) are in effect to reduce inequality within South Africa. 4. Evaluate whether the government of South Africa should continue to support investment by multinational businesses in its economy. [10 marks] Just the answers! Globalisation is the growing trend towards worldwide markets in products, capital and labour, unrestricted by barriers. Within the context of globalisation lies multinational companies. Multinational companies are business organisations that have their headquarters in one country, but with operating branches, factories and assembly plants in other countries. These firms have benefited greatly from the freedoms offered by globalisation. They are more than just importers and exporters; they actually produce goods and services in more than one country. The biggest multinationals have annual sales turnovers exceeding the size of many countries’ entire economies. This sheer size – and the power and influence it can bring – can lead to many problems for nations that deal with such firms. This point is made more obvious by the fact that many of the largest multinationals have their head offices in western European countries or in the USA, yet have many of their operating bases in less-developed countries such as South Africa with much smaller economies. If the companies need to save costs by reducing the size of their workforces, often the last countries to lose jobs will be the ones where the head offices are based. Interestingly, there is now the significant development of large companies from emerging markets – such as De 107 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Beers from South Africa, a (diamond) mining company – opening operations in developed countries such as Canada. Should the government of South Africa continue to support investment by multinational businesses in its economy? The answer to this question will emerge once we have evaluated the positive impact of multinational operations in South Africa and weighed these against the more negative aspects of multinational operations in South Africa. Evaluation of impact of multinational operations on the host country – South Africa There are a range of potential benefits: There are a range of potential benefits:  The investment will bring in foreign currency and, if output from the plant is exported, further foreign exchange can be earned. As foreign investment from firms such as large, multinational car manufacturers pours into a developing country such as South Africa, Japanese Yen and American dollars are traded for the South African rand to set up mining, manufacturing and production facilities which can constitute billions of dollars of investment. This improves a country’s balance of payments and enables the country to afford to purchase more imports than it previously could. Likewise, if products (such as cars) are produced in a developing country and exported overseas then much of these revenues will be returned to the producing country. Again, better enabling a country to ‘pay its way’ in the world.  Employment opportunities will be created and training programmes will improve the quality and efficiency of local people. Just the answers! Developing, expanding and opening new mining and production facilities in a developing country logically brings a lot of new jobs and employment that benefits households in these countries. More local people are employed and the average income of the country rises. This is especially true of low wage countries such as South Africa, where labour intensive production may make better financial sense for these companies than heavily capital intensive industries. It may well reduce manufacturing costs for Toyota to use people on the production line in South African factories rather than expensive robotics. Training programmes and on the job training will raise the average skills and productivity (output per worker) in the industries where this investment takes place. Multinational firms will often need to invest heavily in skills and training programmes to develop staff to meet the demands of production processes that have been developed and refined for efficiency and high productivity.  Local firms are likely to benefit from supplying services and components to the new factory and this will generate additional jobs and incomes. If car manufacturers set up and expand production and manufacturing facilities in South Africa then local firms are going to profit from supplying these firms with goods and services. For example, a car manufacturer will need electricity to run its plant and equipment, food for workers, roads, transport services, etc. It is likely that local firms will gain these contracts, profit and hire additional workers. 108 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered  Local firms will be forced to bring their quality and productivity up to international standards either to compete with the multinational or to supply to it. For local firms to be contracted to supply international firms, then productivity of these firms must be very high to be competitive in their contract bids. Firms will look to invest in capital goods and training programmes to raise their efficiency, productivity and become price competitive. Economic growth is inherently linked to productivity gains in a country.  Tax revenues to the government will be boosted from any profits made by the multinational. Profits from multinational and subsidiaries, as well as from the expansion of domestic firms supplying the multinationals will be taxed – company tax. Additional workers employed will contribute added income tax. As incomes rise so too will the income tax take, but so too will goods and services (VAT) taxes – or consumption taxes – as more is consumed in the South African economy from workers in new employment and on higher wages. Further, unemployment benefits and transfer payments in general, may well be reduced. This frees the South African government up to spend this money on other goods and services (e.g. education and health).  Management expertise in the community will slowly improve when and if the ‘foreign’ supervisors and managers are replaced by local staff, once they are suitably qualified. This will add to the overall talent pool in the South African economy. Newly skilled and experienced managers will then be able to transfer these skills into other firms in the South African economy increasing productivity, competitiveness and profitability of South African firms.  The total output of the economy will be increased and this will raise Gross Domestic Product (GDP). Economic growth will ensue. With economic growth comes an increase in the nation’s standard of living – especially if redistribution policies (e.g. progressive taxation, free health and schooling) are in effect to reduce inequality within South Africa. The expansion of multinational corporations into a country could lead to these drawbacks: Just the answers!   Exploitation of the local workforce might take place. Due to the absence of strict labour and health and safety rules in South Africa (or their lax enforcement through funding issues or bribery and corruption), multinationals can employ cheap labour for long hours with few of the benefits that the staff in their base country would demand. Recent poor publicity has forced the Gap and Nike clothing companies to improve their monitoring of the employment of illegal child workers at factories that produce their clothes in Thailand. It is possible that the same exploitation could occur in South Africa if proper oversight was not in place. How many large businesses would not care about these practices, especially as the factories are removed from Western European and American media investigation? Pollution from plants might be at higher levels than allowed in other countries. Either this could be because of slack rules or because the South African government is afraid of driving the multinational away if it insists on environmentally acceptable practices. This is a sign of the great influence multinationals can have. The worst example of this was the Bhopal gas leakage from the US-owned Union Carbide plant in 1984 which killed thousands of workers and residents. Mining is a notoriously environmentally damaging practice, lax regulations in South Africa could compound the environmental damage caused by mining. 109 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered     Local competing firms may be squeezed out of business due to inferior equipment and much smaller resources than the large multinational. This could be true for inefficient local mining firms, but South Africa does not have a local car manufacturing industry. Some large western-based businesses, such as McDonald’s and Coca-Cola, have been accused of imposing western culture on other societies by the power of advertising and promotion. This could lead to a reduction in cultural identity. Profits may be sent back to the country where the head office of the company is based, rather than kept for reinvestment in the host nation. Profits will either be repatriated to overseas shareholders in the form of dividends or payments to parent companies from their South African subsidiaries. Much could be reinvested and the financing of costs is likely to largely remain in the host country. Extensive depletion of the limited natural resources of some countries has been blamed on some large multinational corporations. The argument is that they have little incentive to conserve these resources, as they are able to relocate quickly to other countries once they have run out. This is potentially the case in South Africa where information in the case study specifically cites “massive platinum and palladium deposits” – these resources could be quickly exploited with large scale mining operations. However, in balance, it is likely that the benefits of multinational operations in South Africa outweigh the disadvantages to a very large extent. After all, this is why governments around the world go out of their way to make their countries investment friendly and welcoming to foreign direct investment and the establishment of multinational operations in their own country. South Africa should welcome these firms, especially so if there is a system of regulations and enforcement of labour and environmental standards, adequate taxation and redistribution policies to reduce the inequality that follows. 1.9 Exam Practice Question: Strong rumours that Kraft is looking to take over Cadbury 1. Define the term Globalisation. [2marks] Just the answers! This is the free trade of goods, capital and labour in worldwide markets. It is unrestricted by trade barriers such as tariffs and quotas. 2. Explain two potential advantages to Kraft of taking over Cadbury. [4 marks] Takeover: A takeover is when one business, usually the larger one, buys controlling interest of another business. This may often be as much as 100% of the company but may be as little as 51%. 110 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Advantages may include:   Instant growth. A takeover will lead to a larger firm. There are many benefits that accrue with growth such as being able to employ specialist professional managers, benefit from cost reductions associated with large scale production, may be able to have increased price setting power, have access to more preferential sources and terms of finance, and could allow the newly larger firm to afford research and development into new products and processes. Increased geographic spread. This doesn’t just open up new markets to Kraft where Cadbury is particularly strong it also allows the company to spread risk (e.g. geographic – if one market or product suffers a fall in demand, then other products and markets will still remain profitable). They could now market simultaneously across their different markets, reducing promotional costs, and also acquire local experts and supply chain contacts. 3. Analyse the problems Kraft might experience as it tries to enter the European chocolate market. [6 marks]    Just the answers!    A lack of understanding of local culture and tastes and preferences. Kraft is an American company and has successfully produced chocolate for the American market. It will need to take time to integrate European managers and specialists into the new organisational structure to learn and benefit from the expertise of these European managers. Human resource management could be problematic initially as European and American corporate culture is likely to be quite different. A lack of local contacts and supply or distribution chains. The management at Kraft will need to do much to retain European management talent within the new organisation. The European management will have much local knowledge and a network of contacts within its supply chains and the distribution of its product. It will be essential for Kraft to retain this knowledge and integrate it into the new, larger company, if it wants to retain the profitability that the Cadbury brand will bring. Resistance to American brands. There is likely to be consumer resistance to American brands within the UK and beyond. Cadbury is a quintessential UK brand that UK consumers have grown up with and have come to associate with being ‘British’. The product has been developed with market research into the tastes and preferences of the UK consumer. It is likely that Kraft will not be repackaging Cadbury chocolate under the Kraft brand. Difference in local tastes. As the case study mentions, American chocolate preference appears to be for sweeter less chocolaty chocolate. Again, it is unlikely that Kraft will try to alter a successful European product but it will need to ensure that new products are developed with the full range of market segments in minds; i.e., a new product will be a response from a demand from UK consumers, and not necessarily from the US consumer. Different languages. This is unlikely to be much of an issue. The UK and US are primarily and heavily English speaking. Cadbury will have skilled staff and managers who are fluent in the different European markets. Kraft would do well to retain these staff and incorporate them into the new organisational structure. Time difference between Europe and the USA. 111 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered  This is an issue that could be relevant as a barrier to fast, effective communication between head-office in the US with operations in the UK. Different European laws regarding product content, advertising, etc. Management in the US will quickly need to come up to speed with these European regulations so they will be able to factor the new information into any strategic European decision. It would be advisable for Kraft to pay special attention to retaining the European consumer law experts presumably currently employed in Cadbury’s operations. 4. Discuss how Ansoff’s matrix model might have been useful to Kraft in making the decision to take over Cadbury. [8 marks] Ansoff’s matrix is a model used to show the degree of risk associated with the four growth strategies of market penetration, market development, product development and diversification. Just the answers! Sell more in existing markets Sell new products in existing markets Sell existing products in new markets Sell new products in new markets 112 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Market penetration: The objective of achieving higher market shares in existing markets with existing products. This particular strategy is not applicable if Kraft have no existing brand presence in the European chocolate market. However, it is likely that they will have at least a small European presence to cater for American expats living in London, Paris, etc. Market penetration within the Ansoff matrix will refer to the Cadbury brand/products.     It is a low-risk strategy. Cadbury is a successful brand with a range of well-established products that already has a substantial share of some European markets, especially the UK market. Improving penetration of the Cadbury branded products may be achieved by improving the marketing mix. Promotion can be focused on existing customers making more purchases. Kraft may see opportunity to reposition some existing Cadbury brands/products. Market development: The strategy of selling existing products in new markets.    This is a medium-risk strategy – can be risky if have little knowledge of the new market. Kraft will have to retain European skills and expertise from its Cadbury operations for this to be successful. New distribution channels will be required to sell in new markets. These channels can take time and expense to set up and establish. Marketing changes – product/packaging/pricing may need to be adapted to new market. Product development: The development and sale of new products or new developments of existing products in existing markets.   This is a medium-risk strategy – may be suitable if existing products have reached saturation or decline. It is often a reason why businesses acquire new businesses. The product range of the new Kraft-Cadbury company will be much larger. There may be products in the Cadbury brand which could fare well in the US market and similarly, some existing Kraft products could be introduced into the UK and other European markets. Just the answers! Diversification: The process of selling different, unrelated goods or services in new markets.     This is a high-risk strategy If successful, it will enable the company to gain market share in existing markets. It enables the company to spread risk. New markets and new products if successfully developed and marketed would enable the company to continue to be profitable if the demand for a particular product or demand in a particular market decreased significantly. Again, this is often a reason why businesses acquire new businesses, and as such could be very applicable to the acquisition of Cadbury by Kraft. Ways in which Ansoff’s matrix is useful:  It helps businesses analyse market growth and product strategies. 113 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered   It provides a formal basis for logical and systematic analysis so that all options are considered. It encourages consideration of alternative strategic options. Essentially, the senior management of Kraft by using an Ansoff’s matrix model in examining this big strategic decision are examining the risk of such a decision. The risks involved in these four strategies differ substantially. By opening up these options, Ansoff’s matrix does not direct a business towards one particular future strategy. However, by identifying the different ways in which a business could expand, the matrix allows managers to analyse the degree of risk associated with each strategy. Managers can then apply decision-making techniques to assess the costs, potential gains and risks associated with all options. In practice, in today’s fiercely competitive world, it is common for large businesses to adopt multiple strategies for growth at the same time. The acquisition of Cadbury will not be the only strategy Kraft has for growth. While Ansoff’s analysis helps to map the strategic business options, it has limitations too. It only considers two main factors in the strategic analysis of a business’s options – it is important to consider SWOT and PEST analysis too in order to give a more complete picture. Recommendations based purely on Ansoff would tend to lack depth and hard environmental evidence. Management judgement, especially based on experience of the risks and returns from the four options, may be just as important as any one analytical tool for making the final choice. Just the answers! The matrix does not suggest detailed marketing options. For instance, market development may seem to be the best option, but which market/country and with which of the existing products produced by the business? Further research and analysis by the management of Kraft will be needed to supply answers to these questions. 114 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Human Resource Management Just the answers! Answer . 115 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Topic 2: Human Resource Management Activity 2.1B Activity 2.1D 2.2 Organisational Structure Activity 2.2A Activity 2.2C Exam Practice 2.3 Communication Activity 2.3A Exam Practice 2.4 Leadership and Management Activity 2.4A Activity 2.4D Exam Practice 2.5 Motivation Activity 2.5A Activity 2.5C Activity 2.5E 2.6 Organisational Structure Just the answers! Activity 2.1A Activity 2.6A Activity 2.6B Exam Practice 2.7 Employer and Employee Relations Exam Practice 2.8 Crisis Management and Contingency Planning Exam Practice 116 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Activity 2.1E Exam Practice Jump to START Exam Practice Interactive! Click or tap to jump 2.1 Human Resource Planning
The IB Business and Management Questions Answered 2.1 Human Resource Planning Activity 2.1A: Global labour mobility 1. Analyse the benefits of increased immigration to: [6 marks] a. McDonalds Corporation in their US operations. Just the answers! The increased immigration to the US would have many benefits to the McDonalds Corporation and their US operations. Increased immigration can lead to an increase in global labour mobility, and for McDonalds this can bring about many advantages. One advantage is that McDonalds would be able to hire workers that may be strong in different areas. Global labour mobility leads to an easing of skills shortages. Hiring skilled migrants can have advantages in that they can take on jobs that cannot be filled by domestic workers, and also as a skills shortage is prevented, wage costs are kept down. This can be a benefit, as for McDonalds, who would have many employees, would benefit from having lower costs in terms of wages and salaries given to the employees. Another benefit is that increased immigration can help in flexible work structures that are adopted by the corporation. McDonald’s is open 24/7, and an influx of workers can help the business stay open for the long hours as migrant workers add to the supply of workers that are willing to work-part time or shift work. Therefore, it can be seen that increased immigration can have a few benefits to the McDonald Corporations Us operations. b. An established technology company, for example IBM, which is struggling to find enough skilled software engineers to satisfy R&D objectives. An increase in immigration can bring about many benefits for an established technology company, such as IBM that is struggling to find enough skilled software engineers to satisfy its research and development objectives. One of the main things that IBM could benefit from is an easing of skills shortage. Migrants coming in can bring in new skills, or particular skills that the company is looking for and these can aid in the company’s operations. Hiring skilled migrant workers can also have two other main advantages in themselves, and that is that they can 117 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered take on jobs that cannot be filled by domestic workers, here due to a lack of ability, but also sometimes due to a lack of willingness. And also, as a skills shortage is prevented, the migrant workers can keep wages down. For IBM, this could mean that instead of hiring software engineers and offering high wages, they can complete the work needed at a much lower cost. Also the increase in immigrants allows a business to employ a flexible and dynamic workforce. In technology companies such as IBM, this is essential as they can bring forward new ideas, experiences and ways of thinking. It can therefore be seen that increased immigration can also help an established technology company. c. Explain how a developed country government might attract immigrants with appropriate skills. [6 marks] There would be many ways that a developed country’s government might attract immigrants with appropriate skills. External recruitment is the process of hiring workers from outside the business, and there are many advantages to this, and that is why the organisation might want to attract immigrant workers with appropriate skills. One way in which this might be done is to offer deals that the immigrants cannot resist. One example of such is offering higher pay, in context of course. Organisations can attract immigrant workers by paying more than they get at current jobs, or if they are working overseas, by enticing them with the benefits of living in the country they are carrying out their operations in. Another way in which a developed country government might attract immigrants is by offering flexible hours. Immigrants are usually more likely to be attracted to flexible working hours, so that if they have families in the country, they are able to be able to spend time on both aspects of their life, especially because they may still be settling into the country. Businesses sometimes also can offer job training opportunities, and so with immigrants who have appropriate skills for the job, they would be able to improve their skills in certain areas. Also, organisations could promote certain aspects of their companies’ corporate culture to appeal to the immigrant workers. Overall though, it would usually be that the organisation would appeal to the needs or wants of the immigrant workers to attract them to their companies. Just the answers! d. Evaluate the Philippine government’s policy of encouraging many of its workers to seek employment abroad. [10 marks] The Philippine government has a policy of encouraging many of its workers to seek employment abroad, and while this comes with benefits to the country, it can bring about a few disadvantages as well. Firstly, there are not enough employment opportunities in the Philippines, and so because for this, the country’s unemployment rate could be quite high, and as a result, the economy could suffer. Through encouraging more workers to seek employment abroad, unemployment decreases, and also there are numerous other benefits as well. By sending people out for work, the people would gain income from working, and usually, this can bring back capital to the country. For example, if there was a family in the Philippines that was struggling to find work and gain income, a member for the family could seek work abroad, and gain income that would then be sent back 118 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered to the family in the Philippines. This income could then be used to for the education of the family as well. Another advantage is that workers could gain work experience and knowledge, and they could come back to the Philippines and improve the country’s industry by starting up businesses in the country, and thereby creating more job opportunities for the country. Capital sent back to the country by workers that are employed overseas can also be used to “improve” the country. For example, capital sent back could be used to for health and education, to build schools, and to further medical research. However, despite all these advantages, there are disadvantages to the Philippine government encouraging many of its workers to seek employment abroad. One of the main disadvantage is the workers could decide that they like living and working in the other country more, and take up residence in the country, and also bring their family with them. And having increasing amounts of workers leaving the country could, in extreme cases, create a shortage of workers in the country, which could cause the country to suffer economically. Overall, it can be seen that while the Philippine government gains many advantages in encouraging its workers to seek employment abroad, the number of workers going abroad should be monitored very carefully to prevent the cause of any serious disadvantages. Activity 2.1B: Economic downturn results in Electrolux job losses 1. Explain why human resource planning (workforce planning) is important to a business such as Electrolux. [6 marks] Just the answers! Human resource planning, also known as workforce planning, is the management process of forecasting an organisations current and future staffing needs. It is an important planning method taken in by businesses, as it has many advantages that businesses, such as Electrolux, can benefit from. Firstly, one of the main advantages of human resource planning is that it can save the business both time and money in the long term. In the case study, it can be seen that currently, Electrolux has been having many problems with the level of the demand of its products. This has resulted in it having a larger workforce then needed, and therefore, labour costs that are comparatively higher than necessary. Human resource planning would help Electrolux take into account its future staffing needs by relating its future demand for its product to the labour required. This would have saved the business both time (in sorting out the problems it currently faces due to the number of current staff) and money, as currently we can see that the business is considering cutting 400 jobs to save $72 million. Another reason why human resource planning is important to a business such as Electrolux is that in the short term it can really help the business if it is going through problem, such as dealing with the management of its staff and human resources. In other cases, where a business might find that it could be low on staff, the business can prepare for this as well. Human resource planning also helps businesses prepare for possible drops in the level of staffing. Examples could be that workers 119 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered retiring or going on maternity leave, and the human resource department can take these into account to prepare for its future staffing needs. If for example Electrolux found that in three months’ time it was planning to take on a long term project to try and improve the current demand for its product, it may find that it may need more research and development staff, and human resource planning could help the business prepare for this. Overall, it can be seen that human resource planning is very important, and not just to businesses such as Electrolux, as the planning aids businesses in preparing for possible future problems. 2. Apart from the global downturn in demand, explain three factors that could influence the number of workers required at Electrolux. [9 marks] Human resource planning requires a consideration of an organisations level of demand (required workers) for labour. The greater the demand for labour, the high the number of vacancies tends to be for a business; however, there are several factors, apart from the global downturn in demand that could influence the number of workers required at Electrolux. Three of these factors could be historical data, flexibility and workload and capital intensity. Just the answers! Firstly, historical data, also known as time series data, of the changes in staffing in an organisation, over a certain period of time, can allow the business to identify trends in the past level of demand for the business. For Electrolux, this could be that Electrolux found in the past that it has always needed quite a large number of staff, being an company that makes appliances, and so would also have quite a large research and development team, would find that it would tend to keep its staffing numbers constantly high. Also, if a trend is found that on average, workers stay for five years, the trend might be expected to continue, and Electrolux could base its number of workers by following the trends. However, it must be taken into account that past data is not indicative of what will happen in the future and so the business should be careful when letting this factor influence its number of workers. Another factor that can influence the number of workers required at Electrolux is the flexibility and workload of the employees. A highly flexible workforce may be able to cope if there is a sudden change in staffing, whereas in a firm where people are over-specialised, there may be a need to employ more workers. This also relates to the size of the business, in which Electrolux, being a relatively large business, will find that its larger workload means that it requires more staff to keep up with demand, however, a global downturn can turn this around in reducing the workload, leaving Electrolux with too many staff. Finally, capital intensity is also a factor that can affect the number of workers required at Electrolux. Capital intensity measures the amount of capital usage in comparison to other factors of production. In the case of Electrolux, a company that would manufacture electrical appliances, it would make sense that the company would have quite a high capital intensity, and this would reduce the number of workers required as productivity could be increased by just buying more machinery instead of hiring more workers, which in the long term can 120 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered save money for the business. Overall, it can be seen that apart from the global downturn, there are many other factors that can influence the number of workers required by Electrolux. Activity 2.1D: India wants more flexible labour contracts 1. Explain the impact on employers and workers of the change in employment contract law in India. [6 marks] Contract of employment refers to the legal agreement between an employer and employee, detailing the terms and conditions of employment (such as the job title, pay and responsibilities of the post holder). In the case study, it can be seen that the Indian government has allowed a change in the employment law, making it so that employers are allowed to shut down business without government permission, if they have less than one hundred employees. This law would have quite a large impact on both the employers and the workers in India. Firstly, for the employers, there would be many benefits f the change in the employment contract law. By being able to let go workers whenever they want, without having to gain government permission, it would mean that if the economy was suffering from a downturn, the employers could end employment contracts so that they do not have to lose money due to labour costs when business is not going to well. In terms of the workers though, it seems that it would not benefit them as much, as when a job is most needed, during an economic downturn, they would lose their jobs, being unable to gain income. Just the answers! However, the one advantage of this change in employment contract law for the workers is that during times when the conditions of the economy is favourable, it seems that employers would have more reason to employ more workers, therefore making it less difficult for workers to find a job. Overall, it can be seen that this change in the law by the government would work out quite well for businesses that are more likely to suffer during an economic downturn. 2. Distinguish between current Indian and Italian labour market laws apparent in the case studies. [6 marks] It can be seen that the current Indian and Italian labour laws are very different, form what can be gathered in the case study. India’s governments recent change in the employment contract law has allowed employers with less than one hundred employees to be able to end their business without government permission, however in contrast to this, the Italian labour market law states that firms with more than fifteen workers cannot get rid of employees, even in a downturn, without risking legal proceedings that can last years. The Indian employment 121 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered contract law therefore makes businesses in India less worried for the state of their business during an economic downturn, as they are able to end employment contracts without concern, and so, during times where the condition of the economy is good, employers are more likely to hire employees, which comes as a benefit to workers as well. In comparison, due to the inflexible laws surrounding employers and employees in Italy, it can be seen that even in times where the economy is okay, Italian employers are careful not to employ workers, and as a result, it can be seen in the case study that a third of Italy’s youth are jobless. Also in the case study, it states that “If a judge then decides the company has acted unfairly, it can be forced to rehire the worker and pay him his lost earnings.” Because of this, the firms have more to lose in the case of hiring employees, unlike the firms in India, and so it is understandable that employers would be more careful when hiring workers. Therefore, while this law makes it constantly difficult for workers to gain work in Italy, workers in India will only really suffer when the economy takes a downturn. 3. Evaluate the employment law the Italian government is seeking to implement. [8 marks] Contract of employment refers to the legal agreement between an employer and employee, detailing the terms and conditions of employment (such as the job title, pay and responsibilities of the post holder). From the case study, it can be seen that the Italian government is seeking to change the current employment contract law. This law currently states that “firms with more than 15 workers cannot get rid of employees even in a downturn without risking legal proceedings that can last years and if a judge then decides the company has acted unfairly, it can be forced to rehire the worker and pay him his lost earnings.” Just the answers! This law currently brings about many disadvantages to both employers and employees. This is because in an economic downturn, employers would have to deal with less than ideal labour costs, and due to the law, employers are also deterred from hiring workers when times are good, as they know that if something happens, they would not be able to let go of their employees. For employees, this makes it very difficult for them to find jobs, and in fact, in the case study it is stated that “a third of Italy's youths are jobless”. The change in dismissal laws would bring about many changes for businesses, and many of these could be seen as benefits. If the current employment contract law is changed to a law that allows businesses to retrench workers when the economy is experiencing a downturn, then employers would not be too concerned with hiring employees when times are good. This may then fix the high unemployment rate amongst youth as well. Also, employers would benefit in that if in an economic downturn, they could retrench workers and save on labour costs as well. However, there is a disadvantage here in that during an economic downturn, many workers would be unemployed, whereas with the current law, employees can be guaranteed that they would have a paying job in difficult times. Overall though, it can be seen that the change in dismissal laws would turn out to bring more advantages than what the current laws hold. 122 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Activity 2.1E: Changing UK employment patterns 1. Explain why part-time employment may be preferred by employees to full-time employment. [6 marks] A part-time employment contract is usually limited to less than 40 hours a week. From the case study, it can be seen that in the United Kingdom, in the past seven years, the total number of part-time employees has been increasing quite steadily since 2005. There could be many reasons for this increase in part-time employment. Firstly, one reason is that there are greater numbers of females and students who choose to work part-time. From the pie chart given in the case study, in can be seen that there were quite a lot of student that took parttime jobs. And with students and female workers, this could be due to the flexibility that part-time work offers, especially considering that both groups here would have prior commitments that they would usually hold to be more important. Another reason for why workers may want to work part-time is that by choosing to work part-time, against fulltime, they do not need to stay at the firm for very long. This provides flexibility for the employees as well. Also, part-time work may be preferential to full-time work in that many people who take part-time jobs could have an interest in other areas of work, and could use the flexible hours provided by part-time work so that they can devote more time into exploring their other areas of interest, and developing skills in that way. Overall, it can be seen that mainly part-time work could be chosen due to the flexible hours that part-time work provides employees, so that employees who are busy with other aspects in their lives can still have a source of income. 2. Examine the benefits a business could gain form employing: [12 marks] Just the answers! a. More staff on part-time contracts There are many benefits that a business can gain from having more staff on a part-time contract. A part-time contract usually limited to a period of less than 40 hours a week. For a business, the main advantage of hiring more part-time staff is that they are cheaper to employ. Part-time employees are generally entitled to lower remuneration packages (pay and benefits) compared to full-time employees. Also, another advantage to the business is that part-time workers are easier to replace, if a replacement is needed. There will always be many workers that are seeking part-time employment, especially considering that today, more and more students and female workers seek part-time employment as well. This gives the business a lot of choice of whom they want to employ as well (e.g. working mothers or college students). Because of this large pool of part-time workers, there would not be a shortage of labour in this area, and so wages would be kept relatively low in relation to full time work as well. This brings in the benefit of keeping labour costs down for the business, and therefore could allow the business to make more profit compared to if they had more full-time workers. Parttime workers are hence said to be very easy to “hire and fire” and so, if the business does need to hire a parttime worker, it would be quite easily done as well. 123 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Finally, another benefit for the business in having more part-time staff is that part-time employment can give the business more flexibility and so it is easier for the business to adjust labour hours to accommodate the fluctuations in demand for their product. Therefore, it can be seen that there are many advantages for businesses to have more staff on part-time contracts. b. More staff on temporary contracts There are also some benefits that a business can gain from having more staff on temporary contracts as well. A temporary contract is usually for a period of time shorter than one year. Temporary workers are also paid less than the permanent, full-time counterparts, and so, again for the business this would mean that labour costs are lowered as lower wages would have to be paid to the workers. Another advantage of having more temporary staff is that it is very easy to find an agency that can help in facilitating the recruitment of temporary workers needed, and so, unlike with finding full-time, permanent employees, temporary employees are much easier to find as well. Along with this, one of the main advantages for employees is that temporary workers can be hired in times where the workload for the business is high, and then can be let go very quickly when the business no longer needs them. N saying this, what is meant is that by having more temporary staff, it is easier for employees to let go of the staff when the business reaches the dips in demand, or if the economy is experiencing a down turn. Therefore, it can be seen that having more temporary staff can also bring benefits to the business; however, overall it seems having more part-time staff brings more benefits. 3. Explain the disadvantages these trends in employment patterns have may have for: [8 marks] Just the answers! a. Workers The increasing trend in more part-time workers will have many advantages to workers, but can also have quite a few disadvantages to workers as well. Firstly, one of the main disadvantages would be that part-time workers are said to be very easy to “hire and fire”. Because of this, for part-time workers there would be a lack of job security and also, this would mean that workers may constantly be looking for jobs, especially in the case where a worker may be looking for full-time employment, and due to the advantages of part-time employees to business, full-time employment may be hard to come by. Another disadvantage is that part-time workers have lower remuneration compared to full-time workers. This equating to lower pay and benefits can make part-time work to be looked on as quite unfavorable by some workers as well. Also, part-time workers may also feel less valued by the business, affecting their own self-motivation and moral. Therefore, it can be seen that while there are advantages to this trend of increasing part-time workers, there are disadvantages to the workers as well. 124 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered b. Employers The trend of increasing part-time employment can actually bring about a few disadvantages to employers as well. There are two main disadvantages here and the first relates to the part-time workers themselves. Compared to full-time workers, part-time workers may feel a lot less valued by their employers, and because of this, they could become less loyal to the business as well. This can negatively affect the organisation’s level of staff motivation and moral. And this in turn could lead to decreasing productivity and could affect the labour turnover, making it too high. Another disadvantage is that a lot of time and resources are consumed in the hiring, induction and training of new part-time staff, and since part-time workers do not tend to stay at the firm for very long, the ongoing process of recruiting and training part-time workers can use up a lot of time and money, along with valuable management time. It could therefore be considered that full-time work I more cost effective. Therefore, it can be seen that this trend in employment patterns also has disadvantages for the employers as well. 2.1 Exam Practice Question: Staff vacancies at Select College 1. Explain the following terms from the case study. [6 marks] a. Human resource management Human resource management refers to the role of managers in developing the organisation’s people (human resources). This will include tasks such as the recruitment, selection, dismissal and training and development of employees. Just the answers! b. Recruitment Recruitment refers to the process of hiring suitable workers. This will entail a thorough job analysis in order to ensure that the best candidate is hired. In the case study, it is shown that the principal thinks that a recruitment agency should be used to select the members they may want to hire. c. Part-time and temporary contract Contract of employment refers to the legal agreement between an employer and employee, detailing the terms of conditions of employment. For a part-time contract, time is usually limited to less than 40 hours a week; however a temporary contract is usually for a period of time shorter than one year. 125 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2. Explain the benefits to the college of workforce planning. [5 marks] Workforce planning, also known as human resource planning is the management process of forecasting an organisations current and future staffing needs. It is an important planning method that has many benefits to the college. Firstly, one of the main benefits is that although in the short term it can costs time and money to undertake, in the long term, both time and money are saved. This is because workforce planning would allow the college to plan ahead for its increases/decreases in workload in the upcoming years. For example, form the case study, it can be seen that the principal has identified, through the use of human resource planning, that the college will need three more administration workers and ten more lecturers. This is due to the fact that it has been identified that more lecturers are needed to set up the science and geography departments, and due to the increasing number of student, more office workers are required to cope with the enrolments. Workforce planning is also beneficial in that, especially for a college, it is necessary that suitable workers are hired to fulfil the job specifications, and here, with human resource planning, by planning ahead, more time can be given to finding that suitable workers to prepare for future staffing needs. Overall, it can be seen that human resource planning is very important and beneficial to the college in that it can help the college prepare for its future staffing needs, especially considering that currently, there is a “shortage in good teachers,” and therefore it may take a while to find suitable teachers to fill the available positions. 3. Analyse the arguments against offering full-time and permanent employment contracts to the new office staff and lecturers. [6 marks] Just the answers! In the case study, it can be seen that the principal is considering that the new office staff and lecturers should not be offered full-time and permanent employment contracts. There would be many reasons why this should be, and one given by the principal is that, because she is paid a share of the college profits each year, she is keen to keep the costs a low as possible, and believes that by hiring part-time and temporary contracts for the office workers, and full-time, and temporary contracts for the lectures, labour costs can be managed. While this argument has benefits in keeping costs down for the college, ideally, excess profits should be feed back into the college to improve its facilities for students. The fact that temporary positions were offered and not full time is due to fact that the college could let go of staff at the end of the year “if either they were poor performers or student numbers were lower than anticipated.” This holds to be a good argument that cannot really be refuted. It is best that the college makes sure that it has teachers that have a good performance and are actually teaching the students what is needed to be taught. Otherwise, the school could gain a bad reputation. Also, the extra lecturers and office workers may not be needed if the student enrolments start to decrease the following year, and so again to ensure that labour costs are not too high, offering temporary work is ideal. Workforce planning is all about ensuring that 126 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered management is able to forecast current and future staffing needs, and act accordingly, however, it must always be taken to account that forecasts may not actually be 100% accurate, and so by accounting for this, and ensuring that the college is not left with excess staff, the principal has argued against offering full-time and permanent work. 4. Evaluate the best ways for Select College to recruit and select new lecturers. [8 marks] Recruitment refers to the process of hiring suitable workers. This entails a thorough job analysis in order to ensure that the best candidate is hired. Since the recruitment and selection process for a business is likely to be quite time consuming and rather expensive, it is crucial that managers ensure the procedures are as effective as possible. Here it would be that it is crucial for the principal to ensure that for Select College, she picks the best way to recruit and select the new lecturers. The principal has suggested that the college “pay a specialist recruitment agency to recruit and select all of the college’s new staff.” There are many advantages to this method; however, there would be disadvantages too. Firstly, the fact that an outside agency would be involved would have the advantage in that they would be qualified in finding the best candidate, and know what makes a good candidate in terms of the specifications they would be given. Also, the college itself would not need to spend time with interviews. However as a disadvantage, the college would obviously have to pay the agency they have hired, and in the end, it could be that the agency does not hire the right people for the job. Further, the principal stated that they would need their services for about six weeks each year. And this could interruptions in the smooth running of the college during the six weeks as well if problems with the recruitment agency arise. Just the answers! However, in the case study, another method has been given by the deputy principal in that, because there is a national shortage of good science teachers, the college needs to be able to “motivate and keep good and professional staff”. Because of this, the deputy principal finds that the college should have full control over how the new teachers are recruited and selected, as the employees are the ones that have to work with the new teachers after all. And while this method would cost the college both time and some money as well, due to the advertising of the job, it would do well in achieving the objectives set out by the deputy principal, and staff could also ensure that staff motivation stays high, and that incoming the lecturers would not change it. Overall though, it can be seen that while the option of the recruitment agency comes with some advantages, it has disadvantages as well that could affect the running of the college, and so, it seems the best method is allowing the principal and deputy principal to carry out the recruitment process as they would best know what to look for in a candidate and also ensure the candidate is right for the school and its aims and objectives. 127 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2.2 Organisational Structure ACTIVITY 2.2A: AAS must change strategy, says new boss 1. Define: a. [4 marks] Hierarchical structure Hierarchy in a business refers to the organisational structure based on a ranking system. The level of hierarchy usually has the CEO at the top, with the unskilled staff at the bottom. Therefore, the levels of hierarchy refer to a different rank with its associated degree of authority and responsibility. In the case study, it can be seen that the managing director of ASS considers the organisation’s current hierarchal structure is considered to be too tall. b. Productivity Productivity measures the level of labour and/or capital efficiency of a business by comparing its level of inputs with the level of outputs. In the case study, it can be seen that ASS must raise its labour productivity if it wants to become profitable. Just the answers! 2. Analyse two possible reasons why the current hierarchical organisational structure of AAS could be contributing to lower levels of labour productivity compared to that of other Airlines. [6 marks] The hierarchy in a business refers to the organisational structure based on a ranking system. From the case study, it can be seen that the current hierarchal organisational structure of ASS is contributing to lower levels of labour productivity, compared to that of other firms. There are many reasons why this could be, and these reasons relate to the fact that ASS has a tall hierarchal structure that has five levels, where it has been stated in the case study that having a two level hierarchal structure would be way more effective. 128 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered A tall hierarchal structure means that there are many layers in the organisational hierarchy, and so this leads to a narrow span of control. A narrow span of control is something that tends to be quite costly, and this is one of the reasons why ASS might have a lower level of labour productivity: because of its high costs in the labour department would make it so that inputs would equate to being a bit more than wanted compared to the outputs. Also, a tall hierarchal structure with a narrow span of control can lead to communication between the employees to be a bit more difficult. Because of this, levels of productivity could be decreased as it would take longer for information to be communicated up the hierarchal structure and then back down again. Further, a loss in communication from the senior managers can result in employees losing motivation and loyalty for the business, as they could feel undervalued. This can also lead to lower levels of productivity, as the employees would not work as well. Therefore, it can be seen that the current hierarchal structure could be leading to lower levels of productivity for the business. 3. In the eventuality of AAS adapting its organisational structure by delayering its organisational structure from five to two level of hierarchy, evaluate the impact on: [8 marks] a. AAS staff Delayering is the process of removing one or more levels in the hierarchy in order to flatten the organisational structure. This can have many impacts on the staff within an organisation, and so if ASS decided to delayer their hierarchal structure, the ASS staff would be impacted as well, in both positive and negative ways. Firstly, delayering would mean that the tall hierarchal structure would become a flat one, and this would lead to the organisation having a wide span of control. Just the answers! For the staff, this would mean that delegation would become an important part of the managing of operations, and so the staff would be given more opportunities to take on more responsibilities and develop their professional careers. Also, being closer to working with the senior managers in the organisation would make the staff feel more valued part of the organisation, as a flatter hierarchal structure takes away the “them and us” culture that would have been overpowering the organisation before. However, there are disadvantages in that by removing layers in the structure, many middle managers may find themselves being retrenched, or demoted, and this can have a huge impact on not just the staff affected but all of the ASS staff, as retrenchment and demotion can reduce the level of staff motivation and loyalty for the organisation. Therefore, it can be seen that delayering would have an impact on the ASS staff. b. Business efficiency Delayering, a process in which layers are removed from the organisational structure to make it flatter can also have an impact on the efficiency of the business. However, the extent and nature of the impact would depend 129 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered on how the organisation has decided to delayer itself. Firstly, delayering itself can create anxiety and a sense of insecurity among workers (because it usually means that there will be retrenchments and demotions), and in terms of the business, efficiency could decrease as this can lead to a decrease in motivation for the staff which can affect the level of productivity. However, a flatter organisational structure could also lead to a wider span of control, and this has advantages in terms of business efficiency as well. A wider span of control can lead to an improvement in communication, as there would be fewer layers in the hierarchy, and so improved communication can increase business efficiency. And also, it is cheaper to operate a wider span of control which, through the advantages of lower costs, the business would also become more efficient. Therefore, it can be seen that business efficiency is also affected by the process of delayering. 4. If a decision were to be made to split and operate separately the domestic and international divisions of the airline, examine the likely impact on: [8 marks] a. AAS staff Decentralisation occurs when some decision-making authority and responsibility is passed onto others in the organisation. In the case study, it can be seen that ASS is considering decentralising itself and separate its international and domestic operations. This could have quite an impact on the ASS staff. Firstly, because employees would now be allowed an input in the day-to-day decision-making, it would mean that the staff would feel more empowered and therefore more likely to feel motivated. Also, the staff could then be held directly accountable for their input, and this could lead to an improvement in the quality of their work as well. Further, by splitting the domestic and international divisions, it could be seen that teamwork between the staff in their individual departments would be encouraged and this sharing of ideas could also help the business as well. However, a disadvantage would be that there would be a greater chance of mistakes, with an increase in divisions having decision-making power, and this is something that the business cannot currently afford to have. Just the answers! b. Business efficiency In terms of the decentralisation of the business, and the desire to split and operate the domestic and international divisions of the airline separately, the efficiency of the business would be impacted. Firstly, this can be seen through the fact that decentralisation can help empower and therefore motivate and inspire loyalty within the staff. For the organisation, this would mean that productivity, and therefore business efficiency would be increased. Also, more input from the workforce could help the business in gaining more ideas to help improve the business efficiency, and also ideas to solve its current problems of profitability and productivity. However, there are many disadvantages of this decentralised structure for the business, and the main one is that there is a loss of control. This can actually cause business efficiency to decrease as authority is diluted, and 130 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered so different ideas could clash, causing more problems within the business as well. Therefore, it can be seen that even business efficiency can be impacted by the separation of the international and domestic divisions in an airline. ACTIVITY 2.2.C: G&M Cars Ltd 1. Construct the current organisational structure of G&M Cars Ltd. Include all staff on your chart. [4 marks] 2. Evaluate whether the current structure is appropriate for the business. [6 marks] Just the answers! The current organisational structure, as gathered from the case study, shows that G&M Cars Ltd. has a tall hierarchal structure. This therefore means that there is a narrow span of control within the organisation, and while this would be beneficial in some aspects for the business, in other aspects, having a flatter organisational structure would probably be better for the business, as it is quite a small company. Firstly, with a narrow span of control, the business is able to communicate more quickly between the smaller teams, however, on the whole, communication is actually reduced, as employees that are in the lower levels of the structure probably would not have much to do with the senior managers and vice versa. In this sense, it would therefore mean that employees may not feel all that valued by the organisations managers, and this could lead to a decrease in staff motivation, which could cause a company as small as this one to suffer. However, a narrow span of control also means that the employees have greater opportunities to earn promotion, however, this would not be too necessary for a business such as G&M Cars Ltd. as it only has 33 employees, most of which work in the bottom level of the hierarchal structure as office staff or mechanics. Also, from this it can be seen that the tall hierarchal structure could actually be quite costly for the business, whereas a flatter one could help improve communication between the layers, as well as be more cost effective. This is because, with current plans of further expansion, communication between the layers is becoming even more 131 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered essential, and the tall hierarchal structure does not allow this as much as a flat one would. Therefore it can be seen that the current structure may not be quite as appropriate for the business; however there are other factors that need to be considered such as the financial position of the business and the organisational culture. 3. Explain how a matrix structure of project teams could be used by this business for new developments. [4 marks] The matrix structure refers to the flexible organisation of employees from different departments within an organisation temporarily working together on a particular project. Therefore, in a matrix structure, functional departments still exist except for a team of workers, usually called the project team, which has the opportunity to work on projects with colleagues from other departments. In terms of the new developments that the CEO, Sophie Geden, is currently planning to undertake, it can be seen that the matrix structure would probably be the most effective way of implementing the new developments. This is because G&M Cars Ltd. would not have to go through the recruitment process and hire new individuals, and this could save the business on much needed finance that would be useful for the developments as well. Also the project team could be made up of the skilled employees from the different departments, therefore ensuring a higher success rate for the developments, and also a culture of team working and collaboration would be created in the organisation that would help the organisation in terms of efficiency, which might be needed as the departments would be losing some employees during the new developments. Therefore it can be seen that the matrix structure could be used effectively by the business for the new developments. 4. Evaluate G&M’s decision to use project teams to manage the new developments. [8 marks] Just the answers! Project teams are used when the business implements the matrix structure. The matrix structure refers to the flexible organisation of employees from different departments within an organisation temporarily working together on a particular project. This would be a very effective way in which the business could manage the new developments; however, there would be a few disadvantages as well that need to be considered. Firstly, as an advantage, by using project teams, costs are saved from recruiting/hiring new workers or other workers from an organisation specifically to manage the developments. Also through keeping workers from the organisation as a part of the project team, the employees choices on the new developments would also be considered, making them feel more valuable, and therefore, this can increase staff motivation and morale. This is essential during the new development stage, as the business could face some unexpected problems, and it is necessary that the employees are capable of handling them. Also project teams allow a culture of team working and collaboration to be created within the organisation. And because experts from different parts of the business can be brought together, the chances of accomplishing the project successfully are increased as well. 132 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered The use of project teams also allows for good career and personal development opportunities for the team members, therefore making work at the G&M Cars Ltd. seem more attractive as well. However, there are disadvantages to project teams that need to be considered such as the fact that since project teams are formed from employees from different departments, there is the possibility that they may not work well together, as ideas can clash. This could affect the chances of success of the new developments. Also, since the team members will have two line managers, a conflict of interest, such as loyalty and prioritisation, could limit the amount of work that is completed on the project, and the completion of the project could be delayed. This could affect the business negatively, if the business is relying heavily on the completion of the developments for its operations as well. However, these disadvantages can be minimised through effective communication, and so, G&M Cars Ltd.’s use of project teams to manage the new developments seems like a good idea that could benefit the business, both in the short term, and the long term. 2.2 Exam Practice Question: Mitsubishi Motors reorganise structure 1. Explain what is meant by: a. [4 marks] Delayering Delayering is the process of removing one or more levels in the hierarchy in order to flatten the organisational structure. In the case study, it can be seen that Mitsubishi Motors has taken to delayering its organisational structure by taking out some middle managers. b. Culture conflict Just the answers! Culture conflict exists when there is a conflict between two or more cultures within an organisation. This may exist, for example, when two firms integrate via a merger or takeover, or when a firm expands overseas, and is ignorant of international cultural differences. 2. Outline why ‘culture conflict’ seems to exist in this business. [5 marks] In the case study, it can be seen that a ‘culture conflict’ seems to exist within the organisation between the incoming German mangers, and the existing Japanese executives. This is because there are two very different working practices in both cultures and both groups in the organisation are not willing to compromise. Because of this, it can be seen that the business is experiencing difficulties with its restructuring. 133 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered The current Japanese managers represent the Japanese culture in their working practices, with a “job for life” attitude, however, with current restructuring, the introduction of new German managers’ means that the business is suffering, as many of the employees who are being removed are the Japanese employees with the more traditional mentalities. Also from this, it can be seen that because the COO team has been made mainly from non-Japanese representatives, a conflict of interest also exists, where the Japanese feel their organisational culture within Mitsubishi Motors is not being valued. Therefore, in the case study, it is seen that there seems to be a culture conflict that exists within the business, and this is mainly due to the difference in the Japanese and German cultures. 3. Analyse the possible benefits to MMC of reducing the chain of command through delayering. [7 marks] The chain of command is the route through which authority is passed down an organisation (from the chief executive and the board of directors to the employees’ right on the bottom level of the hierarchy). Delayering is the process of removing one or more levels in the hierarchy in order to flatten the organisational structure. By using this to reduce the chain of command, there would be many benefits to MMC. Just the answers! Firstly, it can be seen that delayering would allow the hierarchical structure of the organisation to become flatter, and this would lead to the organisation having a wider span of control. This means that a shorter chain of command leads to a wider span of control, and this actually has many benefits for the organisation. A wide span of control is where managers are responsible for many subordinates and many management functions will be delegated. For this, it can be seen that delegation becomes a relatively important part of managing the organisation, and therefore, as extra responsibilities are given to the subordinates, they will feel they are being given more opportunities to develop their professional skills. This can aid in increasing motivation and moral for the staff as well. Also, a wider span of control leads to a shorter chain of command, and this can have the benefit of increased and improved communication. This is because, as there are fewer layers in the hierarchy, it means that communication becomes faster, as there are less people that information needs to get through. Further, a wider span of control is cheaper to operate, as there are fewer levels of management. This can be seen in the case study where MMC has decided to delayer its organisations by cutting a lot of the (unnecessary) middle managers out. Also, a shorter chain of command would mean that there is a smaller 'psychological distance' between those at the top and those at the bottom of an organisation. This has the added benefit of aiding in reducing an 'us and them' culture where workers feel alienated from senior management. Therefore, it can be seen that by reducing the chain of command through delayering, a wider span of control is gained and this can have many benefits for the organisation. 134 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 4. Discuss the possible consequences for the efficiency of the business of the new management structure described in the case study. [9 marks] The management structure described in the case study is a flatter organisational structure, compared to the tall hierarchal structure from before. The organisation has delayered its organisational structure to reduce the levels of hierarchy within the organisation, and reduce the chain of command. This flatter organisational structure means that the organisation has a wider span of control, and this comes with many benefits for the organisation. One example would be that the organisation has improved communication as there are fewer layers within the business, making communication faster. Also, as delegation becomes very important, responsibilities passed down to subordinates can lead to increased motivation and morale as the employees feel more valued. Further, a wider span of control is cheaper to operate and it leads to a smaller 'psychological distance' between those at the top and those at the bottom of an organisation. Just the answers! However, as a consequence of this flatter structure, the delayering could create a fear that redundancies might be used to cut costs and this could reduce the sense of security of the whole workforce. This can lead to a reduction in the efficiency of the business as motivation and morale of the staff is reduced. Also, there is an increased workload for managers who do remain. And here, the efficiency of the business is also affected as this could lead to overwork and stress, and so the efficiency would actually decrease as the managers would be too stressed to work properly. Further, delayering could create one-off costs of making managers redundant, and this, for the short-term could increase the costs in the labour department. In the case study, it can be seen that the business has adopted a matrix structure as well. A matrix structure is an organisational structure that creates project teams that cut across traditional functional departments. The teams in this are usually called ‘project teams’, and they are focused on completing a specific project that would be undertaken by the business. In this case, a ‘COO team’ has been created. While this means that experts from different parts of the business can be brought together to work on the project, thereby increasing the chances of success, and increasing efficiency for the business, it really does depend on how well the team can work together. Since team members have two line managers, there could be a conflict of interest within the team, and loyalty and prioritisation may come into play. This could work both ways, and the project, or the overall running of the business could suffer in the long-term, as efficiency is again reduced due to the increased workload of the ‘project team’. Also there would be negative consequences of the matrix structure id the team members do not get along, and this is because there may be personal differences with priorities within the team. This can again affect the efficiency of which the business is run. Therefore, it can be seen that the efficiency of the business can be affected by the new management structures adopted by MMC. 135 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2.3 Communication ACTIVITY 2.3A: Palm Nut Oils Ltd 1. Outline four barriers to effective communication in this case study. [8 marks] Communication is the transfer of information between different people and between business organisations. Effective communication is therefore vital to the success of any business. However, there are barriers to effective communication, as can be seen in the case study. In the case study, a message regarding the ideas workers may have about working processes was placed on the canteen notice board, however it can be seen that there were many barriers that prevented the message being communicated effectively. Just the answers! Firstly, one barrier was the skill of language used. In the case study, it can be seen that the managing director used some jargon (technical language) in the notice, and this could have hindered communication. Also the level of language used was not too high either. The sentence did not make sense as too much was being communicated through just one sentence. It would have been more effective if the message was broken up so the important information could be easily picked out by the workers. Another barrier that prevented effective communication in the case study was the tone of the message, as a result of poor presentation skills. The message was too formal considering that it was just going out to the employees, and also the managing director did not even bother to sign it. This could have led to many of the employees not liking how the message was communicated and therefore, then deciding not to pay much attention to the message. Internal politics could also have acted as a factor of this poor communication. Internal politics occur when there is conflict within an organisation, and therefore a resistance to cooperate with colleagues and managers could exist. In the case study we see that the management is not actually trusted by the employees, and this would have been a barrier to effective communication, as the employees were more likely to ignore the message, or not take it seriously enough. Considering that there was a poor incentive involved, the latter would be the more likely option, as employees would have given a “useless” suggestion just to get the payment of $25. The communication method itself could 136 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered have also acted as a barrier to effective communication. The message was communicated through the use of notice boards, and it really depends on the culture of the organisation on whether or not the message will actually be read. For example, in the case study it can be seen that there could be some workers that would never look at the notice board and as a result the message would have never been received. Therefore it can be seen that in the case study, many barriers of effective communication could be identified, and these barriers prevented the message from being properly received by the employees. 2. Explain three other communication media that could have been used in this case. [9 marks] In the case study, it can be seen that a form of effective internal communication is what is being aimed for. Internal communication refers to communication within the same business organisation. In the case study, a non-verbal form of communication was used in the form of a notice board in the canteen. It was seen that this did not actually work out too well for the business as there were many barriers to effective communication, and therefore the message was not communicated properly. Just the answers! However, there are many other forms of communication media that could have been used by Palm Nut Oils Ltd. One such medium of communication is verbal communication. Verbal communication involves parties talking and listening to one another. It is a quick and easy communication method; however it does rely on the tone of voice and body language unlike the notice board. Using verbal communication as a communication media, the manager, Johanna Jacobson, could have spread this message through just speaking to her employees. The message therefore would not have been too difficult to understand, as if the employees had questions they could have asked her right after she explained her message. Another form of communication media that could have been used in this case is a form of written communication, however this is not referring to the notice board, but a business letter. Business letters follow a set format in which the layout and language used are considered to be important. And despite popular belief, letters are not only used as a form of external communication, but can be used as a form of internal communication as well. The main advantage of a business letter is that there is a hard copy of the message that can be kept for future references and also, they are specific and can address issues in a lot of detail. A business letter could have been sent to all employees thoroughly explaining the managers need for suggestions of improvement in regards to their working practices and therefore, confusion that exists regarding the request can easily be removed. The memorandum is another form of communication media that could have been used by Palm Nut Oils Ltd. A memorandum (memo) is a note from one person to another. It can be a formally typed note, or it could be a handwritten message, and therefore is a perfect form of internal communication, which is what is needed in the case study. Memos are usually used to send short messages and remainders to people, and therefore, the managing director of Palm Nut Oils Ltd. could have used a memo to spread the message. This would have ensured that the message was quickly sent and received by the employees. Therefore, it can be seen that three 137 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered other forms of communication media could have also been used in the case study; verbal communication, letters or a memorandum. 3. Recommend a more suitable method of communication than the noticeboard of Palm Nut Oils Ltd. Justify your answer. [8 marks] The term channel of communication refers to the method of communication. One such method of communication is electronic mail. Electronic mail refers to the process of using computer wide area networks (WAN) as an internal (intranet) and external (internet) mailing system. In terms of the case study, this would mean that the managing director of Palm Nut Oils Ltd. would use email to communicate her message instead of placing it up on the notice board. Email systems actually have many advantages and there are also better in many aspects over notice boards, especially in the case of a business organisation such as Palm Nut Oils Ltd. Firstly, email is a very fast method of communication and very large quantities of data can be transmitted to a large number of people in a very short time. In the case study, it can be seen that this is useful because it would allow the manager to be sure that everyone has received the message, whereas if it was up on the notice board, there was a very large chance that people would not even bother glancing at it, especially considering that form the case study, it can be assumed that the organisation is more ICT focused, and does not care much for notice boards. Also email does not cost anything, and probably saves more time against the use of notice boards. This is because for a notice board, presentation matters if the manager wants the message to be noticed, however with email the same considerations do not apply. Just the answers! Emails would also be a better method of communication for the business as it would allow the business to save on telephone, fax and stationary costs that would otherwise be used to communicate messages. Email is also usually only acceptable for internal communication, as external communication requires something more formal. In the case study, it can be seen there was a problem with the formal tone of the notice and therefore, email messages could help reduce this, and make it more acceptable for the internal communication that the message in the case study was intended for. However this method of communication does require care to be taken when it is implemented. It is necessary that employees are given sufficient training in using the email system at work, and also are taught to use it in a professional manner. However, things like email etiquette can help with this (ensure that employees are discouraged from abusing email and using it for things such as informal communication), and therefore, would not pose to be much of a problem for the business. It could also prove to be a more effective way in ensuring everyone is up-to-date with their work. The monitoring of emails to ensure this however could lead to an increased internal conflict within Palm Nut Oils Ltd. as this could bring into question the issue of privacy, therefore, the management should look into another method to prevent this. Technical problems could also cause to be a limitation of this method; however, as it is only used for internal communication, if some urgent message were to be sent, it could be done easily enough through back-up methods of communication 138 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered such as mobile phones. Therefore it can be seen that email as a method of communication is more suitable than a notice board for Palm Nut Oils Ltd. and it also brings about more advantages for the business as well. 2.3 Exam Practice Question: Switching off is no way to handle job losses – how not to communicate bad news 1. Define the term ‘effective communication.’ [2 marks] Communication refers to the transfer of information from one party to another. Therefore, effective communication is the efficient and successful transfer of information from one party to another. Effective communication is vital to the success of any business as it serves the purpose of making staff aware of their roles and expectations and it can help managers gather and act upon feedback from employees and other stakeholders. It is therefore seen that effective communication allows the managers to have a better understanding and control of their business. 2. Outline how this case could harm employer-employee relationships in this factory in the future. [9 marks] Just the answers! Communication is the transfer of information between different people and between business organisations. In the case study, it can be seen that Panasonic Corporation did not communicate the redundancies effectively, and from the information given, it can be seen that this could have quite a negative impact on the business and it could harm the employer –employee relationship. Firstly, it is known that the information about the redundancies did not actually go through the proper channels of communication, and therefore, poor communication existed in this case. Poor communication can hinder the running of an organisation, and it can be seen that this is exactly what can happen here. As a result of the poor communication, low moral would exist among the employees. The fact that they were kept uninformed about the redundancies, and were practically told lies about the safety of their jobs could lead to the remaining employees developing a fear that the business will do it again. This would therefore harm the employeremployee relationship as the staff could feel undervalued, and not important enough to the company that they would have to find out their job losses through the news. This can also lead to a loss in confidence and sense of direction in the company, which would in turn lead the company to suffer as well. As Victoria Smaill said in the case study, “What people fear most is not knowing: it is common sense to inform staff because rumours and 139 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered insecurity are much worse.” This suggests that by dealing with the communication of this information in a more effective way, such outcomes, like a loss in confidence and insecurity, could have been prevented. This case also shows how the managers of the Panasonic Corporation could have lost the trust their employees place in them. This is because they were told something, and were lead to believe that there jobs were safe, when in actual fact, just a couple of days later they found out that this was not true. And all this communication actually went straight to journalists and newspapers, where employees were left uninformed. This loss of trust could therefore lead to internal politics and conflict between the employees and managers. This therefore would also be another way in how this case could harm the employer-employee relationship in the factory in the future. Overall, it should be seen that in the future, employees of the Panasonic Corporation would become less motivated, and feel less loyalty towards the business operations as well. Also they would not trust their employers and this would act as a barrier to effective communication in the future. 3. Evaluate the different ways in which Panasonic might communicate any future redundancies to staff and the media. Refer to all aspects of effective communication – the appropriate sender and receiver, the clarity of the message, the medium to be used and the opportunity for feedback. [9 marks] Effective communication is vital to the success of any business. It is important because it allows the employers to make sure the staff are aware of their roles and expectations, and it also allows managers to gather and act upon feedback from employees, customers and other stakeholders. For Panasonic Corporation, it can be seen that effective communication is essential for the company, especially now, where poor communication has had many negative impacts on the employer-employee relationship in the factory. Just the answers! In the case of future redundancies, it is therefore important that Panasonic takes care in communicating the necessary information to its employees. There are many ways in which this can be done. Firstly, one way in which Panasonic might communicate any future redundancies is through verbal communication. This involves the parties concerned with the message in question talking and listening to one another. This would be a useful way to communicate redundancies to the staff and media as it has the added benefit of showing that the managers care for the employees, as this is probably one of the more time consuming ways of communication (unlike with notices which only need to be written once and then can be posted wherever necessary). In terms of effective communication, this method would definitely fulfil the criteria of getting to the appropriate receiver as the sender could ensure that the people they are talking with are the right people that need to be informed. Also, if the receiver does not understand the message, verbal communication comes with the advantage of question being able to be asked and answered without any delay. Also the “sending” of the message would not be costly in terms of money, and also there is a lot of feedback opportunity as well. It can be therefore be seen that verbal communication would be a very effective form of communication for Panasonic and its purposes, however there are other ways as well. Panasonic could also communicate through the use of notice boards. 140 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Notices are usually used when a message needs to reach a range of people, and from the case study, it can be seen that there would be many people, including staff and the media that would want to be informed of the redundancies. However, notices are not always clear, and there is not usually an opportunity for instant feedback, unlike with verbal communication. Therefore, against the use of verbal communication, notices may not be the most effective method, however, notices are less time consuming, and are also ideal when short messages need to be conveyed, however this is not the case here. Just the answers! Another way in which Panasonic could communicate staff redundancies is through business letters. Letters can be used for both internal and external communication, and so, in terms of the appropriate receiver getting the message, both the staff and the media could be sent a business letter explaining, in depth, the situation with redundancies. This would also mean that the message could be quite clear, and the medium used is also not that difficult to work through. However, in terms of feedback, the same disadvantage as with notice boards exists. Feedback opportunities are not instantly given here as well. It can therefore be seen that overall the best one would be verbal communication where the message is passed on in person. It provides the opportunity for feedback, and also allows the receiver to clarify the message, ensuring nothing is misinterpreted. Therefore, it can be seen that in regards to communicating its redundancies, Panasonic has many more effective ways in which it can spread its message, in contrast to the way they did it this time. 141 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2.4 Leadership and Management ACTIVITY 2.4.A: Disaster at the bakery 1. Identify the management roles that Ruby seems to have demonstrated in this case. [4 marks] Management is the practice of achieving an organisation’s objectives by using the available resources of the business, including human resources. In the case study, it can be seen that Ruby seems to have demonstrated many management roles and has dealt with a crisis suitably. Firstly, we can see that Ruby has done things right as well as done the right thing. She has handled the situation by directing and controlling the employees that she is in charge of, and has also delegated some tasks to subordinates so she can have more time to deal with the bigger issue at hand. Ruby has also acted as a problem solver by not panicking in the face of the crisis, but thinking things through logically, so as to prevent the business from losing out even more. She has found a backup solution of using another oven so that the bakery does not need to stop its current orders. Also she has organised the staff by giving them set tasks to carry out and as lead them, meaning she has also acted as a leader here as well. Overall, it can be seen that Ruby seems to have demonstrated the role of a manger very effectively in this case. Just the answers! 2. Explain which style of leadership Ruby seems to be employing in this case. [4 marks] Management and leadership style refers to the way in which managers and leaders behave or reveal their behaviour in certain ways. In the case study, it can be seen that Ruby seems to be employing a situational style of leadership. Situational leadership is a leadership style that, unlike the others, is not based on any single approach to leadership because employees and businesses are all very different in so many ways. In the case study, we see that the business is facing a crisis, and therefore, it can also be seen that using this style of leadership, Ruby has analysed the situation and found that taking on an authoritarian leadership style 142 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered is best. In the case study, we see that Ruby has made decisions quickly, without much, if any, consultation with her employees. Ruby has decided that the business will use a spare oven from another bakery until they can set up in a new site. However, although Ruby has made all the decisions, she has not quite taken on the autocratic leadership style, and this is because we can see that she has still delegated some of her tasks to her employees to speed up the management of the crisis, and has even left six employees to organise the production of their goods using the borrowed oven. Therefore, we see that Ruby has taken on a situational leadership style, even though it seems like an autocratic leadership style in the case study. 3. Discuss whether this was the appropriate style of management to apply in this situation. [8 marks] There are many different types of management and leadership styles that Ruby could have applied in this situation, however, it seems that the style that she has chosen to apply is most likely the most appropriate for the situation that Ruby found herself in. Firstly, it can be seen that Ruby used the situational style of leadership and management, and this style is unlike the other styles as it is not based on any single approach to leadership. Ruby, using this style, has taken an authoritarian approach to the crisis, and this is useful in that some employees may have not been able to handle it if a laissez-faire approach was taken. Just the answers! A laissez-faire leader or manager is one who prefers to have minimal direct input into the work of the employees. While this style could lead to high levels of motivation, as the staff could feel trusted and highly wanted by the employer, in this specific case, there would be a large downfall to using this approach. Many of the employees would most likely have different ideas on how to go about solving the problem the bakery was faced with, and this could lead to arguments among the employees. On the other hand, the employees may have become complacent, and therefore may have not really cared about the situation, and this could have also led to the problem never being fixed. Therefore, it can be seen the laissez-faire approach would not have been ideal. In the case of a democratic approach, which is when the leader prefers to discuss with and involve employees in the decision-making, it can be seen that there would be some problems as well. While having the same advantage as the laissez-faire approach, the decision-making process using the democratic style becomes a long drawn out process that would be completely useless for a crisis situation where quick action and decision making needs to take place. It can therefore be seen that an autocratic leader would better handle this situation. An autocratic leader is one that makes all the decisions and prefers not to delegate any tasks to their subordinates. This would be suitable as well in this crisis situation; however, again there would be some slight problems. In this case, we can see that Ruby has successfully made some quick decisions so her business can be saved, however, if she had approached this situation with an autocratic style she may have felt overloaded with all the work that would have needed to be done. She would have had to organise production with the borrowed oven, as well as talk to the real-estate agent. Without having the eight employees she has overlooking this, 143 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered being overworked could have decreased productivity, which is something that is essential currently for her. Therefore, it can be seen that the situational leadership style is the most appropriate style that could have been applied in this case as it allowed Ruby to take control however it still meant that she could delegate tasks to her employees so she could deal with some of the bigger issues the business was facing from the crisis. ACTIVITY 2.4.D: Leadership style at McNuggets 1. Analyse the leadership/management style that McNuggets has appeared to have adopted. [6 marks] Management and leadership style refers to the way in which managers and leaders behave or reveal their behaviour in different ways. In the case study, we can see that McNuggets have appeared to have adopted the autocratic leadership style. Just the answers! An autocratic leader or manager is one that makes all the decisions and prefers not to delegate any responsibility to their subordinates. Instead, an autocratic leader simply tells the employees what to do. In the case study, we see this happening as “every single activity of the workers is laid down by company regulations”. As an example given, all the employees have to greet the customers with the same welcome. This shows that all the employees are told what to do. On the one hand, it can be seen that this is useful as through this style of leadership, the business has established a reputations for cheap meals of consistent quality with rapid customers service, as the strict “employee guidelines” ensure that the workers do not get complacent. Also, an autocratic leadership is very useful in times of crisis where quick decision making needs to take place. However, on the other hand, it can be seen that this autocratic leadership style has drawbacks. Firstly this style of leadership communicates from the top of the hierarchy to the bottom, and therefore, there is no prospect of feedback for the leader. Because of this, if the leader is doing something wrong, the leader will never know, as the employees are not allowed to give the feedback, unless the leader is asking for it. Therefore the opinions and suggestions of the workers are completely ignored. This can actually lead to more negative effects, as it can cause resentment amongst the employees who want to be part of decision-making. The employees may start to loose motivation, moral and loyalty for the business, and in the case study, we can see this de-motivation of employees through the fact that the staff turnover is said to be very high, and that absenteeism is becoming a problem. However, in this approach, the managers “believe they have “thought of everything” and that workers do not need to show initiative.” 144 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2. Examine, using management and leadership theory, the apparent low levels of motivation at McNuggets restaurants. [8 marks] In the case study, it can be seen that an autocratic leadership style has been adopted by McNuggets, and through this, we can see apparent low levels of motivation at McNuggets restaurants. Firstly, an autocratic leader is one that makes all the decisions. This style of leader simply tells employees what to do and prefers not to delegate any responsibility to their subordinates. Through this style, while there are a few advantages, it can be seen that there are disadvantages to, one of them mainly being the effect this style has on the motivation of the staff at the restaurant. In the case study, we see that the managers believe they have “though of everything”, however, this autocratic style does not allow feedback from the subordinates, and therefore, the managers can not actually be completely sure of this. Although the workers are well looked after, there is probably resentment amongst the employees who wish to be a part of the decision making process for the business. Not being allowed to say anything in the way of their work and what they think should be done would lead to the employees feeling undervalued. This could lead to a lack of loyalty for the business, and also an increase in the lack of motivation. This is because the staff would not feel appreciated, and feel that they are not worth anything to their employers. In the case study, we see that while the employees are encouraged to make their views on certain subjects known, it is made clear that they cannot, “under any circumstances, change the method of working laid down by the McNuggets head office”. This would lead to the staff feeling as if their employers are only asking for their opinion to make themselves look good. This could lead to even lower levels of staff motivation as the value they think they hold in the business would be even more reduced. Employees like autonomy, and if this is not given, they may feel restricted, and this can also lead to de-motivation as well. Therefore, it can be seen that through this use of an autocratic leadership style, there are apparent low levels of motivation at the McNuggets restaurants. Just the answers! 3. Analyse how a different leadership style might improve motivation of staff within these restaurants. [8 marks] In the case study, it can be seen that the current leadership style, the autocratic leadership style, is having a negative effective on the level of staff motivation within the business. With the employees being unable to actually voice their views on certain areas of the business, they are feeling undervalued, and this has therefore led to a high staff turnover and an increasing problem of absenteeism. Therefore it can be seen that maybe a different leadership style should be used by the business to improve the motivation of staff at the restaurants. An example of a style of leadership that could lead to an improvement in the motivation of staff is the democratic style. A democratic leader is one who prefers to discuss with and involve employees in decisionmaking. In this case, it can be seen that the employees who want to be a part of the decision-making process would be given a chance to voice their ideas, and this could lead to quite a big improvement in terms of 145 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered motivation amongst the staff. This is because it would make the staff feel like more valued members of the business, and it could also aid in improving their loyalty towards the business as well. The democratic style of leadership is known to lead to better moral and motivation amongst the employees as they are able to express their views and have some input into decision making. This sharing of ideas could also help the business as a whole, as the leaders could be made aware of things they may have missed in the running of the business, as they would also gain feedback through this style of leadership. Also, in the case of the restaurants, the leaders cannot always be around, and therefore, a democratic style may work even more effectively as a way of ensuring that employees remain on task, as oppose to the autocratic style where the employees feel they are being forced to do what they may not want to. Moreover, in the case study, we can see that the employees are trained, and therefore, we know that the staff would be skilled as well. This means that the input given could be useful for the business as well. However, there are limitations to this style, in that it can delay the decision-making process, and is not actually suitable when dealing with a very large workforce, as is in this case with McNuggets being one of Asia’s largest chains of fastfood restaurants. Overall though, this democratic leadership style would help the employees feel more appreciated, and therefore could lead to an improvement in the level of staff motivation in the business. 4. To what extent is the style of leadership used at McNuggets appropriate for a business such as this? [10 marks] Management and leadership style refers to the way in which managers and leaders behave or reveal their behaviour in different ways. An autocratic leadership style is also known as an authoritarian style, and this style refers to when a leader or manger is the one that makes all the decisions for the business. Just the answers! An autocratic leader is known to prefer to be the one in control of the decision-making process, and usually just tells employees what to do, preferring not to delegate any responsibilities to the subordinates. In this case it can be seen that this style of leadership is appropriate for the business to some extent, however, there are also aspects of this style that would not be appropriate for a business such as McNuggets. Firstly, with McNuggets being one of Asia’s largest chains of fast-food restaurants, it can be seen that the company would actually have quite a large workforce. In such as case, an autocratic style would be useful in that it could help control the large workforce by setting standards that must be met by every employee. The autocratic style would be useful, as because of the large workforce, a democratic, or laissez-faire style could lead to a longer decision making process or the employees getting complacent. An autocratic leader would therefore help the business keep focus on its aims and objectives. This can be seen in the case study as a recent survey has shown that “the public appreciate that no matter which restaurant they are in, they can always depend on buying the same range of dishes, at similar prices with the same quality.” 146 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Further, an autocratic style would be useful as such as large company could face serious problems if it cannot deal in situations where it may face a crisis. An autocratic style works best in such situations when quick decisions need to be made, and so to that extent, an autocratic style is useful for a business like McNuggets. However in the case study it can also be seen that McNuggets is suffering from a lack of staff motivation. An autocratic style can cause resentment amongst employees who want to be a part of the decision-making process. Employees can also feel undervalued as well by the organisation, and this can affect their level of motivation, morale. This can have a negative impact on the business’s efficiency as well. Therefore, an autocratic style can de-motivate and alienate the workforce, which would be very bad for a large business such as McNuggets because, although it may not seem like it, it actually relies on the work of the employees to continue running smoothly. McNuggets now has a high staff turnover and increasing absenteeism, and through this we see how negatively the autocratic style is affecting the business. Through this, we can see that while to some extent the autocratic leadership style is appropriate for a business such as McNuggets, there would most likely be more appropriate styles as there is quite a large extent to which the autocratic leadership style has a negative effect on the business. 2.4 Exam Practice Question: Catering at Le Menu 1. Explain the types of leadership style Sophie and Arlia most closely represent. [6 marks] Just the answers! Leadership styles refer to the way in which managers and leaders behave or reveal their behaviour in different ways. In the case study, it can be seen that Sophie is an autocratic leader. An autocratic leader or manager is one that makes all the decisions in the business, and here we can see that Sophie is someone that prefers to make all the decisions regarding Le Menu. An autocratic leader is someone who simply tells employees what to do, and this style of leadership is usually used when the workforce is unskilled and depends on the direction and instruction of leaders. In the case study, it can be seen that Sophie is a “tough, direct manager, whom tells workers exactly what she wants”. This shows that Sophie takes on an autocratic style of leadership as she prefers to have control over the workings and management of Le Menu. She expects that employees always work to a high standard, and is strict when they do not, instantly dismissing them. Therefore, we also see that, like an autocratic leader, Sophie is quick in decision making and is always thinking critically in terms of the task at hand and who the best people are to fulfil the task. In contrast, we can see that Arlia has a very different style of leadership. Arlia takes on a democratic leadership style, and this can be seen as Arlia is seen to be much calmer when dealing with the employees, however she is not a laissez-faire leader as she does not have minimal contact with her employees. In the case study, we can see that Arlia prefers to consult with her staff before making decisions. A democratic leader is one who prefers to discuss and involve employees in decision-making, and therefore Arlia can be seen as a democratic leader. 147 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered We see that she is more involved with the strategy of the business, and will “work with Le Menu’s chefs on the type of food to prepare for an event.” Arlia is making sure that she takes into account the views of her employees before making a final decision. Therefore in the case study, it can be seen that while Sophie takes on an autocratic leadership style, Arlia takes a more democratic approach in her style of leadership. 2. Employ appropriate management and leadership theory to analyse the possible reasons why Le Menu overspends on food. [6 marks] In the case study, it can be seen that Sophie is an autocratic leader. This is someone who prefers to carry out all the decision-making themselves, and prefers it if employees simply do what they are told. We see that Arlia is different in her leadership, in that she is a democratic leader. A democratic leader is someone who prefers to discuss with and involve employees in the decision-making process. Just the answers! It can be seen that both types of management and leadership styles could lead to some possible reasons for why Le Menu could be overspending on food. In the case of an autocratic leader, like Sophie, it can be seen that as she is the one who wants to make all the decisions, she would have quite a large workload. Because of this, it could be seen that Sophie would be constantly carrying out her management role by telling others what to do, that she may overlook some things, just because of the time frame and workload that she has. Because of this, one of the possible things she may have overlooked is the amount of money being spent on food, and therefore, as she is the one that makes all the decisions, nothing would really be done by the other employees to fix it. The same, in terms on workload, would be the case for Arlia. Being a democratic leader, it can be seen that Arlia takes the time to listen to what her employees think, and want, and try to do her best to get al ideas so that they can be included in the decision-making process. Also, she may try to make sure that all her employees are content with the decisions made, and that may require more time and effort from her. Because of this, she may have neglected looking at food prices, in favour of making sure that her employees feel involved, and valued members of the business. Therefore, we can see that both styles may become involved in the work the style favours, and this could lead to some important things being overlooked, such as how much is being spent on food by Le Menu. 3. Discuss the advantages and disadvantages to Le Menu of Sophie Geden’s style of leadership. [8 marks] Management and leadership styles refer to the way in which managers and leaders behave or reveal their behaviour in different ways. Sophie is an autocratic leader. An autocratic leader or manager is one that makes all the decisions in the business, and prefers not to delegate any responsibilities to their employees. This style of leadership can be seen to have advantages, however, there would be disadvantages to, and these can be seen in the case study. 148 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Firstly, as an advantage of this style of leadership, it can be seen that if the workforce is unskilled, it can depend on the direction and leadership of the manager. In the case of Le Menu where there are only four other permanent positions in management, and where many temporary workers are taken aboard, it can be seen that there is a high chance for unskilled workers existing down the lower end of the hierarchy. To ensure that Le Menu is able to offer the high-quality catering service that it is known for, it is therefore essential that a skilled leader can direct the unskilled workforce. Also, as another advantage, an autocratic style of leadership means that the decision-making process is quick. For a service such as Le Menu, this is seen to be a benefit where if a crisis occurs (such as a problem with the food), the crisis can be solved quickly and efficiently without a long drawn out decision-making process. An autocratic leader is someone who can make critical decisions, and in this case, it can be seen that Sophie has made critical decisions regarding her employees. She is only interested in keeping those that are the best in her workforce to uphold the company’s reputation. For employees, this could prevent complacency as they would constantly have to pay attention and work efficiently and effectively to ensure that they are not dismissed. However, there are disadvantages to this style of leadership as well. Just the answers! An autocratic style of leadership has communication that is goes down from the top. This can increase an ‘us and them’ culture, and it also means that there is no prospect of feedback for the leader, and in the case study, we can see that many employees do not like Sophie’s attitude, however, they can do nothing about. As the employees are not given a chance to voice their opinions and give suggestions, resentment is caused among the workforce, as they can feel less valued by their employer. This can lead to a decrease in loyalty and in turn a lack of motivation and morale. We can see this has happened in the case study, where Le Menu is now facing problems with recruiting agency staff members, because of the autocratic style of leadership that Sophie takes on. Therefore, it can be seen that while there are advantages for the autocratic style of leadership, there are also disadvantages of Sophie’s autocratic style of leadership for Le Menu. 149 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2.5 Motivation ACTIVITY 2.5A: Applying the motivational theories 1. Explain which level of Maslow’s hierarchy Ashleigh seemed to be on: a. [6 marks] At ISC Maslow’s Hierarchy of Needs is a motivation theory that outlines the five levels of needs, from the requirement to satisfy basic psychological needs through to self-actualisation. Maslow argued that until a lower need is met, people cannot progress onto the next level of needs. From the case study, we can see that when Ashleigh was working at IS Computers, she would have been on the security needs level from Maslow’s hierarchy. This can be seen as Ashleigh was paid a high salary, and so her physiological needs (the needs that must be met in order for people to survive) were met. And due to this high salary, we can also see that her security needs were met as well. These needs refer to the desires necessary to make people safe and stable. Security includes predictability and order, and we can see that at IS Computers, Ashleigh was given specific programming tasks and worked to deadlines. However, she worked alone and was not assigned to teams, which leaves her at the security needs level, as her social needs were not fulfilled. Just the answers! b. At Index Computers. At Index Computers, it can be seen that Ashleigh had moved up two levels on Maslow’s Hierarchy of Needs, and is at the level of esteem needs. This can be seen through the fact that Ashleigh was paid a high salary so that both her psychological (needs that must be met in order to survive) and security needs (needs that refer to the desires necessary to make people feel safe and stable) were met. Also, in contrast to at IS Computers, Ashleigh was appointed to Victoria’s five-member team. The team was friendly and she had already met Victoria, and therefore, through this we see that Ashleigh’s social needs (these needs refer to the human need of being accepted as part of a friendship group or family) were met. Also, in the 150 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered case study, we can see that Victoria recognised talent and achievement, and allowed the team members to take control. This therefore allowed Ashleigh’s esteem needs to be met, which are her desires for recognition and being able to have self-respect. Therefore we can see that Ashleigh is at the esteem needs level at Index Computers. 2. Explain why team working might be important to Ashleigh’s motivation. [6 marks] Team working is where employees have the opportunity to work alongside fellow employees. From the case study, we can see that Ashleigh was not able to work in a team at IS Computers, however, she was assigned to a five-member team at Index Computers, which lead her to be more satisfied with her job. This is most likely because team working has many advantages that would have made Ashleigh feel more valuable to the business, and therefore would have increased her motivation. Firstly, in Ashleigh’s case, working alone on assignments at IS Computers made her find the work not very rewarding, and dull. Team working on the other hand can reduce boredom and help meet the social needs of employees. According to Maslow’s Hierarchy of Needs, this is an important factor of motivation as well. And therefore, through team working, Ashleigh’s motivation was increased. Also, team working can act as a motivator, as it can be a form of non-financial motivation for Ashleigh. For example, working within a group made Ashleigh enjoy work more and her team also fulfilled her esteem needs (Victoria, the team leader, allowed team members to take control of complete software solutions). Just the answers! Moreover, it can be seen that team working can help create a sense of belonging (this can aid in reducing absenteeism and staff turnover) and we can see that Ashleigh probably feels more valued at Index Computers. This can increase her loyalty towards the business, and therefore also increase her motivation and labour productivity as well. Additionally, team working can lead to greater flexibility and multitasking as workers can learn from their team members. This also has the added benefit of workers being able to replace one another during times of absence so that projects can continue without delays. Team working can also lead to improved communication within the workforce as it encourages different departments to get together to share ideas, and this could lead to the increased sense of belonging for Ashleigh, meeting her social needs that were not met at IS Computers. Therefore, we can see that team working is very important to Ashleigh’s motivation. 3. Evaluate, using this case study as a starting point, how Herzberg’s research on ‘hygiene and motivating factors’ can be effectively applied within a work environment. [10 marks] Herzberg’s two factor theory looked at the factors that motivate employees, namely motivation and maintenance (hygiene) factors. Hygiene factors are parts of a job that Herzberg referred to that do not increase satisfaction but help to remove dissatisfaction, such as reasonable wages and working conditions. Motivators 151 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered are the factors that Herzberg considered to increase job satisfaction and motivation levels, such as praise, recognition and responsibility. Firstly, hygiene factors cause job dissatisfaction if they fall below a level considered to be acceptable by the workforce. In the case study, we can see this at IS Computers where Ashleigh found the working conditions unacceptable and therefore left. The working conditions at Index Computers were perceived to be much better by her, despite the fact that at both places she was paid a high salary. Through this, it can be seen that when the working conditions were unacceptable, job dissatisfaction was caused. Through such things, it can be taken note by businesses that in a work environment, hygiene factors should be at acceptable levels, to preserve job satisfaction. Examples would include reasonable wages, good relationships with peers subordinates and supervisors, and also appropriate company policies, rules and regulations. Motivation, due to achievement, recognition, responsibility and advancement of workers can lead to increased worker satisfaction. In the case study, we see how recognition of Ashleigh’s skills by her supervisor has led to increase job satisfaction and motivation for her. Through this, it can be gathered that motivators can be used in the workplace to increase motivation in a work environment. Examples of motivators would include giving opportunities for promotion, job enrichment, job enlargement and empowerment. However, despite the usefulness of Herzberg’s two factor theory, it can also be seen that Herzberg’s motivators would not work in a business environment with low-skilled and low-paid jobs. Also, the role of team working is ignored in Herzberg’s theory as well; whereas in the case study, we can see that Ashleigh valued her social needs (Maslow’s Hierarchy of Needs), and quit her job at IS Computers because they were not being met. Therefore, we can see that while Herzberg’s theory can to some extent be effectively applied to a work environment, a consideration of the conditions of the work environment and the organisational culture should be made as well. ACTIVITY 2.5C: Staff turnover increases at Telemarketing Ltd Just the answers! 1. Explain the drawbacks to the business of high labour turnover and high staff absence. [4 marks] Labour turnover measures the percentage of the workforce that leave the firm in a given time period, usually one year. A high labour turnover rate suggests that employees are incompetent, or they lack job satisfaction. In the case study, it can be seen that Telemarketing LTD has a very high labour turnover at 45% this year. For the business, the assumption that the employees lack job satisfaction could have a negative impact on the corporate image of the business. However, along with this it can also have a negative impact on the existing staff members. A high labour turnover could decrease staff motivation and moral as well. Absenteeism measures the percentage of the workforce not present at work within a particular time period. In the case study, we can see that the level of staff absences in 2013 rose to 9%, 4% more from 2011. A high rate of absenteeism suggests that employees are deliberately avoiding coming to work. This suggests low motivation and moral and 152 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered also perhaps the use of poor management techniques. High absenteeism therefore has the drawback of decreased motivation and loyalty for the business. 2. Referring to the work of two motivational theorists, explain the likely reasons for staffing problems at Telemarketing. [8 marks] There are many likely reasons for the current staffing problems that exist at Telemarketing Ltd. In the case study, we can see that Telemarketing Ltd. is suffering from high labour turnover and high absenteeism as well. Two motivational theories that could help in explaining the likely reasons for such problems are Maslow and McGregor. Firstly, Maslow’s Hierarchy of Needs, the motivation theory that outlines the five levels of needs, from the requirement to satisfy basic psychological needs through to self-actualisation, can help explain the problems. Maslow argued that until a lower need is met, people cannot progress onto the next level of needs. According to this theory, we can see that employees at Telemarketing Ltd. are probably even unable to get past the first level, as they are paid a low basic wage. The other levels have not even been closely met either as security needs, social needs and esteem needs are also not fulfilled. From the case study, we can see that employees at Telemarketing Ltd. may be on the psychological needs level where money to meet the basic needs of the employees is maybe met, if at all. Through this it can be seen that the employees would not be too motivated to work at the organisation due to the work conditions and unreasonable wages. This could explain the high staff turnover and absenteeism, as employees would lack the motivation or moral to actually want to go to work as well. Just the answers! Using McGregor’s Theory X, the same can be seen. McGregor’s Theory X explains the negative management attitude about the workforce. Theory X managers see their workers as being lazy people who avoid work as possible. By not trusting their workers, and heavily monitoring them, the same affect can be seen where motivation and moral is decreased. Loyally for the business also decreases as the workers of Telemarketing Ltd. feel as if they are not being valued or appreciated by their employers and this again can explain the problem of high labour turnover and absenteeism. Therefore, we can see through these two motivational theorists that through a decrease in motivation, problems such as high labour turnover and absenteeism can occur. 3. To what extent might the principles of job enrichment be introduced into this business to help staff achieve ‘self-actualisation’? [10 marks] Job enrichment might, to some extent, help staff achieve ‘self-actualisation’. Job enrichment involves giving workers more challenging and complex tasks, which can contribute to the workers feeling a sense of achievement as they are able to exploit their potential. It also gives workers more responsibilities and it aims to 153 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered give them greater independence in their work as workers have better opportunities to express and develop their own ideas. In the case study, we can see that Telemarketing Ltd. is suffering from high labour turnover and high absenteeism due to a lack of motivation in the staff. The employers monitor their employees very carefully and are very strict with rest periods, pay low wages and not allowing them to talk to other members of the staff. Through this, it can be seen how employees may find their work monotonous and also quite boring. Also the unreasonable wages and working conditions can also result in a decrease in loyalty for the business. Maslow’s Hierarchy of Needs is the motivation theory that outlines the five levels of needs, from the requirement to satisfy basic psychological needs through to self-actualisation. Through job enrichment, it can be seen that by giving workers an increase sense of responsibility and power in their own-decision-making, esteem needs could be met. Along with this though, job enrichment could also allow the workers to have a sense of autonomy within their work, and this can lead to them enjoying their jobs. This can therefore improve motivation and moral within the business as employees could become to feel more appreciated because of their work. However, there is another side to this as well. Self-actualisation is where workers strive to be the best they can be, so while on one hand we can see that through job enrichment, workers may become more motivated, not all factors can be solved through just this. Financial motivation is also needed, due to the current low basic wage the employees of Telemarketing are receiving. Maslow argued that until a lower need is met, people cannot progress onto the next level of needs. Without the basic psychological, security and social needs being met, it can be seen that according to Maslow, job enrichment would not actually do anything towards helping the staff reach self-actualisation. However, if Telemarketing Ltd. were to give their employees a pay rise, or adopt another pay system, it could be seen that job enrichment might help. Therefore, we can see that while to a small extent job enrichment may help workers achieve self-actualisation, currently without the correct financial motivators in place, job enrichment will not do much more than slightly increasing the employee’s motivation and moral. Just the answers! 4. Recommend a pay system for staff at Telemarketing that will encourage long-term motivation. Justify your recommendation. [10 marks] In the case study, we can see that currently, telemarketing Ltd. pays their employees through a profit-related pay system, alongside giving a low basic wage. Through what has been examined, it can be seen that this pay system is doing nothing to encourage motivation within the workforce, and therefore, Telemarketing Ltd. should change their pay system. A more suitable pay system for the staff at the business is the performance related pay system. Performance related pay is more flexible than profit-related pay as a payment system. Performance related pay rewards 154 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered employees (as individuals, teams or as a whole workforce) who meet certain goals. There are actually a variety of ways in which performance related pay can be paid. These include performance bonus, loyalty bonuses, a pay rise and gratuity. The main advantage of performance related pay is that is can create incentives for people to work and perform better, and it also helps that workers can focus better if targets are clearly set out. It is a fairer system of pay in that hard work is recognised and rewarded and it can help a performance culture to grow within the organisation where people strive to achieve their targets. Specifically to the case study, it can be seen that paying staff in terms of loyalty and gratuity would really help increase staff motivation as well. Firstly this is because we can see that due to the low basic wage currently being paid, employees’ feel that they are not being paid well enough and this has led to problems of high labour turnover and absenteeism. By giving gratuity (which is paid to staff who complete their employment contract), it can be seen that the Telemarketing Ltd. might be able to reduce their labour turnover as well as increase staff motivation. This is because staff would be more willing to stay till the end of their contracts to gain the gratuity, and also, because of this, they would be more motivated to carry out their work in the long-term. Also, giving loyalty bonuses would help in reducing absenteeism, as workers who have stayed with the firm for a certain length of time would be rewarded as well. This would also aid in increasing motivation as the willingness to be loyal to the business would also have increased. Therefore, through performance related pay, it can be seen that Telemarketing Ltd. can encourage long-term motivation. ACTIVITY 2.5E: Incentive for Value Added Resellers Outline what is meant by: a. Just the answers! 1. [6 marks] Monetary bonuses Financial methods of motivation are the way in which businesses motivate workers by using some form of monetary reward. In the case study, we can see that monetary bonuses have been used by Value Added Resellers to motivate their employees. Monetary bonuses are the extra rewards of money that are given to employees for a pre-determined reason. This could be something like a bonus given due to good performance, loyalty or a sales bonus, based on the number of sales made by an employee. Monetary bonus can also include overtime payments, where money is given to workers who work overtime. b. Incentivise on volume Another method of financial motivation, a form of monetary reward, is incentives by volume. Incentive schemes that are based on rewarding employees according to the volume of sales come under this category. Monetary 155 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered rewards are given to employees depending on the volume of sales that they have contributed towards. In the case study, we can see that it is considered that incentivise by volume schemes generally have “negative implications for all parties” and this is because incentivise by volume usually works to motivate the short-term business but really does nothing for the business’s long term aims and objectives. 2. Explain the different financial rewards in the case study. [6 marks] Financial methods of motivation are the ways that businesses can motivate workers by using some form of monetary rewards, such as profit-related pay. In the case study, we can see that most incentive schemes at Value Added Retailers are based on salaries, monetary bonuses and fringe payments. Salaries are set at a fixed annual rate but paid at the end of each month. Salaries help improve a firm’s cash flow since workers are only paid once a month; usually directly into the worker’s bank account. This provides a safer and more convenient method of monetary reward compared to wages, as there is no need to pay the workers in cash. Also salaried workers usually work more than their contracted hours, however, are not paid overtime for their work. Monetary bonuses are a form of time-based payment systems where rewards are usually given in regards to the time an employee has spent working at the particular firm (for loyalty bonuses), or how long the employee has spent working on a particular project (overtime bonus). Fringe payments have also been used as financial rewards in the case study. Fringe payments, also known as perks, are the payments and benefits to an employee in addition to his or her wages or salary. These can vary from one firm to another and depend on the position of the employee in the organisation. In the case study, we can see that a fringe benefit of offering a trip to Hawaii was given to the top performing VAR employees. Therefore, it can be seen that different rewards have been used in the case study to increase motivation. Just the answers! 3. Examine the advantages and disadvantages of each financial reward scheme for VARs. [8 marks] In the case study, we can see the Value Added Retailers give financial rewards as a method of increasing motivation within their business. Financial rewards such as salaries, commissions and fringe benefits have been identified in the case study. Firstly, in regards to salaries, which are fixed annual rate payments made each month to employees, it can be seen that there are advantages of such a scheme, however, there are disadvantages to. Salaries can help improve a firm’s cash flow and also aid in making payments safe and convenient for the business. However, there are some key disadvantages here as well. It is not easy to distinguish the efforts or outputs of different 156 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered workers, and therefore, through a salary based reward system, employees who are more efficient and productive could be ignored, leading to resentment. Also there is little, if any, incentive to actually work harder as people know that they will be paid the same amount each time. Because of this, ‘slacking off’ may be encouraged instead. In regards to fringe benefits, it can be seen that the same disadvantages do not exist. In fact, fringe benefits actually help encourage employee loyalty and motivation as employees feel the need to work better to gain the fringe benefits. They also help make employees feel valued because the employer provides these extra benefits, and so it can help take care of the safety needs (from Maslow’s Hierarchy of Needs). However, as a disadvantage here, fringe benefits can come with huge costs to the business. For example, from the case study it is seen that VARs gave the top performing employee a trip to Hawaii. Costs for this trip would be incurred to the business, and these costs can add up and become a huge burden on a firm’s cash flow position. Commissions on the other hand also have their own advantages and disadvantages as well. Commissions are a form of output based payment systems and workers are paid based on a proportion of sales or output contributed by the worker. This system overcomes the problems with time-based payment systems, but there are many disadvantages with this type of financial reward. Firstly, there is added pressure on workers to sell more or perform at a faster rate. This increase in the need for quantity could forego quality or customer care and this could have detrimental effects on the efficiency of the business. Therefore it can be seen that all the financial rewards used by VARs have both advantages and disadvantages that need to be considered when making a choice into what financial rewards will be used by the business to increase motivation. Just the answers! 4. Evaluate which financial rewards are likely to be most motivating to VARs selling products such as computers for manufacturers to small businesses. [6 marks] There are many forms of financial rewards that can be used to increase motivation of employees. These forms have financial rewards however have to be carefully chosen to ensure that they are the best possible for the organisation, situation and the products in question. In this case, it can be seen that there are two forms of financial rewards that could be quite motivating to VARs selling products such as computers for manufacturers to small businesses. The first financial rewards system is fringe payments. Fringe payments are also known as perks, and they are the payments and benefits to an employee in addition to his or her salary (or wages). By offering fringe benefits, employees would become more motivated to gain the ‘prize’ that is offered by the business. This increase in motivation can also lead to an increase in moral and loyalty and this can lead to an improvement business efficiency, productivity and customer care. Also fringe benefits can allow better direction within the business if they are offered correctly. An example would be giving fringe benefits to employees that achieve their targets 157 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered (matching with the targets of the business, and the business’s own aims and objectives). However, fringe benefits can be quite costly, and can create a huge burden on a firm’s cash flow position. Another form of financial reward that could be motivating to VARs is a performance based pay system. Performance related pay is more flexible than profit-related pay as it rewards employees (as individuals, teams or as a whole workforce) who meet certain goals. Performance related pay can be paid through performance bonuses, loyalty bonuses, a pay rise and gratuity. The main advantage of performance related pay is that is can create incentives for people to work and perform better. Workers can also focus better if targets are clearly set out and it acts as a fairer system of pay in that hard work is recognised and rewarded and it can help a performance culture to grow within the organisation where people strive to achieve their targets. In such a case we can see that targets set in regards to computer output could be met quite easily though this payment system. However, this also has its disadvantages in that non-financial motivators are ignored and quality could be foregone if an emphasis is placed on quantity in the targets. It can also cause stress if targets are unrealistic or unachievable and this could lead to having the opposite of the desired effect, and employees could actually lose motivation. Therefore, it can be seen that while there are financial reward systems that can motivate VARs employees, the advantages and disadvantages needs to be considered before a method is specifically chosen. 2.5 Exam Practice Question: Zinx Explain what is meant by: a. Just the answers! 1. [6 marks] Empowerment Empowerment is a form of non-financial motivation which involves a line manager giving his or her subordinates some autonomy in their job and the authority to make decisions. It is thought that this approach can boost motivation and moral within a business as empowered employees can have a say in how things are done at work. This can lead to a sense of achievement when a task is accomplished successfully. However, it must be seen that empowerment is used carefully, as empowering worker with inadequate skills could lead to more problems for the business in the long run. In the case study, we can see that Zinx is considering using empowerment to increase staff motivation due to a recent article which explains the benefits of using empowerment in the hospitality industry. b. Team working Team working is where employees have the opportunity to work alongside fellow employees. Working in groups can reduce boredom and help to meet the social needs of the employees. From the employer’s perspective, 158 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered team working can help build a sense of belonging, and this can reduce absenteeism and staff turnover. This can increase business efficiency in the long run as well. In the case study, we can see that in the article, it suggests that the “hotel industry employees should be seen as a part of a team.” The creation of division can be damaging as it creates an “us and them” culture within the organisation. Team working can create fluid organisational structures, reducing the levels of management, and therefore making increasing business efficiency and productivity. 2. Differentiate between job enlargement and job enrichment. [5 marks] Job enrichment, also known as vertical loading, gives workers more challenging jobs with more responsibility. It aims to give workers greater independence and power in their work, and therefore can aid in the improvement of the level of staff motivation. Job enrichment also gives workers better opportunities to express and develop their own ideas and can lead to a better sense of achievement when their ideas are implemented. This can lead to employees becoming more committed in their work. Job enlargement on the other hand refers to broadening or increasing the number of tasks that an employee performs. The idea here is that increasing the variety of tasks that is done by an employee can reduce boredom and monotony, and therefore increase motivation. Job enlargement can therefore add interest for a job where a worker is allowed to have an “enlarged” role within the organisation. Therefore while job enrichment increase autonomy and recues monotony, job enlargement only reduces monotony. Explain how greater empowerment at Zinx can affect: a. Just the answers! 3. [9 marks] Employees Empowerment involves granting workers the authority to be in charge of their own jobs, to make decisions and to execute their own ideas. Therefore, employees would be allowed some autonomy in decision-making and would be able to decide for themselves the best way to deal with a task, issue or problem. Such an approach could boost both moral and motivation within a workforce as empowered employees would be able to have a say in how things should be done, giving them a greater sense of appreciation, and achievement when a task is completed successfully. At Zinx, greater empowerment would make employees more motivated at work as they would feel more valued by the company. Also this would increase their loyalty towards Zinx as well. b. Clients Greater empowerment of the employees at Zinx would actually have quite a great impact on the clients of the organisation as well. With Zinx being a part of the hospitality industry, we can see that the empowerment of staff could actually have a positive impact on the running of the business, and this can translate over to improved 159 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered customer service (improved motivation, moral and loyalty of staff members due to empowerment can lead to an improvement of customer service as well). Also, with empowerment, the organisation structure would also become more fluid, and this would aid in the solving of problems, as less layers of management would need to be covered for a decisions to be made if a client as an issue with something. In the case study, we can see that the article suggest that clients may appreciate dealing with empowered employees more. This is because staff would be able to immediately solve problems and put issues right without having to go through layers of management to get what they need. c. The business Through the empowerment of employees (granting employees the authority to be in charge of their own jobs, to make decisions and to execute their own ideas), there would be quite an effect on Zinx itself, and the extent of the effect depends on how effectively empowerment would be used by the business. The effective use of empowerment could lead to increase motivation and moral within the business, and for Zinx, this could lead to increased productivity and business efficiency as well. Through empowerment, as seen through the article, Zinx could remain competitive and successful by going ‘above and beyond’ and empowering their employees so that they work harder in the business environment. However the business needs to check the skill of the employee and whether or not the employee can be trusted or not as if an inadequate employee is empowered, than problems could be caused for Zinx, and managers would have to spend both time and money fixing expensive mistakes. 4. Discuss, using the motivational theory of Herzberg, whether Zinx should increase empowerment at the business. [8 marks] Just the answers! Herzberg’s motivational two factor theory looked at the factors that motivate employees, namely motivation and maintenance (hygiene) factors. Motivators are the factors that Herzberg considered to increase job satisfaction and motivation levels due to achievement, recognition, responsibility and the advancement of workers. Hygiene factors are parts of a job that Herzberg referred to that do not increase satisfaction but help to remove dissatisfaction, but only if they are at an acceptable level. In the case study, we can see that Zinx is considering empowering their employees to increase the motivation of its staff. According to Herzberg’s motivational theory, it can be seen that increasing empowerment is one of the ways in how motivation should be increased within a business. By using empowerment, the nature and content of the job is improved for the employee, and therefore the job is made more interesting. Empowerment also aids in increasing the level of autonomy that employees can display, and it also gives them responsibility. This helps employees feel more valued and appreciated by the business, therefore increasing motivation. Further, Herzberg believes that employees should be motivated using a democratic leadership style, and the authority and decision-making power that is passed down to employees through the use of empowerment gives 160 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered emphasis to this style, further showing that Zinx’s decision to increase motivation through empowerment is the right one. Herzberg sees motivators as things such as achievement, advancement personal growth and recognition and these are all given through empowerment as well. Therefore, through Herzberg’s motivational theory, it can be seen that Zinx should increase empowerment at the business. However, on the other hand, we can see that Herzberg’s two factor theory ignores team working, which would be an essential part of the empowerment implemented at Zinx. Just the answers! In the case study article, we can see that team work has been emphasised as being essential in the hospitality industry, however Herzberg’s theory disregards it. Overall though, Herzberg’s motivational theory promotes the use of empowerment as a method if increasing motivation, and therefore Zinx should increase empowerment at their business to increase the level of staff motivation. 161 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2.6 Organisational and Corporate Culture ACTIVITY 2.6A: Porsche culture contributes to success 1. Define the term ‘corporate culture’. [2 marks] Corporate culture, also known as organisational culture, describes the traditions and norms within an organisation, such as dress code, work ethos and attitude towards punctuality. The corporate culture of a business is the character and personality of an organisation and it refers to the organisational values that are held by the mangers and the employees of the organisation. In the case study, we can see that Porsche has a corporate culture that places their clients first. 2. Outline two factors that may have affected Porsche’s corporate culture. [4 marks] Just the answers! Corporate culture refers to the traditions and norms within an organisation. In the case study, we can see that Porsche has a corporate culture that places their clients as the most important people, followed by their employees, suppliers and then shareholders. There are many factors that may have affect Porsche’s corporate culture. Firstly, the nature of the business can have an influence on the corporate culture of the organisation. The corporate culture is shaped by the purpose and activities of the organisation. This means that the philosophy of current managers and its founders can have an impact on the culture. In the case study, we can see that Porsche’s current culture embodies the views of the former boss, Ruby. Ruby’s philosophy of placing the clients first is what Porsche’s current culture is all about. Also, rewards may have affected Porsche’s corporate culture. If employees are likely to be appropriately remunerated for their efforts, there is more chance of a strong culture being formed. Porsche’s corporate culture places its workers as the second most important people and therefore, we see that it is likely that employees will feel valued by the organisation. The loyalty and motivation that this creates would mean that things like customer service would improve in quality, and therefore, rewards 162 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered would have affected Porsche’s corporate culture. Therefore, we can see that there are factors such as the nature of the business and rewards that can affect the corporate culture of Porsche. 3. Analyse why Porsche’s philosophy of focusing on the needs of clients, workers and suppliers will ultimately satisfy shareholders. [6 marks] In the cases study, it can be seen that Porsche has a philosophy of focusing on the needs of clients, workers and suppliers, and believe that doing this will ultimately satisfy the needs of their shareholders. This happens through the fact that by satisfying the needs of the clients first, Porsche are ultimately gaining advantages over other companies and gaining the benefits of having satisfied customers. Placing customer care first above all else means that customers would feel valued, and this can inspire a sense of brand loyalty. This means that customers would buy things from the company because they like the customer service, and feel that regardless of price; they are getting a better deal. This can lead to having more customers, and more satisfied customers, and this means that Porsche would gain a better corporate image, which could satisfy shareholders. In focusing on the needs of their workers, many more advantages can be gained as well, ultimately leading to satisfying the shareholders. Firstly, by focusing on their employees, employees would begin to feel more valuable to the business. This can inspire loyalty and also increase motivation and moral among the staff. Because of this, there are many benefits such as increase in the quality of customer care (leading to satisfied customers), lower staff turnover and absenteeism and an improvement in the company’s image. A higher motivation level can also lead to a stronger corporate culture, and this has benefits as it can create a sense of belonging for the staff and also reduces mistakes through a reduction in misunderstandings. All these benefits can lead to higher profits as they aid in increasing the productivity and efficiency of the organisation. Higher profits would lead to the shareholders becoming satisfied because this may increase dividend payments, or allow them to reinvest money to make the business grow further. Through this, it can be seen that through focusing on the needs of the clients, employees and suppliers, the shareholders are ultimately satisfied. Just the answers! 4. Discuss the problems of adapting the corporate culture of a car manufacturer when it is taken over or merges with a foreign car manufacturer. [8 marks] There can be many problems when adapting the corporate culture of a car manufacturer when it is taken over or merger with a foreign car manufacturer. Many, if not all, of these problems would stem from the cultural differences that would exist between the two organisations. These differences can cause a cultural clash to exist. Cultural clash is when there is a conflict between the cultures of two or more organisations. 163 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered In a merger, we can firstly see that due to cultural differences, problems would be caused in regards to communication. Effective communication is prevented due to a difference in cultures, be it due to the language, or the different values that the businesses hold, but both these barriers to communication can lead to misunderstanding or mistakes, as employees are not familiar with the processes of each organisation. This can cause problems in that adapting to the culture can prove to be difficult and this could place a halt in the organisation’s activities, or cause inefficiency. Businesses may then try to adapt to the corporate culture, and this can cause problems in itself. Firstly, the cost of implementing change can be very high. There would be things such as training costs and costs within management when the two businesses merge. This change may be looked on as unfavourable, and a resistance to change from the workforce may present itself. This may be due to the differences in culture where the workforce is familiar with one corporate culture and does not want to change. The cultures may be so different that resentment may also appear, causing more problems for the business to occur. In the case study, we can see that US and UK based businesses usually have a strong shareholder culture. This is the complete contrast from the “client and employee” culture that Porsche demonstrates, and such a change in the attitudes of the organisation may come as a shock from employees, if the other culture is adopted. Employees may find that they are not as valued and this could lead to a decrease in motivation. In the case study, we can assume that this occurred when BMW and Rover Cars tried to integrate, and the same for Chrysler and Mercedes-Benz. Because of this, it can be seen that by adapting the corporate culture of a car manufacturer when it is taken over or merges with a foreign car manufacturer, the difference in cultures can lead to many problems for the business. ACTIVITY 2.6B: Changing culture – from state ownership to private sector ownership Just the answers! 1. Explain two reasons why might culture clashes have resulted from state control to a public limited company. [6 marks] Culture clashes refer to the conflict between two or more organisations due to a difference in cultures. In the case study, it is seen that it is possible that there may have been culture clashes that could have resulted when British Airways changed from state ownership to a public limited company. One reason for this culture clash could stem from the nature of the business itself. Firstly, a state ownership would have possibly placed an emphasis on just getting the job done. From the case study, it can be seen that customer satisfaction ratings were low and the business was also overstaffed. It seems as if the business was 164 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered there just to provide jobs for the employees and therefore the business did not really have any set targets that it was working towards. In contrast, the privatisation of the company bought its operations into focus, where a profit based focus was placed on all the strategic decisions made for the business. There is a huge difference in culture here between the incoming managers and previous mangers and therefore, it can be seen that when British Airways was privatised, it could have led to conflict between the different ideas behind running the business. Another reason why culture clash may have occurred could have been due to sanctions placed on employees. With the privatised culture, it seems as if employees were not monitored as the focus was mainly on profits. Because of this, staff training was ignored, and the change in culture may have been a shock for the existing employees, that they would take it to extremes of placing the surcharge that they did to increase profits, not understanding that the management may have not wanted that. The cultures where too different, and misunderstandings eventuated when the ownership changed for the business, and this would have been another reason for why a culture clash existed as well. Therefore it can be seen that is was mainly due to the nature of the business, and the different focuses that were present for the business is what lead to the culture clash. 2. Explain two factors that may explain why a culture clash may develop if BA were to be taken over by an Indian-owned, low-cost airline. [6 marks] If British Airways was to be taken over by an Indian owned, low cost airline, there are many factors that could explain the existence of a culture clash. Firstly, one factor would be the different natures of the businesses. Just the answers! In the case study, we can see that British Airways is now a company that is very focused on making a profit and all its strategic decision are focuses on the profit made. British Airways currently places an emphasis on cutting costs and increasing profits. An Indian owned low cost airline on the other hand may have a culture that focuses on making things as cheap as possible for its flyers. It would therefore not worry too much about its profit, and focus more on offering cheaper flights for its clients. Through this it is seen that there is a huge difference in cultures here so conflict could arise due to misunderstandings and miscommunications that may happen due to the different values that both airlines are used to. This leads to the second factor that could explain the reason for a culture clash developing and that is that there would be a resistance to change from the British Airways. British Airways with its focus on profit would have resulted in higher profits and therefore employees and managers both could have had higher earnings. Changing to a culture that basically ignores profit may cause resistance among the employees of British Airways, especially if they find that their earnings are severely reduced. This resistance to change could lead to resentment between both organisations, therefore leading to conflict as well. Therefore it can be seen that a culture clash would develop in British Airways was to be taken over by an Indian owned, low cost airline due to the major differences in the corporate cultures of the two businesses. 165 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2.6 Exam Practice Question: Regal Supermarkets – a case study in cultural change 1. Explain one possible reason why Anna thought it necessary to change the organisational culture of Regal Supermarkets. [4 marks] In the case study, it can be seen that Anna thought it was necessary to change the organisational culture of Regal Supermarkets. One possible reason for this could have been the fact that it was seen that profits were not high for the business, and Anna may have wanted to change this. She found that the business could have a lot of potential, describing it to be a “sleeping giant”. Because of this, her intentions were to increase the share price and therefore also allow for higher dividends. It was seen that the company did not have anyone in the family that had the skills to takeover, and so we can see that Anna may have thought it was necessary to change the organisational culture of Regal Supermarkets to increase the successes and profits of the organisation. 2. Outline the type of culture that Anna seems to be introducing at Regal Supermarkets. [4 marks] In the case study, we can see that Anna was very quick in her decision making and within five weeks she had changed most of the key managers in the business, and had carried out several plans to change the corporate culture of the organisation. Through this, it can be seen that Anna seems to be introducing what looks to be Charles Handy’s power culture. A power culture occurs when there is one dominant individual or group who hold decision making power. Just the answers! In the case study, we can see that Anna holds all of the decision-making power in Regal Supermarkets. Also in a power culture the organisational structure is likely to be flat with a wide span of control for the decision makers. It is possible that Regal Supermarkets had a taller hierarchal structure; however, from what can be seen in the case study, Anna’s changing of managers could have led to a flatter hierarchal structure. Formal job titles and positions would also not be regarded because decision-making power exists with only a few individuals, and we see this in the case study as Anna replaced 50% of the existing managers and directors. Therefore it can be seen that Anna, in keeping all of the decision making power, has chosen to introduce a power culture at Regal Supermarkets. 3. Analyse the key steps that Anna should have taken to manage cultural change more effectively. [8 marks] A culture change occurs when an organisation adopts or changes to a new culture possibly due to changes in their external or internal environments. In the case study, we can see that Anna has quickly changed the culture at Regal Supermarkets; however, this process was done so rapidly that employees were not given the chance 166 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered to adapt. Anna could have gone about managing the cultural change better, and there are several key steps that should have been taken. Firstly, Anna should not have tried to integrate the new culture so rapidly. Making quick decisions without consulting the other employees has meant that the employees were unable to adapt to the change in culture. This means that the new culture was most likely not well received, and a resistance to change would have also been caused. Anna should have taken careful steps when changing the corporate culture of the business. Making a few changes at a time would have been better than the hasty decisions that she made earlier. This would have allowed employees to slowly get use to the new culture, and it would have also allowed the employees to gain a better understanding of the new culture. This would have added in the employees being able to better uphold the values of the culture and this would have also aided in creating a stronger corporate culture, which comes with benefits of better communication, teamwork, and a reduction in misunderstandings as well. Another thing that Anna should have done to manage the cultural change more effectively is that she should have explained the changes she was going to make to the employees. In the case study, we see that the previous corporate culture of the business had a strong emphasis on the business’s employees being like family. Regal Supermarkets worked in a “family” culture where it was said that the whole business was like being in a “big family”. Because of this, it can be seen that the employees where probably used to having their opinions being taken into consideration before major decisions were made and Anna’s way of handling the change may not have been the most effective way. This is because the employees may have felt that they are suddenly not valued anymore by the business, and this could lead to a decrease in motivation and moral, as well as loyalty for the business. Sitting down and talking about her ideas of changing the corporate culture of the business may have aided her in allowing other employees understand her views, and by making them understand her views, the resistance to change could have also been reduced. Therefore it can be seen that there are several key steps that should have been taken by Anna to manage cultural change more effectively at Regal Supermarkets. Just the answers! 4. To what extent will the change in culture guarantee future success for this business? [9 marks] In the case study, we can see that Anna found that it was necessary to change the corporate culture of the business to guarantee future success. However, it can be seen that this change may only guarantee future success to some extent. This is because there are both advantages and disadvantages of changing the corporate culture of a business, and these need to be fully considered and their individual impacts need to be taken into account before the change is carried. Firstly in the case study, it is seen that Regal Supermarkets was suffering as it was not making enough profits. It had a strong corporate culture, however in terms of the actual running of the business this corporate culture was not doing enough to keep the businesses profits up. Through this, it could be seen that a change in culture 167 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered could have been necessary in trying to change the current operations of the business and therefore make the business more profitable. A change in culture may have led to a stronger culture within the organisation, and in relation to the case study, it can be seen that Anna’s main aim and reason for changing the corporate culture of the business was to increase the financial success of the business. Anna believed this could be achieved through changing the corporate culture of Regal Supermarkets. Through this it can be seen that a change in culture could guarantee future success for the business, however there is another side to this, in that this mainly relies on the fact that the change in corporate culture proves to be successful, and there are many factors that could hinder its success. Firstly, there may be high costs involved in creating a change in culture. This could be due to staff training that may be given to get employees to adapt and work according to the new culture, or due to costs in the actual implementation of the culture, but regardless of why, high costs could actually decrease the financial means of the business, and if the change is not a success, it could result in the business struggling even more. Also, the way that the change has been carried out has left little time for the employees to even adapt to the idea of the change. This may have caused quite a large resistance to change, thereby limiting the success of the culture change. This is because a resistance to change would lead to employees making more mistakes, and could lead to spiteful acts and resentment, especially in this case where they may feel that they are not really valued members of the business anymore. Just the answers! Public opinion is also a factor that would act as a barrier to the change and lead it to being unsuccessful. In the case study it can be seen that media coverage of the change has been projected to be quite negative. Due to this, Regal Supermarket may lose its customers if it feels the change may affect the level of customer service they are given. Losing customers would negatively impact the future success of the business. Through this it can be seen that while to some extent a change in culture may aid in gaining future success for the business, it does not necessarily guarantee it as there are some external factors that can have an impact on how the change is received and they cannot be completely controlled. 168 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2.7 Employer and Employee Relations 2.7 Exam Practice Question: Single global super union within a decade 1. Define: [4 marks] a. Single-union agreement Single-union agreement refers to an organisation agreeing to participate in the collective bargaining process with a single trade union that represents the workers. In the case study, it can be seen that Amicus aims to create a single union that will cross international boundaries, and has started doing this by signing solidarity agreements with a union in Germany and two others in the USA. b. Collective bargaining Collective bargaining is the negotiation process whereby trade union representatives and employer representatives discuss issues with the intention of reaching a mutually acceptable agreement. Just the answers! 2. Analyse two potential benefits to both workers and employers of a ‘globalised union’. [7 marks] A globalised union is a union that accepts members from the same industry irrespective of their skills, qualifications, ranking or the nature of their work (therefore it is like an industrial union), however this applies to a union in a global context, and therefore means that workers are accepted from any country and company. There are actually many benefits to both workers and employers of a ‘globalised union’ as a globalised union can give the benefits of a labour union, but on a much larger scale. Firstly, one potential benefit of a globalised union is that it can aid in improving the conditions of work for its members. A globalised union would look out for the rights of the workers that are part of the union, and this would therefore have clear benefits to the workers. This is because the workers would find that their needs are being met and this can also benefit workers 169 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered as they would therefore enjoy their work more. This translates over to a potential benefit for employees as the workers would therefore become more motivated, and this increase in motivation can lead to improved moral and loyalty. An increase in motivation also has the added benefits of a decrease in staff labour turnover and absenteeism, as well as increasing business efficiency and productivity. For the employer this would mean that the businesses profits could increase if the businesses productivity comes to outweigh the costs by a large margin. Another potential benefit of a globalised union is that it can aid workers with legal matters or give them financial support. This has a benefit to the employees as it can lead to a sense of security for the employee. The second potential benefit of globalised unions is that they allow negotiating to happen between employees and employers in regards to matters such as a demand for a pay rise and benefits. This can help as it can reduce drastic action being taken by the workers (e.g. strike action), and employees (e.g. closure), if a conflict arises. A negotiation would be seen as a win-win situation for both parties involved. Therefore, it can be seen that there are some potential benefits to both employees and employers of a ‘globalised union’. 3. To what extent would any one multinational company be likely to be affected by the development of one large global trade union? [9 marks] A multinational company is likely to be affected by the development of one large global trade union to some extent, however, there are some limitations to the impact the global trade union would have on the company as well. Just the answers! Firstly, a multinational company could be affected by a global trade union as the development of one large trade union would include many workers from different industries all together. For a multinational company that may be working in several sectors of the economy, it can be seen that workers in all the different sectors could be part of just one large trade union, and this could place all their needs and wants together. Because of this, for the company, it would mean that for all the different areas, they would be dealing with just one single union, and this may make things easier in terms of communication between the two parties in the event of conflicts. Negotiations could also run smoother as the same people could be dealing together. Ideas would be conveyed quicker if both parties knew each other well enough. However, in the case of conciliations and arbitrations, finding a neutral party may be even harder with so many members involved. A large trade union also has to cater for the many views of the employees, and therefore it can be seen that a conflict of interest could arise. This would affect the multinational company as employees from different countries may take different views on certain things (e.g. a pay rise), and this could lead to misunderstandings between the company, and the union. Also a trade union is influenced by the number of members it has. Generally, a union is more powerful if members are united in their cause and if there is a large percentage of the workforce belonging to the union. In this case, a global trade union for a multinational company would mean that there would be more workers that are part of the company’s workforce united under one cause. Because 170 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered of this, the trade union would have more power in their say as more workers could be demanding the change. However, on the other hand, because a multinational company is already quite large, it may already have an industrial union that is for employees of the company. Because of this, a global trade union may mean a few more members are added, however, it could also not change anything as the number of members could have already been quite large form the start. Also, a trade union’s goals are still the same, whether they would be a globalised union or not, and therefore in that case, the development of a globalised trade union would not affect a multinational either. Just the answers! It can therefore be seen that it really depends on the current state of affairs regarding unions for the multinational company; however in general, the development of a globalised trade union will still affect the company to some extent, especially because it would contribute to increasing the power the union has. 171 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2.8 Crisis Management and Contingency Planning 2.8 Exam Practice Question: The BP Gulf of Mexico disaster 1. Define the following terms: a. [4 marks] Crisis management Crisis management refers to the responses of an organisation’s management team to a crisis situations. It involves setting up measures to allow instantaneous and constructive action to be taken in the event of a crisis. In the case study, it can be seen that BP used a crisis management plan to try and deal with the disaster of the Deepwater Horizon drilling rig exploding. b. Contingency plan Contingency planning is about being proactive to changes in the business environment. It involves developing a plan before an unwanted and unlikely event occurs by using “what it” questions to identify possible threats. It looks at how to deal with a crisis through the development of back up plans. In the case study, it seemed as if BP did not really have a contingency plan ready for the disaster and the impacts of it. Just the answers! 2. Outline the key steps BP would have gone through to produce a contingency plan for a crisis such as the Deepwater Horizon. [5 marks] Crisis management entails the use of business contingency plans which aid in reducing the negative impacts of disasters. Contingency plans generally consist of six key stages and these stages are the steps that BP would have gone through to produce a contingency plan for a crisis such as the Deepwater Horizon. The first step involves selecting a team of staff who are trained to deal with crisis. These usually include a senior executive and someone who is good at dealing with the press. This helps ensure that all external enquires 172 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered relating to the crisis are dealt with by the team so that the correct and desired messages are portrayed to the public. The next step is that the team analyses and assesses the potential threats. This forms the bulk of the contingency planning as in this step, ‘what if?’ scenarios are considered. The impact that each scenario could have on the organisation is analysed and user-friendly plans are devised to deal with these impacts. The third step involves the team developing and implementing alternative tactics. This is because there should be plans to ensure that critical business functions are protected in the event of the crisis. For example, in the case study, it could be seen that in the time of a crisis, it is essential for BP to still be able to continue selling the oil, as without that, it could come across even larger problems. This step therefore requires self-sufficient resources to be deployed to maintain its core activities. The following step is focused on communication. Information and decisions that have been made have to be systematically communicated to those who are involved. The fifth stage involves the business resuming its normal operations, as by then, the business should have dealt with the crisis. The last stage in a business contingency plan could arguably be the most important as it could help the business deal with or prevent future crisis. The last stage involves reflecting on the crisis, and the actions taken so that the business is better prepared to deal with crises in the future through updating its contingency plan. These are therefore the six key steps that BP would have taken to prepare a contingency plan for the crisis that it was facing. 3. Analyse the reasons why the BP share price fell by 50 per cent following the Deepwater Horizon crisis. [7 marks] Just the answers! In the case study, it can be seen that the BP share price fell by 50 per cent following the Deepwater Horizon crisis. There could be many reasons due to this fall in price; however, the main one would be because of the crisis and the impacts of it. Firstly, in the case study it is seen how BP did not actually have a contingency plan quite ready in terms of the oil spill, and along with that, to the public, it would seem like the business does not care about the environment. Showing this lack of corporate social responsibility would have therefore had a negative effect on the share price. Acting in a socially responsible way can be a source of competitive advantage for the business, however, the opposite also holds true where acting in a way that is not socially responsible can lead to the company gaining a disadvantage amongst its competitors. This oil spill would have been regarded as acting in a way that is harmful to the environment and therefore BP could have lost some of its major customers who may not want to be associated with the current image that was portrayed to the media. Due to this, this would have led to a loss in sales for the business, thereby affecting the share price of the company. 173 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Another reason as to why the BP share price could have fallen is that due to the crisis, it had to pay $20 billion to victims of the oil spill, and it also declared that it would not be paying any shareholders dividends in 2010. These are impacts of the oil spill that would have led to the share price falling as the business would be losing quite a bit of its market share price, due to the $20 billion that it had to give away. Alongside this BP’s costs would have also increased for the same reason. Not paying out dividends would have also made shareholders quite upset, along with the poor public relations that the disaster caused as well. These reasons would have all contributed to having a negative effect on the organisations profit, and therefore, it can be seen that they would have contributed to the 50 percent fall in the BP share price. 4. Discuss the likely benefits and limitations of BP’s contingency planning when preparing for any future disasters like Deepwater Horizon. [9 marks] Contingency planning looks at how to deal with a crisis to ensure the continuity of the business. It is about being proactive to change and using ‘what if?’ questions to identify possible threats. There are many benefits of BP using contingency planning to prepare for future disasters however; there are limitations as well that need to be considered. Firstly, contingency planning can help reduce risks since most, if not all, eventualities are accounted for. Through this, it would mean that BP could have accounted for the fact of a possible oil spill, and therefore looked into making backup plans to ensure that if the disaster did occur, the negative impacts were minimised. Also contingency planning helps reduce the impact of the crisis on the organisation as well as the fact that there is a well thought out plan that can be followed in the event of a disaster. Just the answers! In the case study, we can see that BP did not have a contingency plan ready and this caused it to suffer poor public relations, along with a decrease in its share price. Contingency planning could have help BP limit these disastrous negative impacts. Contingency planning also helps reassure staff and hence satisfy their safety needs (Maslow’s Hierarchy of Needs). This is because employees would feel safer with the fact that the business is forward looking and is prepared to deal with disasters. They would be reassured that if something did happen; their jobs would most likely still be safe. Contingency planning also necessitates effective communication between management and employees and this has the added benefit of enhancing productivity and motivation of the business. This is because it would reduce the “us and them” culture that may exist within the organisation, thereby improving the sense of appreciation that employees would feel. This could also lead to increased loyalty for the business, and in times of crisis, such as the disaster that BP is facing, this loyalty from the employees can prove to be very useful. However, there are limitations of contingency planning as well. Contingency planning would use up valuable management time and resources for BP, thereby increasing the costs of the business. The crisis that have been planned for are sometimes more likely to have never happened, and therefore the time and money invested 174 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Just the answers! into the possible solutions could be a waste. For example, if the oil spill disaster did not happen, then BP would have wasted both time and resources in their contingency plans that could have been better used elsewhere. Another limitation is that if the plans are based on outdated or inaccurate data, then inappropriate actions may be taken during the event of the crisis, and this could have further negative impacts than originally expected. Also, contingency planning cannot actually account for all disasters, specifically natural disasters like tsunamis and earthquakes. Therefore, it can be seen that while contingency planning would have benefits to BP if they use it to prepare for future disasters like the Deepwater Horizon, there are limitations to using contingency planning and these need to be considered as well. 175 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Accounts and Finance Just the answers! Answer . 176 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Topic 3: Accounts and Finance Activity 3.1A Activity 3.1B Activity 3.1C Activity 3.1D Activity 3.1E 3.2 Investment Appraisal 3.3 Working Capital Activity 3.2A Activity 3.2B Activity 3.2C Activity 3.2D Exam Practice Activity 3.3A Activity 3.3B Activity 3.3C Activity 3.3D Exam Practice 3.4 Budgeting Activity 3.4A Exam Practice 3.5 Final Accounts Activity 3.5A 1.2A Activity 3.5B Activity 3.5C Activity 3.5D Activity 3.5E Activity 3.5F 3.6 Ratio Analysis Just the answers! 3.1 Sources of Finance Activity 3.6A Activity 3.6B Activity 3.6C Activity 3.5D Activity 3.6E Exam Practice Exam Practice 3.5 Exam P Interactive! Click or tap to jump 177 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 3.1 Sources of Finance Activity 3.1A: EIB loans €30 for research and development in aeronautics 1. Evaluate whether loan capital was the best source of finance for this company. [12 marks] Just the answers! Loan capital are loans that are obtained from commercial lenders such as banks and these loans tend to be medium to long term sources of finance. Loans are an external form of finance and while they come with quite a few advantages, there are disadvantages to using loan capital as well. In the case of this company, it can be seen that the French company has been granted a €30 million loan by the European Investment Bank. For the company, using loan capital as a source of finance, there are many advantages. One advantage would be that using loans is a very quick way to gain capital. It is faster than the use of selling shares, as once a loan is granted, that source of finance is given just like that, whereas with shares, it can be very hard to judge how long it would take for all the shares to sell for the company to be able to raise the amount of capital needed. In the case of this French company, €30 million is a large amount of finance, and therefore, had another method of gaining finance been used, it would have been harder to raise that much money as quickly as it had been raised with the loan. Also, another advantage, in the case of selling shares instead of getting a loan, is that with shares, a proportion of company ownership is passed over to the shareholder, including voting rights. This can lead to a dilution of control among other things, whereas with loans this risk would not exist for the company. Further, in the case study, it can be seen that currently, share prices are also very volatile and uncertain, and this might also lead to shareholders having less confidence in the company’s profitability. This would have led to the company being unable to sell many shares as investors would be, as stated in the case study, “understandably nervous at the present time with uncertain share price”. However, with these advantages, there are disadvantages to using loan capital as well. The main disadvantage is that with using loan capital, there is interest that needs to be considered. This might make it hard for the company in the long-term having to pay interest, as with the company getting a loan of €30 million, the interest on that would be quite substantial. Also, getting a loan of that amount may also be quite difficult for the 178 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered company as it is quite a large sum of money, and so lenders may be quite apprehensive of lending out such a large amount, in fear of not being repaid. However, despite these disadvantages, it can be seen that the French company has been granted the loan, and in the case of interest, it is stated in the case study that interest rates have currently been falling. Therefore, though this, it can be seen that for the company, gaining finance through loan capital might have actually been the best source of finance for the company currently. Activity 3.1B: Indian companies take AIM 1. Explain why Indian companies might decide to join AIM rather than the full Stock Exchange. [4 marks] In this case study, it has been seen that four Indian Companies floated on the London AIM market. Between them, they were able to raise a total of $387 million. There might have been many reasons why Indian companies might have decided to join AIM rather than the full stock exchange, and these reasons most likely come from the companies’ situations and also the benefits they gain from joining AIM rather that the full Stock Exchange. One reason for this might be due to the fact that through joining AIM, there are no “costs or controls of a full public listing” that come with floating on the full Stock Exchange. This might mean that it is easier for the Indian companies to float their shares on AIM as they probably are not quite globally recognized companies yet, and therefore, starting through AIM might be a better option for them. Also, these companies can gain many benefits through joining AIM over the full Stock Exchange. One is that they can gain capital through an international pool, and so, it can help start their companies to be internationally recognized. Also, through AIM the companies benefit from “a professional investor base and a commitment from LSE to serve emerging economies.” This helps suit the companies’ probable situations as developed companies wanting to emerge into wider international markets. Just the answers! Therefore, it can be seen that Indian companies gain quite a few benefits in joining AIM, and that is why they may want to join AIM over the full Stock Exchange. 2. Explain why Peacocks is likely to have decided to issue shares by prospectus to the general public. [4 marks] There are many reasons why Peacocks is likely to have decided to issue shares by prospectus to the general public, and many of these reasons stem from the benefits gained by the company by carrying out an IPO. An IPO, or an Initial Public Offering, is the first sale of stock by a private company to the public. In offering an IPO, Peacocks would go from being a private company to a public limited company. One benefit of doing so is 179 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered that Peacocks is able to raise a huge amount of capital, and in the case study it can be seen that the company aims to raise £42 million to repay outstanding debt and for further expansion plans. Also, through this, the company’s cash flow can be improved, and also, becoming a public limited company allows Peacocks to gain limited liability. It can be seen therefore, that because of these reasons (the benefits gained by Peacocks), Peacocks would have decided to issue shares by prospectus to the general public. 3. Interpret what the managing director of Peacocks meant when she said there were advantages in selling shares to repay debt. [6 marks] In the case study, it can be seen that the “managing director believes that there are great benefits in replacing debt finance with equity or share finance.” Through this, it can be interpreted that selling shares to repay debt has many advantages, and these advantages would go towards helping the company in achieving its company objectives and being successful. Firstly, just selling shares in itself has many advantages for the business. Selling shares allows the business to gain large amounts of capital. This capital can then be used by the business to improve cash flow in the business, and also, aid the business in expansion plans and paying debt. Another advantage of selling shares is that through selling shares, the business becomes a public limited company, meaning that the liability of the business becomes limited, which comes as an advantage for the owners of the business. As mentioned before, the capital gained from selling shares can be used to repay debt. This comes with many advantages, as stated by the managing director of Peacocks. The main advantage would be that through selling shares, finance is raised to repay debt, and this is better than through using other sources of finance for a few reasons. One reason is that, for example, if debt is used to repay debt, then a cycle is formed, and the interest from the debt would always be there. Shares have no interest, and therefore, through this, it can be seen that using equity finance to repay debt finance has its benefits in that the debt can be repaid, with no increasing interest being formed on the side. Just the answers! 4. Explain why Incitec Pivot is likely to have decided to use a rights issue of shares to raise capital. [4 marks] Rights issue of shares is when existing shareholders are given the right to buy additional shares at a discounted price. From the case study, it can be seen that Incitec Pivot has used rights issue of shares to raise capital, as it is offering its shareholders a 40% discount on the company’s latest share price. There are many reasons why Incitec Pivot may have used the rights issue of shares to raise capital. One reason would be that through using the rights issue of shares, capital can be gained very quickly as it is existing shareholders that are offered the rights issue, and these shareholders would most likely be more willing 180 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered to buy the shares as they would probably be holding more confidence in the company. Also, through offering a rights issue of shares to the existing shareholders, the threat of a further dilution of control does not exist, as it is only existing shareholders who can buy the shares at a discounted price, and so there would not be any more new shareholders that hold a portion of the company’s ownership. Because of these benefits for the business, the rights issue of shares would seem like the perfect option for the business in order for it to raise capital to finance its long term investment and research plans. 5. Evaluate whether a shareholder in Incitec pivot would be advised to buy the rights issue of shares being offered. [8 marks] From the case study, it is seen that Incitec Pivot plans to raise $1.17 billion through a rights issue of shares. Through this, it can be seen that Incitec Pivot would most likely be advising its shareholders to buy the rights issue of shares; however, there are some disadvantages in raising capital through the rights issue of shares for Incitec Pivot too. Just the answers! Firstly, one reason why Incitec Pivot would advise its shareholders to buy the rights issue of shares being offered is so that the company can raise capital to fund its long term investment and research plans and also to repay loans. Another advantage of doing so would be that for the shareholders, as they are offered a discounted price, they would benefit from gaining a proportion of ownership of the company with paying less for the share. It would be more affordable for the shareholders of Incitec Pivot as well. Another reason why a shareholder in Incitec Pivot would be advised to buy the rights issue of shares being offered is because of the dividend payments. For shareholders, buying shares comes with the advantage of divined payments, and Incitec Pivot would use this advantage to persuade existing shareholders to buy the rights issue of shares. Through offering a rights issue of shares, Incitec Pivot also is able to raise capital without being under the risk of a further dilution of control, and so that also adds as more incentive for the company to advise its shareholders to buy the shares being offered. However, despite these reasons, there would be some reasons why Incitec Pivot may be unwilling to advise its shareholders to buy the rights issue of shares. The shares are being offered at a 40% discounted price and therefore, this would mean that the company is selling shares for less than they are worth. This would lead to them raising less capital than originally forecasted. Another disadvantage of this plan is that, as stated in the case study, the share issue is likely to reduce the market share price in the short-term. For Incitec Pivot, this would mean that the shareholders may actually be less willing to buy the shares as the expected gain in buying the shares may be seen to less than wanted. Although, it can be seen that the company would benefit more from advising its shareholders to buy the rights issue of shares, and therefore, it is most likely that Incitec Pivot would advise its shareholders to buy the rights issue of shares being offered. 181 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Activity 3.1C: Tick the boxes … Sources of Finance Long-term finance Sale of shares to the public Short-term finance Available to Unincorporate d Businesses  Available to Private Companies  Sale of debentures Medium-term finance Leasing  Debt factoring  Take on partners                      Ten-year bank loan   Rights issue of shares   Loans from family      Just the answers! Bank overdraft Available to Public Limited Companies 182 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Activity 3.1D: Telkonet raises $3.5 million by sale of debentures 1. Explain the terms: [4 marks] a. Convertible debentures Debentures are a type of long-term loan to a business with the promise of fixed annual interest payments to the debenture holders. Convertible debentures however can be converted into equity. From the case study, it can be seen that the company CuraGen has issued $125 million of convertible debentures that can be converted into shares in seven years’ time at a price of $127 per share. b. Working capital Working capital also known as net current assets is the day to day money that is available to a business. It is calculated as the difference between a firm’s liquid assets and its short term debts. From this case study, it can be seen that Telkonet Inc. has issued debentures to raise finance to cover its working capital. 2. Evaluate the strategy of both companies in raising finance through the sale of debentures rather than either selling shares or a long-term bank loan with variable interest. [10 marks] Just the answers! Both companies in this case study, Telkonet Inc. and CuraGen have decided to raise finance through the sale of debentures rather than either selling shares, or getting a long-term loan with variable interest. Debentures are a type of long-term loan to a business with the promise of fixed annual interest payments to the debenture holders. Telkonet Inc. has arranged to sell $3.5 million of three-year debentures of 13%, while CuraGen has decided to sell $125 million dollars of convertible debentures. There are many reasons why both these companies may have decided to sell debentures instead of using other sources of finance for investments, to finance their working capital (in the case of Telkonet Inc.) or for their longterm research (in the case of CuraGen). One advantage of using debentures over getting a long term bank loan with variable interest is that with debentures, the interest that has to be paid is fixed whereas the variable interest can be unpredictable as it changes with the state of the economy. While it is a benefit when interest rates are low, if interest rates soar, the companies would have to pay more interest, than what they would pay for the debentures. Also, another advantage is that with the sale of debentures, the companies ownership is not being sold over, unlike with shares. This means that debenture holders would not have any voting rights in the company, and also, the companies would not end up suffering from a dilution of control as well. Another benefit to Telkonet Inc. and CuraGen is that currently, it can be seen that, from the case study, that world share prices are falling, and “another bad day has been recorded with further falls”. This would mean that if the two companies had decided to sell shares, the price they sold them for would be quite little, and also, this fall in share prices would also lead to investors losing confidence in the profitability of buying shares from the businesses. 183 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered However, despite all these advantages, there are a few disadvantages over the companies choosing to sell debentures over shares or getting a bank loan. One disadvantage is that with debentures, interest needs to be paid to the debenture holders, whereas with shares, this problem does not exist. Also, another disadvantage would be that selling enough debentures needed to raise the amount of capital needed by the company may actually take a while. Loans on the other hand, once approved, counts for quick and easy access to the capital needed by the companies. Although, it can probably be seen that the advantages overcome the disadvantages in this situation, and therefore, it can be concluded that the strategy used by both companies in raising capital through the sale of debentures over the use of shares or loans, is a reasonable one. 3.1 Exam Practice Question: easyJet takes off to 342P share price 1. Define the terms: [4 marks] a. Public limited company A public limited company is a company that is able to advertise and sell its shares to the general public via the stock exchange. From the case study, it can be seen that easyJet is a public limited company as it sells its shares to the general public. b. Share price A share price is the value of a single share. From the case study it can be seen that easyJet had a share price that started at £3.10 a share, however, it has seen this share price rise strongly on its first day by 10% to £3.42. Just the answers! 2. Outline two possible sources of long-term finance available to easyJet. [6 marks] Long-term refers to any period after the next five years. There are many possible sources of long term finance that are available to easyJet, however, all these possible sources of finance need to be carefully evaluated to see whether or not they would be the best option for the company. Two of these possible sources of finance for easyJet are debentures or gaining long term loans. Debentures are a type of long-term loan to a business with the promise of fixed annual interest payments to the debenture holders. They are similar to shares, however, unlike shares, debenture holders do not usually have a say in the business (no voting rights) or ownership of it. The benefit to debenture holders is that they receive interest; however, this comes at a disadvantage to the company as they need to pay interest to debenture holders. In a sense, raising finance through debentures is like raising finance through debt. For the 184 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered business, this long-term finance source holds an advantage over selling shares as they do not lose control in the business. Another source of finance that is available to easy jet is a long-term loan. These loans are obtained through commercial lenders such as banks and are more commonly used for the medium to long term, which is something that easyJet wants. For the advantages of this for the business, raising capital through loans allows a large amount of capital to be raised very quickly (if approved by the lender): especially with a profitable business with a higher credit rating, lenders are not too hesitant in offering loans. However, what falls to the disadvantage is that, as with debentures, there is the issue of interest. EasyJet would need to pay back interest when gaining capital through long-term loans and this may affect the cash flow of the business in the long-term. Through this, it can be seen that there are many possible sources of finance for easyJet, however, they do have their advantages and disadvantages that need to be considered before a decision is made on how they company is going to raise capital. 3. Explain why an expansion in easyJet’s passenger numbers has increased the need for short-term and long-term finance. [6 marks] For every business, careful attention needs to be paid to the cash-flow situation in the business. Different sources of finance are used to deal with different situations, and they are usually grouped under three different sections; short term, medium term, and long term finance. Just the answers! In the case study, it can be seen that an expansion in easyJet’s passenger numbers has increases the need for short-term and long-term finance. Short term refers to the current tax year. In terms of easyJet’s external sources of finance, it can be seen that this is anything that has to be repaid to creditors or lenders within the next twelve months. This increased need for short term finance in the business would link to the higher demands of working capital needed for the day to day running of the business. Due to the increases number of passenger numbers on easyJet’s flights, more resources that are bought for the passengers would be needed. This would be things like food and resources given to passengers on the flights such as pillows, blankets etc. Short term finance would be needed so that the business can continue effectively running on a daily basis. Long term on the other hand, refers to any period after the next five years. This would be finance needed to complete the businesses plans for the long term. For example, it can be seen that the increase in passenger numbers would lead to easyJet needing more planes in the future. They have planned to increase the number of planes running by 32, and long term finance is needed to fund this development. Along with such things, long term finance would also be needed for expansion plans of the company’s airport facilities as well. Therefore, it can be seen that due to the increase in passenger numbers in easyJet, both short and long term finance would be needed to make sure that the company continues to run effectively and efficiently. 185 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 4. Evaluate the view that easyJet’s decision to raise long-term finance by selling shares is preferable to raising it through borrowing. [9 marks] Long term finance refers to sources of finance that are for the long term; this is anything in the period after the next five years. Examples of such include both equity finance (selling shares) and debt finance (borrowing). With both these sources of finance, there are both disadvantages and advantages to them, and therefore, before a decision is made in which method should be used to raise capital for the business, the sources of finance need to be carefully evaluated. For example, the main advantage that debt finance holds over equity finance is that as no shares are sold, there is no threat or risk of the dilution of control in the company. This holds advantages for the company owners as they are the only ones with voting rights to how the business should be run. In the case study though, it can be seen that the owners of easyJet would not face this disadvantage too much as Mrs. Haji-Ioanno, the owner and her brother and sister still control about 75% of easyJet. The main disadvantage of debt finance is that it has to be repaid with interest, whereas with equity finance, the advantage is that it never has to be repaid. Just the answers! With equity finance, while there is the slight disadvantage of paying dividend to shareholders, they do not need to be paid every year, however, with the interest that comes with borrowing (debt finance), the interest must be paid when demanded by the lender. However, with borrowing, there is no permanent increase in the liabilities of the business, as the loans will have to be repaid eventually, an unlike with selling shares, the lenders have no voting rights or ownership in the business. Also, another advantage of borrowing is that interest charges are an expense and are therefore tax deductible. This reduces the total company tax paid by the business, however, with shares; the advantage would be that a large amount of finance can be raised through equity finance in comparison to debt finance. For example, in the case study, it can be seen that the share price for easyJet has risen strongly on its first day, rising 10%. This rise in share price would make investors more confident in the profitability of the business, and therefore, they would show more interest in buying shares in the business. Therefore, through this, it can be seen that although borrowing has its advantages, for easyJet, it seems that selling shares is preferable to using debt finance to raise capital. 186 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 3.2 Investment Appraisal Activity 3.2A: Textile company plans investment 1. Calculate the payback period for both projects. Year Project X Net cash flow ($) [6 marks] Project Y Cumulative cash Net Cash Flow ($) flow ($) Cumulative cash flow ($) 0 (50,000) (80,000) 1 25,000 25,000 45,000 45,000 2 20,000 45,000 35,000 80,000 3 20,000 65,000 17,000 97,000 4 15,000 80,000 15,000 112,000 5 10,000 90,000 - Just the answers! 1. Project X Payback period estimate Between Year 2 and Year 3 Difference $50,000 - $45,000 = $5,000 Average monthly cash $20,000 ÷ 12 inflow = $1,667 Number of months $5,000 ÷ $1,667 =3 Payback period 2 years and 3 months Project Y Year 2 2 years 187 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2. Explain which project should be selected if payback is the only criterion used – and why. [6 marks] If the payback period criterion is used, the project that should be selected is Project Y. This is because it would take the business only two years to payback Project Y, whereas, Project X would take three months longer, with a payback period of two years and three months. The payback period refers to the period of time for an investment project to earn enough profits to repay the costs of the initial investment. Using this criterion, the business can see how long the payback period for each Project is, and also allows the business to see whether the Project will be paid off, and if they will break-even before the projects’ need to be replaced. From the payback period data displayed above, it can be seen that Project Y seems to be the most reasonable choice in terms of the project chosen as the business will break-even sooner, meaning the business would start making profit from the Project sooner. Also, a shorter payback period tends to reduce the risk of the investment, and this is another reason why Project Y would also be the project selected if the payback criterion is used. 3. Calculate ARR for both projects. [6 marks] Project X Project Y Project profit $90,000 - $50,000 = $40,000 $112,000 - $80,000 = $32,000 Average annual profit $40,000 ÷ 5 =$8,000 $32,000 ÷ 4 =$8,000 ARR $8,000 ÷ $50,000 x 100 =16% $8,000 ÷ $80,000 x 100 =10% ARR 16% 10% Just the answers! 4. The business has a cut-off or criterion rate of 11% for all new projects. Explain if either project would be acceptable with this restriction. [3 marks] The cut of criterion rate is 11% for all projects and from the data above, it can be seen that the ARR for Project X is 16% and the ARR for Project Y is 10%. From this, it can be seen that Project Y is definitely not an acceptable project with the 11% restriction. On the other hand, further qualitative information may be reviewed by the business to say whether Project X is acceptable or not. This is because the criterion rate at 11% is only slightly smaller than 16%, so, while it can be seen that Project X may be worth the risk, and therefore acceptable to take on, further information may help the business be more confident in any decision to go forward with the project. 188 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 5. Taking both results of payback and ARR together, which project would you advise the business to invest in? [8 marks] The payback period refers to the period of time for an investment project to earn enough profits to repay the costs of the initial investment. From the data given in the case study, it can be gathered that the payback period for Project X is two years and three months, and the payback period for Project Y is two years. In this regard, in seems that Project Y would be the better project to invest in; however other factors need to be considered as well. The accounting rate of return calculates the average profit on an investment project as a percentage of the amount invested. The ARR of Project X here is 16%, and compared to the ARR of Project Y, which is 10%, the 16% ARR value shows that Project X is more worth the risk of the investment. With that, it would seem that Project X is probably better as, there is only a three month difference in the payback period and the ARR value is higher. However, the company’s objectives need to be considered as well. If the company is looking to payback the project quickly, then Project Y would be better, even though there is a better rate of return on Project X. The profit gained from Project X is received at a later stage in the project’s timeline, due to its slighter longer payback period, and this means that it would be worth less in today’s value. However, in comparison to the criterion rate of 11%, Project X has the relatively more attractive ARR. Therefore, it can be seen that as Project X has the higher ARR value, proving to be worthier of the risk of investment, despite its slightly longer payback period, and so, in conclusion, Project X would most likely be the reasonable choice for the business to invest in. 6. Explain any additional information that would help you advise the business on a more suitable project. [4 marks] Just the answers! Along with the quantitative investment appraisal information that has been gained from the case study, qualitative investment appraisal information would also help in advising the business on the more suitable project. For this, many things should be looked at, for example, predications, objectives, and risk profiles, the state of the economy, corporate image, human relations and exogenous shocks. These are very important, especially in terms of making an investment decision as, along with the quantitative data, a full picture of the investment choices in question can be gained, owing to giving the best possible chance of success for the business. For example, the company’s objectives matter in an investment as if the company has a strong ethical stance on some choices, the investment decision should reflect this so that the company can stay true to their mission and vision statements. Therefore, additional qualitative information is also needed to advise the business on the more suitable project. 189 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Activity 3.2B: Discounting cash flow 1. Calculate the present-day values of the following cash flows: [6 marks] a. $10 000 expected in four years’ time at prevailing rate of interest of 10% 1 Present Day Value = $10,000 × (1.10 ) 4 = $6,830 (4sf) b. $2 000 expected in six years’ time at prevailing rate of interest of 16% 1 Present Day Value = $2,000 × (1.16) 6 = $821 (3sf) c. $6 000 expected in one year’s time at prevailing rate of interest of 20% 1 1 Present Day Value = $6,000 × (1.20) = $5,000 2. The net cash flows in Table 1 above have been forecasted by a manufacturer for a major purchase: a. Calculate the payback period [3 marks] Net Cash Flow ($) Cumulative Cash Flow ($) 0 (50,000) 1 25,000 25,000 2 20,000 45,000 3 20,000 65,000 4 15,000 80,000 Just the answers! Year 190 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Payback period Between Year 2 and Year 3 Difference $50,000 - $45,000 = $5,000 Average monthly cash inflow $20,000 ÷ 12 Number of months $5,000 ÷ $1,667 = $1,667 =3 Payback period is therefore 2 years and 3 months. b. Calculate the average rate of return (ARR) [4 marks] Year Net Cash Flow ($) 0 (50,000) 1 25,000 2 20,000 3 20,000 4 15,000 Total net cash flow 80,000 Project profit $80,000 - $50,000 = $30,000 Average annual profit $30,000 ÷ 4 =$7,500 Just the answers! ARR $7,500 ÷ $50,000 x 100 =15% ARR is therefore 15% 191 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered c. Calculate the discount on all cash flows at a discount rate of 10% Year [3 marks] 0 Net Cash Flow ($) (50,000) Discount Factor 1.00 1 25,000 2 20,000 3 20,000 4 15,000 1 1 ( ) = 0.9091 1.10 1 2 ( ) = 0.8264 1.10 1 3 ( ) = 0.7513 1.10 1 4 ( ) = 0.6830 1.10 d. Calculate the net present value [3 marks] Year Net Cash Flow ($) Discount Factor Present Value ($) 0 (50,000) 1.00 (50,000) 1 25,000 0.9091 22,727 2 20,000 0.8264 16,529 3 20,000 0.7513 15,026 4 15,000 0.6830 10,245 64,527 Just the answers! NPV 192 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Activity 3.2C: Net present value 1. Using the data in Table 1 above: a. Calculate the NPV at the discount rate of 20% Year [4 marks] 0 Net Cash Flow ($) (35,000) Discount Factor 1.00 Present Value ($) (35,000) 1 15,000 0.8333 12,500 2 15,000 0.6944 10,416 3 10,000 0.5787 5,787 4 NPV 10,000 0.4823 4,823 -$1,474 b. Explain why the NPV is negative [2 marks] The NPV is negative because the discount rate at 20% for all the net cash flows shows that the total net cash flow gained from the business, at its present value, is not enough to cover the costs of the investment, Form the net present value, it can be seen that in fact, the investment in 4 years’ time will actually be worth – $1,474. c. Explain why the project would not be viable if the business had to borrow finance at 20% [2 marks] Just the answers! The project would not be viable if the business had to borrow finance at 20%, as through the NPV value, it can be seen that the business would actually make a loss of $1,474. The NPV value is a negative and therefore, it can be seen that at a 20% discount rate, the project is not worth pursuing. 2. If the criterion rate used by the business for new investments is 10%, would this project have a positive net present value, and would it therefore be acceptable? Explain. [4 marks] If the criterion rate used by the business for the new investments was 10%, than, from the case study and information given, it can be seen that the project would have a positive net present value. Net present value is an investment appraisal technique that calculates the total discounted cash flows, minus the initial cost of the investment of a project. On financial grounds, if the figure is a positive value, than the investment project should 193 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered be carried out as the positive value shows to us that the project is worth pursuing. The 10% criterion rate would give the net present value a figure of $5,736. This figure is positive and shows that the future amount of money has a value of $5,736, and therefore, as it is not a negative the investment project is worth pursing at a criterion rate of 10%. Activity 3.2D: Location investment decision 1. Calculate the payback period for both projects and comment on your results. Year Location A Net cash flow ($) [4 marks] Location B Cumulative cash flow ($) Net Cash Flow ($) Cumulative cash flow ($) 0 (12,000) (12,000) 1 3,000 3,000 6,000 6,000 2 4,000 7,000 5,000 11,000 3 5,000 12,000 3,000 14,000 4 6,000 18,000 2,000 16,000 5 5,000 23,000 5,000 21,000 Location A Location B Payback period estimate Year 3 Between year 2 and year 3 Difference - $12,000 - $11,000 Just the answers! = $1,000 Average monthly cash inflow - Number of months - $1,000 ÷ 250 3 years =4 2 years and 4 months Payback period $3,000 ÷ 12 = $250 194 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered The payback period for Location A is three years, whereas the payback period for Location B is 2 years and 4 months. Because of this, according to the payback criterion, the location that should be used is Location B. 2. Calculate the ARR for both projects. [4 marks] Location A Location B Project profit $23,000 - $12,000 = $11,000 $21,000 - $12,000 = $9,000 Average annual profit $11,000 ÷ 5 =$2,200 $9,000 ÷ 5 =$1,800 ARR $2,200 ÷ $12,000 x 100 =18.3% $1,800 ÷ $12,000 x 100 =15% ARR 18.3% 15% Just the answers! 3. Explain why the manager might find it difficult, in the light of your results, to make a choice between these two projects. [4 marks] One of the main reasons why the manger would find it difficult to make a choice between these two projects is because of the conflicting quantitative data gained from the two different investment appraisal methods. The ARR criterion favours Location A, with Location A having a ARR value of 18.3%, however, the payback period criterion favours Location B, with Location B having a payback period of only two years and four months compared to Location A’s payback period of three years. Because of this, with Location A having the better ARR value, it would seem to be the project more worth the risk of pursuing, however, the difference in the ARR value of the two projects differs only by 3.3%, which, with Location B having a shorter payback period, seems to make the choice of which location to choose difficult for the managers. Also considering the fact both projects total net cash flow amounts to about the same, with $23,000 for Location A and $21,000 for Location B, and they both cost equal amounts as well makes the choice between the two projects even more difficult. 195 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 4. Calculate the net present value of both locations at: a. [6 marks] 10% discount Year Location A Location B Net cash flow ($) Discount factor Present value ($) Net cash flow ($) Discount factor Present value ($) 0 (12,000) 1.00 (12,000) (12,000) 1.00 (12,000) 1 3,000 0.9091 2,727 6,000 0.9091 5,455 2 4,000 0.8264 3,306 5,000 0.8264 4,132 5,000 0.7513 3,757 3,000 0.7513 2,254 4 6,000 0.6830 4,098 2,000 0.6830 1,366 5 5,000 0.6209 3,106 5,000 0.6209 3,106 3 4,994 NPV b. 4,313 20% discount b. Year Location A Location B Discount factor Present value ($) Net cash flow ($) Discount factor Present value ($) 0 (12,000) 1.00 (12,000) (12,000) 1.00 (12,000) 1 3,000 0.8333 2,500 6,000 0.8333 5,000 2 4,000 0.6944 2,778 5,000 0.6944 3,472 3 5,000 0.5787 2,894 3,000 0.5787 1,736 4 Just the answers! Net cash flow ($) 6,000 0.4823 2,894 2,000 0.4823 965 5 5,000 0.4019 2,010 5,000 0.4019 2,010 NPV 1,076 1,183 196 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 5. Comment on your results to Question 4. [4 marks] Net present value is an investment appraisal technique that calculates the total discounted cash flows, minus the initial cost of the investment of a project. When calculating the net present value of the two locations at a 10% discount rate, I found that Location A had the higher value and therefore seemed to be the investment worth pursuing. However, at a discount rate of 20%, the net present value for Location B was higher at $1,183, compared to the net present value of Location A at $1,076. This meant that at the discount rate of 20%, Location B is seen to be the investment more worth pursuing. However, it can be seen that there is quite a difference between the net present values at the 10% discount rate, and only a small difference of $107 at the 20% discount rate and so, overall, in terms of net present value, it would seem that Location A is the investment more worth pursuing. 6. Using all of your results, recommend to the manager which location you consider should be selected, on the basis of the quantitative data. [8 marks] Investment appraisal is the general term referring to the quantitative techniques used to calculate financial costs and benefits of an investment decision. There are four main types of investment appraisal, and in this section, three of the four methods have been used to gain relevant quantitative data to help the business come to a decision on which location should be selected to aid the business in its growth. The three methods of investment appraisal used were the payback period, the accounting rate of return and the net present value. Just the answers! From the information gathered, what can be concluded is that Location A seems to be the investment project that worth pursuing the most. Firstly, in regards to the net present value, which is the technique that calculates the present discounted value of the investment of a project, it can be seen that Location A is probably the best project. This is because at the 10% discount rate, it has the higher net present value, making it worth more the risk of pursuing. Also, at the 20% discount rate, although the net present value is lower than that of Location B’s, the difference is only $107 and therefore, it seems to be the one with the most form of profit for the business. The accounting rate of return calculates the average profit on an investment as a percentage of the amount invested. From the data gathered, it can be seen that even in this investment appraisal method, Location A is favoured. Location A has an ARR value of 18.3%, compared to Location B’s ARR value of 15%. This means that Location A gains more profit on average in comparison to Location B. From this, it can be seen that in regards to the net present value and the accounting rate of return, Location A is the project that is worth the risk of pursuing, and also the one that gives the most profit to the business on average. However, the payback period for this project is six months longer than the payback period for Location B. Location A has a payback period of three years, while Location B only has a payback period of two years and four months. However, for the business, this could be overlooked as the payback period is only six months longer, and in comparison to Location B, Location A has the significantly higher return making it relatively more attractive as an investment project. 197 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Therefore, as has been concluded, Location A, due to the benefits of average profit and present value that it gives to the company, seems to be the location that should be selected by the manger. 7. Examine the likely reliability of these cash flow forecasts. [6 marks] Sales forecasting is a quantitative technique that attempts to estimate the level of sales a firm expects to achieve, over a given period. The cash flow forecasts given in this case study would have most likely come from sales forecasting methods (such as extrapolation, the Delphi technique, market research and time series analysis) and the annual sales forecasted would have given the business the net cash flows for each investment project the business is looking towards pursuing. The cash flow forecasts have the potential to be quite reliable; however, this would only be possible if the sales forecasts that have been gathered are reliable and accurate in themselves. The cash flow forecasts would be reliable if the company has ensured that steps have been taken to gather accurate sales data for the sales forecasting method. For example, more accurate and reliable results can be gained from gathering monthly data instead of quarterly data. Also, using the appropriate sales forecasting method would also help the data gained for the cash flow forecasts to be more reliable. Just the answers! For example, using extrapolation in the case of this business would be a good idea as the business is looking to forecasting sales, and therefore cash flows, for the next five years. This is looking into the long term for the business and therefore, sales data needs to be as accurate as possible to ensure that its reliability stays, regardless of the time period of the forecast. However, it is impossible to take everything into account and forecast sales figures that are 100% reliable. Qualitative factors that need to be considered, such as the state of the economy and exogenous shocks, can have an effect on sales in the future for the business. These things cannot be predicted as they are random and so, even if these are taken into account the extremity of the various situations may be ignored, and this can affect the reliability of the cash flow forecasts. For the business, looking into choosing a location to invest in, the decision being made would be quite important in terms of the running of the business in the future. Because of this, it would be assumed that the business would take careful steps to ensure accurate and reliable quantitative data is gathered, and therefore, it can be concluded that the cash flow forecasts are quite reliable, however, there are ever changing factors that can affect the actual cash flow figures on the future. 198 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 3.2 Exam Practice Question: Investing to stay competitive 1. Define the terms: a. [4 marks] Residual value The residual value is an estimate of the scrap or disposal value of the asset at the end of its useful life. From the case study, it can be seen that the residual value of Project Y is expected to be $1 million and the residual value of Project Z is expected to be $0.5 million. b. Expected life expectancy The expected life expectancy of a project is the predicted life span of an investment. From the case study, it can be seen that Project Y has an expected life expectancy of 5 years, whereas Project Z’s expected life expectancy is only 4 years. 2. Explain how Rapid Print might have forecast future annual sales. [6 marks] Just the answers! The way in which Rapid Print may have forecast their future annual sales would have been through sales forecasting. Sales forecasting is a quantitative technique that attempts to estimate the level of sales a firm expects to achieve, over a given period. There are a range of tools that can be used here, and the managers of Rapid Print would have used these forecasting techniques to predict the future annual sales of the business. Four of these forecasting techniques are extrapolation, the Delphi technique, market research and time series analysis. Extrapolation is a technique used to predict what is likely to happen in the near future by identifying the trend that exists in past data. The trend is extended to predict future sales. For the Delphi technique, a panel of independent experts are used and they discuss and come to a conclusion on the forecasting of sales in the distant future. Another such technique is market research. Market research is identifying and establishing the future purchasing intentions of consumers and this helps in sales forecasting and as the purchasing trends can allow a trend in future sales to be seen as well. Lastly, the time series analysis technique attempts to predict the future sale levels by identifying the underlying trend from a sequence of actual sales figures that have been recorded at regular intervals in the past. From the time series analysis, the underlying trends, random and seasonal fluctuations in past sales, cyclical factors (linked to the state of the economy) and responses (of customers due to things such as sales promotions) can be seen. These figures would then aid with the sales forecasting method. Therefore, through the use of sales forecasting, Rapid Print would have forecast their future annual sales. 199 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 3. Calculate for each project: a. [8 marks] The payback period Year Project Y Project Z Net cash flow * ($m) Cumulative cash flow ($m) Net Cash Flow * ($m) Cumulative cash flow ($m) 0 (20) (12) 1 5 5 4 4 2 5 10 4 8 3 5 15 4 12 4 5 20 4 16 5 5 25 - - *Assuming 8 million annual sales for Project Y and 6 million sales for Project Z Project Y Payback period b. Project Z 4 years 3 years The average annual rate of return (ARR) Project Z Project profit $25m - $20m = $5m $16m - $12m = $4m Average annual profit Just the answers! Project Y $5m ÷ 5 = $1m $4m ÷ 4 = $1m ARR $1m ÷ $20m x 100 =5% $1m ÷ $12m x 100 =8.3% ARR 5% 8.3% 200 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 4. On the basis of your results and any other relevant factors, advice Asia Print on which investment project it should choose. [7 marks] Investment refers to the purchase of an asset with the potential to yield future financial benefits. In the case of Rapid Print, an investment decision has to be made on which investment project the company wants to pursue, however, both qualitative and quantitative factors have to be considered. Investment appraisal is the general term referring to the quantitative techniques used to calculate the financial costs and benefits of an investment decision. In this case study, the information gained can allow us to use two investment appraisal methods: the payback period and the accounting rate of return. From both the two investment appraisal methods that were carried out, it can be seen that in terms of the financial costs and benefits, Project Z seems to be the investment project more worth the risk of pursuing. Firstly, Project Z has a better payback period, and if the company is looking to payback its costs quickly, than Project Z, with its payback period of three years, is the project that should be pursued. Also in terms of the average rate or return, Project Z has an ARR value of 8.3% compared to Project Y’s ARR value of 5% and so again, Project Z seems to be the better investment project. Just the answers! However, qualitative factors must also be considered. These are things like predictions, the company’s objectives, and the risk profile of the firm, the state of the economy, the corporate image, human relations and exogenous shocks. Also the quality of the assets that are being looked at should also be taken into account. From the case study, it can be seen that Project Y has a newly designed highly automated printing press, however, to operate it, two highly trained operatives are needed, and as a result of such, there would be six redundancies. Here, while the machine is new and seems to be very effective, it is not necessarily completely reliable and this could cause problems for the business in the future. Also, in terms of the two highly trained staff, money would be needed to train the staff and so this increases the costs of the project. The six redundancies could also affect staff moral and motivation. However, as a benefit, the project allows direct internet link with customers and so rapid input of new material can be printed quickly and this would help Rapid Print, as the market they are in is highly competitive and allowing for fast and efficient service would give them a competitive advantage. There are benefits to Project Z as well. While the machine here is not as new and advanced as the technology in Project Y, it is said in the case study that it is very reliable. However, this project also has a disadvantage in terms of the fact that it is noisy and so local residents may complain about the noise. Although, Project Y also has its disadvantages and as an advantage for Project Z, the machinery purchased can be operated by existing staff. This would reduce the redundancies and also, in terms of such, would be the favoured project by the employees. The costs of this project would also be less as staff would not need to be trained in how to use the machinery, as in with Project Y. Staff motivation and moral in taking this project would not decrease as much as it would with Project Y as well. So, overall while there are many benefits for Project Y, there are disadvantages too, just like with Project Z. 201 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Just the answers! In considering these factors, it can be seen that with the advantage in the investment appraisal methods, Project Z seems to be the project that is worth the risk of pursuing the most, and so Rapid Print should undertake this project. 202 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 3.2 Investment Appraisal3. 3.3 Working Capital Activity 3.3A: Burton Inc. Cash Flow Forecast 1. Using the data in Table 1 above, calculate the missing data values A, B, C, D, E, F and G. Working A B C D E F Answer ($) 9–3 =6 11 – (8+1+0.5+1) = 0.5 4+2 =6 1+1+2+1 =5 6–5 =1 6,000 (1)+0.5 [7 marks] (500) 500 6,000 5,000 1,000 = (0.5) Just the answers! G Closing balance of March (500) 2. Identify one more likely cash payment that could be received by Burton Inc. and one more cash payment that could be made by the business. [4 marks] Cash is the actual money that a business has received from selling its products, and the cash flow refers to the transfer or movement of money into an out of an organisation. The cash payment received by Burton Inc. would be a cash inflow for the company. 203 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered One likely cash payment that could be received by Burton Inc. is a loan. A loan is money obtained from commercial lenders such as banks and they tend to be medium to long term sources of finance. A loan could be received by this company if the company wanted one, as the loan could help the probable cash flow problems in the first three starting months; however, it also needs to be considered that interest would also have to be paid. A cash payment made by the business would be a cash outflow for Burton Inc. One more likely cash payment that could be made by the business is the costs of electricity. The running of the business would require electricity, especially considering it is an online business. Therefore, this would also be a likely cost incurred by the business. 3. Using Table 1 above, construct a revised cash flow forecast for April, assuming: PayPal® sales are forecast to be $1 000 higher, Materials are forecast to be $500 higher and other costs are forecast to be $1 000 higher [9 marks] Burton Inc. Cash Flow Forecast (All figures in $000) January February March April Owners’ capital injection 6 0 0 0 PayPal® sales 4 5 7 7 Payments by debtors 0 2 2 3 Total cash in 10 7 9 10 Lease 8 0 0 0 Rent 1 1 1 1 Materials 1 1.5 3.5 2.5 Labour 1 2 3 3 Other costs 1.5 2 1.5 2.5 Total cash out 12.5 6.5 9 9 Net cash flow (2.5) 0.5 0 1 Opening balance 0 (2.5) (2) (2) Closing balance (2.5) (2) (2) (1) Cash inflows Just the answers! Cash outflows 204 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Activity 3.3B: Fashion shop forecasts look good 1. Complete the cash flow forecast by calculating values for X, Y and Z. Working X Y Z Answer ($) 34 – 35.5 = (1.5) 2+4+3+1.5 = 10.5 12 – 10.5 = 1.5 [3 marks] (1,500) 10,500 1,500 2. Analyse two problems that Divya and Courtney might have experienced when drawing up their cash flow forecast. [6 marks] A cash flow forecast is a financial document that shows the predicted future cash inflows and cash outflows for a business over a trading period. While there are many benefits of cash flow forecasting, there are also quite a few limitations to it, and through this, both Courtney and Divya could face some problems when drawing up their cash flow forecasts. Just the answers! Firstly, while Divya feels that she has gained good market research, inaccurate or poor market research could lead to incorrect sales forecasting. It is known that an undesirable marketing campaign could put off potential customers and this could harm Divya and Courtney’s firm. The cash flow forecasting they have done is solely based on the market research that Divya has gained through some desk research (secondary data) and observations (primary data). While this would be able to give a good indication, it would not necessarily give the data they may want for the business Divya and Courtney want to start. They would be a new business in the market and this could have an effect on their sales, in comparison to the already running businesses that Divya observed and gained market research from. Another problem that Divya and Courtney could have faced when drawing up their cash flow forecast could be the fact of competitors. What Divya and Courtney have almost done is gained market research data from their ‘future’ competitors once they start up their business. They have based their cash flow forecasts on how their competitors are faring currently and so, assumptions based on such may not necessarily prove to be correct for Divya and Courtney’s exclusive ‘top brand only’ fashion store. So from this, it could be seen that there is no guarantee that prediction and assumptions made in cash flow forecasts will actually hold to be true in the future. Because of this, there would be a few problems faced by Courtney and Divya when drawing up their cash flow forecasts as the figures given are estimates, and they would both have to be aware of it. 205 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 3. The first three months’ actual trading was poor and cash sales were 20% below forecast. Construct a new cash flow forecast for July assuming 20% lower cash sales, 20% lower clothes purchases, an opening cash balance of ($2000); all other factors remain unchanged. 7 marks] Fashion Shop’s Cash Flow Forecast for July All figures in $000 July ($) Cash inflows Owners’ capital injection 0 Cash sales 7.2 Payments by debtors 3 Total cash in 10.2 Cash outflows Lease 0 Rent 2 Clothes purchases 3.2 Labour 3 Other costs 1.5 Total cash out 9.7 Net cash flow 0.5 Opening balance (2) Closing balance Just the answers! Net monthly cash flow (1.5) 4. To what extent would drawing up a cash flow forecast increase the chances of this business being successful? [10 marks] Cash flow forecasting is when a business draws up a financial document that shows the expected movement of cash into and out of a business, per time period. The information gained here is essential for the day to day running of any business. This is because if a business does not know about the difference between profits, and the their cash flow, when they run into problems such as financial difficulties it would be hard for them to get out of them. 206 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Cash flow forecasting aids businesses in forecasting and predicting the future cash flows of a business, which would allow a business to be more prepared for any possible future problems the business may have. Cash flow forecasting increases the chances of a business being successful to quite some extent, as there are many advantages of such for the business; however, there are a few big limitations as well. Firstly, as an advantage of cash flow forecasting, cash flow forecasting aids the planning process, which from the case study, it can be seen that this would be very helpful for Divya and Courtney. This is because they had many questions about the costs involved, and most given tended to be estimates of what they were not quite certain about. Through cash flow forecasting, a business can anticipate and identify periods of potential deficiency, and therefore, allow the business to prepare for such problems. It also could help Divya and Courtney manage possible liquidity problems and allow them to adjust the timing of their receipts and payments to avoid cash flow problems, which in the long run would be beneficial for the smooth running and success for the business. Just the answers! Cash flow forecasting is a method of good financial control that can help a business better achieve its aims and objectives. This therefore, is the link for cash flow forecasting in helping a business be successful, in that it can help them with their aims and completing objectives so that the business can follow both vision and mission statements. Cash flow forecasting therefore has shown to be useful to quite an extent, however, there are limitations to cash flow forecasting and therefore, while it is useful, it cannot be the only thing the business uses if the business wants to be successful. For example, cash flow forecasting, just like other financial (and other) methods, can only be as good as the data gained. Poor market research, demoralized work force, inadequate operations management, competitors, changing fashion, tastes and the state of the economy and exogenous shocks can all contribute to limiting the accuracy of the cash flow forecast, which could lead to problems for the business. It always needs to be known by the business that the cash flow forecasting, no matter how accurate it may seem, is only really an estimate based off data gained, and therefore can change. The business would also need to use other tools to help with the success of the business, as finance is not the only department that matters. Things such as marketing and operations management also need to be considered. And therefore, through this, it can be seen that while cash flow forecasting helps to some extent, other tools are also needed for the success of the business. 207 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Activity 3.3C: La Carnicería Sanitaria (LCS) 1. Prepare a monthly cash flow forecast for the first six months of operation of the new wholesale facility of LCS. [10 marks] LCS’s cash flow forecast for January to June (All figures in $000) Jan Feb Mar Apr May Jun Loan 60 0 0 0 0 0 Sales 0 10 10.2 10.404 10.612 10.824 Total cash in 60 10 10.2 10.404 10.612 10.824 Meat suppliers 3 3.06 3.121 3.184 3.247 3.312 Monthly wages 3 3 3 3 3 3 Monthly charges 3.15 3.15 3.15 3.15 3.15 3.15 Electricity 0.4 0 0.4 0 0.4 0 Total cash out 9.55 9.21 9.671 9.334 9.797 9.462 Net monthly cash flow 50.45 0.79 0.529 1.07 0.815 1.362 Opening balance 0 50.45 51.24 51.769 52.839 53.654 Closing balance 50.45 51.24 51.769 52.839 53.654 55.016 Cash inflows Cash outflows Just the answers! Net cash flow 2. Comment on the impact that the new wholesale facility will have on the current cash position and cash flow of LCS. [6 marks] Cash flow refers to the transfer or movement of money into and out of an organization. Cash inflows mainly come from sales revenue while cash outflows are items of expenditure. The new wholesale facility would actually have quite an impact on the current cash position and cash flow of LCS, however, the impact would differ in terms of the stage the new wholesale facility is at. 208 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Firstly, at the start, when the building for the new wholesale facility is just bought, the cash flow of LCS would likely to be in the negatives, as money would be needed to buy the facility. The cash inflows here would be near zero for the facility, apart from the loan, whereas the expenses (the cash outflows), would be quite great in terms of money being spent in materials, and the building to get the wholesale facility started. However, as a loan has been taken, it would not affect the cash flow position of LCS as much as the loan could be repaid of slowly in the next five years. On the other hand, profit could be less in relation to wholesale facilities operating as, due to the working capital cycle, it can be seen that there would be a time lag between when the products of LCS are produced at the facility to when they are sold and money is gained from them. However, once the new wholesale facility is stocked and up and running, the cash flow and current cash flow position of LCS would show an improvement, if things go according to plan and the cash flow forecasted proves to be true. The cash inflows then would slowly come up to even out the cash outflows, which would be reducing slowly to become a steady amount, apart from any big expenses on investments that may later be made. Because of this, the cash position and cash flow would show to be positive overall. Therefore, through this, it can be seen that the new wholesale facility would have an impact on the current cash position and cash flow of LCS. 3. Evaluate the different methods LCS could use to improve the liquidity position of the new wholesale facility if the sales forecasts prove to be overly optimistic. [10 marks] Just the answers! Liquidity is the ability of a business to convert assets into cash quickly and easily without a fall in its value and cash flow forecasting is when a business draws up a financial document that shows the expected movement of cash into and out of a business for a certain time period. If the sales forecasts of LCS prove to be too optimistic, there are actually quite a few things that can be done by LCS to improve the liquidity position of the new wholesale facility. There are actually three main things that can be done in regards to this; LCS could seek alternative sources of finance, improve cash inflows and reduce cash outflows. Firstly, if a business is able seek alternative sources of finance, and then the liquidity position of the business should be able to be raised. In this case for example, LCS could get an overdraft, sell of fixed assets, get the aid of a debt factoring service or use a sale and leaseback strategy. For the overdraft, the bank would allow LCS to withdraw more money than it has deposited, and so, immediate access to a source of finance would be gained. This could help improve the cash flow position in the current time; however, it could cause even more problems for the firm later, especially in the long term. This is because the firm would need to pay interest on the amount that is drawn and also, banks do not tend to be too willing to lend to firms if they are already in a financial crisis as they are more high risk, and do not want to lose out on finance themselves. The other such methods come with about the same advantages and disadvantages; they are good for the short term, however, in the long term, they could cause problems for the business if cash flow problems are not fixed quickly. In order to improve cash flow however, there are also many other things that can be done. In particular for this business, LCS could 209 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered get tighter on credit control. By limiting their trade credit to customers or reducing the credit period customers are granted, LCS would be able to receive cash sooner, rather than later, and this could also help improve the liquidity position of the business. The disadvantage to this however is that some customers may not like the limits placed on the credit offered, and may switch to rival firms if they are offering a better deal. The same would happen if LCS decides to improve cash inflows through adopting a cash payment only policy. While this would cut out the time lag that comes with credit payments, it would lose convenience for customers and could actually end up affecting sales and therefore negatively affecting their cash flow as well. Another thing that could be done however is the reduction of cash outflows. LCS could reduce expenses without comprising on quality, and this would lead to be beneficial for them and allow them to keep their current customers as well. Through finding things like maybe new suppliers that offer cheaper supplies but with the same quality could help the business in improving its liquidity position as well. Therefore, through this, it can be seen that there are actually quite a lot of things that can be done by LCS to improve its liquidity position if the forecasted cash flows turn out to be too optimistic. Activity 3.3D: Cash flow drying up for small Indian firms 1. Explain the term ‘working capital’. [3 marks] Working capital is the amount of finance available to a business for its daily operations. It is also known as net current assets and it is calculated as current assets minus current liabilities and it is usually gained from the sale of the company’s goods or services. From the case study, it can be seen that Ms Singh does not have enough working capital, and so is using finance saved for other things as working capital, as the cash flow position of the business was affected by the recession. Just the answers! 2. Interpret why Ms Singh is finding it so difficult to control her working capital. [7 marks] Working capital is the amount of finance available to a business for its daily operations. It is also known as net current assets and it is calculate as current assets minus current liabilities. From the case study it can be seen that Ms Singh is finding it quite difficult to control her working capital. There could actually be quite a few reasons for this, and through the case study, some reasons can be identified. Firstly, one reason why Ms Singh may be finding it difficult to control her working capital could be due to the fact that she has overstocked on the product she is selling. In the case study, it can be seen that she “completed machines are filling up the yard in her factory.” From this, it is obvious that the firm has too much stock as a result of an ineffective stock control system. This stock that is being kept around is taking up storage space, which actually costs money, and therefore, through this, there is less money for the day to day running of the 210 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered business. Through this, it can be seen that Sonali Singh has overstocked, and not really taken into account just how many machines she could sell. Because of this, money that was meant to be used for expansion plans is being used just to keep the business running on a daily basis. Another reason is unforeseen changes. Given in the case study is the fact that Ms Singh found the recession quite shocking and “it was too sudden to prepare for it”. Through this, it can be seen that Ms Singh did not actually take into account the state of the economy, or any possible problems that could affect her cash flow. Because of this, she was unprepared, and this would also be another reason why she found it so difficult to control her working capital; because she had not taken care in drawing up cash flow forecasts which could have helped her face such problems as she would be able to prepare for some of the foreseeable things. These would not however be the only things that could be the reason as to why Ms Singh may be finding it difficult to control her working capital; other causes could include overtrading, over borrowing and poor credit control as well. Therefore, through this, it can be seen that Ms Singh herself has not very carefully thought to how she is operating her business in terms of the finance and therefore there are many reason as to why she is finding it so difficult to control her working capital. 3. Evaluate three ways in which Ms Singh could try to reduce the finance tied up in working capital. [10 marks] Just the answers! Improving the cash flow position of a business requires effective working capital management. Cash flow refers to the transfer or movement of money into and out of an organization and working capital is the amount of finance available to a business for its daily operations. It is usually gained from the sale of the company’s goods or service and is also known as net current assets (calculated as current assets minus current liabilities). There are many ways in which Ms Singh could try to reduce the finance tied up in working capital and these ways are linked to the management of working capital and improving the liquidity position of the business. Usually there are three main ways in which a business can do this. They can seek alternative sources of finance, improve cash inflows, or reduce cash outflows. In the cash of Ms Singh, it can be seen that improving cash inflows and reducing cash outflows are probably the best ways for her to reduce the finance tied up in working capital. One way she could do this is through changing her pricing policy. From the case study, it can be seen that many customers have turned out to be quite unwilling to pay for the stock, or even want the stock anymore due to the recession; however if the product Ms Singh sells is even just a little but price elastic, changing the price of her products should aid in her being able to sell her excess stock, and also gain business revenue from the stock she has already sold. This would allow Ms Singh to get better cash inflow and so; less finance from the business would need to be used for working capital. However, this method has a disadvantage in that making her product cheaper could result in her getting less profit overall form her products. 211 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered Another way in which Ms Singh could try to reduce the finance tied up in working capital is through improving her marketing planning. While this would be seen to be quite expensive in that market research would have to be done so she could effectively improve her marketing, this method does have its advantages as well. Improving marketing planning would allow the business to better meet the needs and wants of customers and this would aid in improving cash inflows, thereby freeing up finance in working capital. In the case of Ms Singh, effective marketing planning could stop the delays her customers are already putting on in terms of gaining and paying her for her stock that they have purchased. Lastly, another method is through reducing expenses. This would help Ms Singh reduce cash outflows, which would improve the net monthly cash flow for the business. Overall this would mean that there would be more working capital and so less finance would be tied up in the working capital, unlike how it is currently. However, the disadvantage to this method is that sometimes quality could be forsaken for cost, and so, while it could be cheaper, materials may be of a lower quality and this could result in complaints from customers as well. However there are many other methods that could be used by Ms Singh as well, and so through this, it can be seen that there are many ways for Ms Singh to reduce the finance tied up in working capital, however all these ways have their advantages and disadvantages and so need to be considered carefully against the needs of the business. 3.3 Exam Practice Question: Coffee Call seeks funds for expansion 1. Define the terms: a. [4 marks] Loan finance Just the answers! Loan finance is capital that is gained from commercial lenders such as banks. Loan finance tends to be a medium to long term source of external finance. From the case study, it can be seen that the sisters have gone to the bank to secure a loan finance to fund their expansion plans. b. Liquidity Liquidity is the ability of a business to convert assets into cash quickly and easily without a fall in its value. From the cash study, it can be seen that most of Coffee Call’s cash inflows are from cash sales and cash is classified as a highly liquid asset. 212 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2. Explain why material costs have been forecast to be 50% of sales. [4 marks] The materials have been forecast to be 50% of sales and this is because of the cost-based pricing strategy used by the business. Cost-based pricing refers to setting prices based on the costs of production rather than the level of demand or the prices set by customers. Through the information given in the case study, it can be seen that Coffee Call has actually used a cost-plus pricing strategy. This is also known as mark-up pricing and it takes place when a firm calculates its unit costs and then adds a percentage profit to determine the price. From this, it can be seen that Coffee Call has decided to use a 100% mark-up as their percentage, and are selling their products at a such a price that they have a 100% profit margin on each product sold. There are many pricing strategies that are available to the business, however, the business has chosen the cost-plus pricing strategy, and that is why the materials have been forecasted to be 50% of the sales. 3. Prepare a cash flow forecast for Coffee Call for the first six months of the year. Coffee Call’s cash flow forecast for January to June Jan Feb Mar Apr May [8 marks] Jun Cash inflow Cash sales 20,000 20,000 20,000 40,000 40,000 40,000 Loan 0 20,000 0 0 0 0 Total cash in 20,000 40,000 20,000 40,000 40,000 40,000 Materials 10,000 10,000 10,000 20,000 20,000 20,000 Electricity and gas 0 2,000 0 0 0 0 Staff wages 2,000 2,000 2,000 3,000 3,000 3,000 Marketing 500 500 500 500 500 500 Owner’s drawings 0 0 20,000 0 0 0 Tables 0 0 20,000 0 0 0 Total cash out 12,500 14,500 52,500 23,500 23,500 23,500 Net monthly cash flow 7,500 25,500 (32,500) 16,500 16,500 16,500 Opening cash balance 7,000 14,500 40,000 7,500 24,000 40,500 40,000 7,500 24,000 40,500 57,000 Just the answers! Cash outflow Net cash flow Closing cash balance 14,500 213 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 4. Discuss the advantages and disadvantages of Coffee Call using the venture capitalist as a source of finance. [9 marks] Venture capital is a high risk capital that is usually in the form of loans or shares invested by venture capital firms or individuals, usually at the start of a business idea. From this case study, it can be seen that the venture capital has been gained by Coffee Call through the ‘sale’ of share. A venture capitalist has taken an interest in Coffee Call and is willing to fund it for a 20% stake in the business. While this seems like a really good option for Coffee Call, the managers need to be careful as while there advantages to venture capital, there are disadvantages too, and these need to be taken into account. Firstly as an advantage, venture capital for Georgina and Caroline would actually provide a quick and easy way to gain a source of finance for their expansion, as a venture capitalist has already expressed an interest in funding their business. Also, unlike a loan, the venture capitalist here has not demanded any form of interest payment. This means that the finance gained through the venture capitalist would be Coffee Call’s to use. It would not have to be repaid and so it is better than a debt in that sense. For a disadvantage though, venture capitalists will usually demand a return on their capital. This is in the form of a stake in the business for Coffee Call, and so while it seems like a good choice currently, the finance in terms of the long term also needs to be considered by the sisters; there is a risk of disagreements and control issues between stakeholders. Just the answers! Moreover, it is extremely difficult for any individual person to have all the skills, experience and contacts required to run a business successfully. Therefore, Georgina and Caroline would have to be careful and make sure that they keep looking into what’s best for the business and make sure that it is being run smoothly. This means not always relying on the venture capitalist to do what needs to be done, as even they will not always have the necessary skills to face certain problems. However, despite these disadvantages, all sources of finance have disadvantages and so these need to be looked at in relation to other sources of finance. In terms of selling shares, as Coffee Call is a small to medium sized firm, it can be seen that investors may not be too willing to buy shares quite yet, so to grow, another option for Coffee Call would be gaining a loan. This means debt for the business and also interest as well, and so, it can be seen that venture capital does have its advantages for Coffee Call as well. Therefore through this, it can be seen that venture capital seems to be a good source of finance for Coffee Call. 214 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 3.4 Budgeting Activity 3.4A: Variance analysis at Oasis Cookers Ltd 1. Define the following terms: a. [4 marks] Budgeted figures A budget refers to a financial plan for expected revenue and expenditure for an organization (or a department within an organization), for a given period of time. Budgeted figures are the figures used in this financial plan and these are then compared with the actual figures to find out the variances for the variance analysis. b. Variance Variance refers to any discrepancy between actual outcomes and budgeted outcomes. Favourable variances exist when the variance is beneficial for the business, such as sales being higher than budgeted or costs turning out to be lower than expected. The opposite is true for adverse (unfavourable) variances. 2. Explain how a manufacturing business sets budgets for sales and costs. [4 marks] Just the answers! A budget refers to a financial plan for expected revenue and expenditure for an organization for a given period of time. There are actually several ways that an organization might set its budgets, and these are chosen bearing in mind the purpose of the budget and also the organisational objectives of the firm. For a manufacturing business, there would be a few ways that a business could set up budgets for sales and costs. One way in which this can be done is through using historical data. Budgets are actually often based on what has happened in the past, and this helps to set trends for future budgets. For Oasis Cookers, this would not actually be the ideal method, as it can be seen that currently, the economy is experiencing a downturn, and so figures are bound to be very different from last year. Another method that could be used is through looking at the available finance. This would involve Oasis Cookers Ltd to look at the amount of funds available to the business so they would be able to see how where each lot can be placed in the budget. The greater the financial strength of the business, the greater the amount of funds that are available, and the opposite is also true. This is a good method as the current financial stability of the business can be taken into account. However, along with this, when setting a budget for sales and costs, the manufacturing business would also go through many process and would have to consider questions like how much the firm should spend in each department, how 215 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered many workers are needed, and how much money should be set aside for a contingency fund. These answers to the questions would aid the manufacturing business in knowing the future sales and costs which would therefore help the business set up a budget for the sales and costs. 3. Calculate the variances to complete table 1; indicate whether the variances are favourable or unfavourable. [6 marks] Budgeted and actual figures for the year ending 31 December 2012 $000 Actual figures Sales revenue 165 150 15 Adverse Cost of materials 80 70 10 Favourable Labour costs 22 23 1 Adverse Gross profit 63 57 6 Adverse Overheads 40 43 3 Adverse Net profit 4. Budgeted figures Variance 23 14 9 Adverse Using the variance results, comment on the performance of Oasis Cookers during the year. [4 marks] Just the answers! Variance refers to any discrepancy between actual outcomes and budgeted outcomes. Favourable variances exist when the variance is beneficial for the business, such as sales being higher than budgeted or costs turning out to be lower than expected. The opposite is true for adverse (unfavourable) variances. From the variance analysis above, it can be seen that the overall performance of Oasis Cookers has actually not been that great during the year. Firstly, it can be seen the budgeted figure for the sales revenue turned out to be $15 000 less in the actual value. This was an adverse variable that would have affected the profit of the business greatly. And then, among the costs, apart from the costs of material, all other costs were adverse. Adding this together, it was shown that the business had actually spent $4 000 more on costs than budgeted for. Also, the net profit of the business, which was budgeted to be $23 000, but turned out to be only $14 000, meant that this variable was also adverse. Through this, it can be seen that, with many of the factors turning out to be adverse and this could be due to the limitations of the budget. Two main limitations are prominent here, unforeseen changes and being over-generous with the budget. Through the figures in the variance analysis though, it can also be seen that the overall performance of Oasis Cookers was not great. 216 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 5. Evaluate the usefulness of budgets to a business such as Oasis Cookers. [7 marks] A budget refers to a financial plan for expected revenue and expenditure for an organisation for a given period of time. Budgets are a very useful tool for businesses and this is because for the business there are many advantages to budgeting, however there are disadvantages as well. Budgeting is important because it allows business managers to plan ahead and anticipate financial problems. It acts as a measure of the progress businesses have made to achieve their organisational objectives, which is important for Oasis Cookers to ensure that they are achieving what they have been set to do, even in times where the economy is taking a downturn. Effective budget control is needed to ensure that the business continues and survives through the condition of the economy at the moment. For Oasis Cookers, budgeting would help control the firm’s money and would help the entire workforce to focus on common goals. Budgeting acts as a motivational factor, and again this is important considering the current situation. It also helps the business keep a tighter control of their finances, which would help Oasis Cookers in avoiding inefficient expenditure. This is because it would allow them to anticipate costs and revenues of different business activities, and hence allow them to agree on competing priorities and targets. Also, budgetary control can act as a method of allocating and clarifying responsibilities and this can act as a further source of motivation. However, despite these advantages, there are limitations to budgeting as well that need to be taken into consideration when a budget is being made, or else it would not prove to be too useful for the business. Firstly, a limitation is that there are likely to be unforeseen changes that can cause a large difference between the budgeted figures and the actual figures. For example, for Oasis Cookers last year’s budget, the change in the economy might have affected the budget too much, making it invalid. Unforeseen changes would include things like the downturn the economy is facing currently, and the unexpected high interest rates, and this would affect the cost of supplies for Oasis Cookers. Another limitation could include the mangers being overly generous for the budget, and this, could mean that the budget ends up being completely unreliable, and could lead the business into a false sense of security for the year. Budgets can also be rigid and poorly allocated and these types of budgets can result in lower quality of the final products of Oasis Cookers as well. Through this, it can be seen that the limitations of budgeting could have quite adverse effects, however, there are many advantages as well. Therefore, as a tool, budgeting is very useful for Oasis Cookers as it can help the business in anticipating future financial problems. 3.4 Exam Practice Question: Burton Inc.® Just the answers! EXAM PRACTISE QUESTION 1. Calculate the budgeted and actual profit figures. Budgeted net profit [2 marks] = $66 000 – ($15 000 + $12 000 + $6 000) = $33 000 Actual net profit = $70 000 – ($18 000 + $17 000 + $5 000) = $30 000 217 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 2. Using variance analysis, discuss whether the management of Burton Inc.® should be satisfied with the performance of the business over the last 12 months. [10 marks] Budgeted and actual figures for the year ending 31 December 2012 $000 Budgeted figures Actual figures Variance Sales revenue 66 70 4 Favourable Direct labour 15 18 3 Adverse Direct materials 12 17 5 Adverse Fixed costs 6 5 1 Favourable Profit 33 30 3 Adverse Variance refers to any discrepancy between actual outcomes and budgeted outcomes. Favourable variances exist when the variance is beneficial for the business, such as sales being higher than budgeted or costs turning out to be lower than expected. The opposite is true for adverse (unfavourable) variances. A variance analysis shows the discrepancies for each certain cash inflows or outflows. Just the answers! From the variance analysis shown above, it can be seen that for sales revenue and fixed costs, the outcomes were favourable variances, with $4 000 and $1 000 respectively being a benefit to the financial position of Burton Inc. However, all other variables did not show the same promise, and it can be seen that they were adverse variances totaling $11 000. Although, from this alone it could be quite hard to see whether Burton Inc. should be satisfied with the performance of the business over the last 12 months overall. Other information would also be needed, but just from the variance analysis, the answer would be no. It can be seen that there are more adverse variance than favourable ones, and this could hint for the business that the costs have been higher, and so Burton Inc. could have been overspending. Underselling can be seen to not be a problem, as sales revenue was higher than budgeted and this could mean that the business has been working satisfactorily, however, the causes of this variance should be investigated nevertheless. It can be seen however that the performance could have been better. With so many adverse variables, this should be a clue for the business that their performance has not been as high as expected, and so something must be wrong, whether it is due to the limitations of budgeting or the faults of the business, and even this should be investigated. Overall though, just from the variable analysis, it should be said that Burton Inc. may not be as satisfied with its performance as it could have been better, according to budgeted figures. 218 | P a g e p r o u d l y p r e s e n t e d b y I B B u s i n e s s a n d M a n a g e m e n t . c o m © Burton Inc. and VIBE Education Ltd 2014 Jump to START
The IB Business and Management Questions Answered 3. Outline two other pieces of information that would have helped you in your answer to Question 2. [4 marks] There are actually many other pieces of information that would have helped in seeing how Burton Inc. performed over the last 12 months, as it can be seen that the variable analysis alone is not enough to give all the information needed to determine the performance of the business. Just the answers! One thing that could have also helped analyse how Burton Inc.’s performance was over the last 12 months is a cash flow statement