Higher Business Management Core Notes

Just in case you have ‘misplaced’ your notes for the upcoming prelims for Higher Business Management, may I remind you that the Education Scotland core notes can be viewed or downloaded from these hyperlinks:

Business Enterprise Core Notes
Business Decision Areas 1: Marketing and Finance Core Notes
Business Decision Areas 2: Human Resources and Operations Core Notes

The Boston Box - Higher Business Management

One of the concepts that confuses many students is the Boston Box or the Product Portfolio or even the Boston Matrix.

As you can see what we have is 4 categories of products by market growth and market share. This is used for companies with a large portfolio of products or a wide product range.

Companies will look to see where their products would fit into these categories and then decide what to do next? Should they invest or divest?

Stars

These are products with high market share and growth. These products will be invested in more until they can hopefully turn into cash cows (which need little maintenance or tinkering). At this point though there will be a lot of investment in the product, so a positive return in terms of profit may not yet be reached.

Question Marks (also sometimes called Problem Childs)

These products have high growth but still low market share. They are unpredictable and perhaps a bit of a gamble. It is likely there will be lots of competitors in these markets, so is it worth developing the potential of these Question Marks? Ultimately some will be developed and invested in, while others will be left to die or even withdrawn. Hopefully some question marks may become stars or cash cows with the right investment and development.

Dogs

An easy decision for managers here. Low growth and low market share mean these products have to be withdrawn or discontinued and reinvest the money into something with more potential.

Cash Cows

These products have high market share but low growth. They are in a mature or saturated market. Cash Cows raise a lot of revenue for the company, often with little maintenance. They do still need to have some investment, in terms of advertising and still will need to be managed, but not to the same extent as some of the others. Money raised from cash cows will be reinvested into working out whether question marks can be turned into stars. Some stars may benefit from revenues raised from cash cows too. Sadly, if neglected, some cash cows may end up being dogs and reach the end of their product life.

The Boston Box model is simplistic and is only used to give managers an idea of where their products are in terms of growth and market share.

Loss Leaders

here's a presentation on Loss Leaders

http://www.slideshare.net/slideshow/embed_code/1028813?rel=0&hostedIn=slideshare#

#business

Pricing - What is Market Skimming?

This is a pricing tactic that is often used in electronics.

When the product is first released the price is set high, quite often a premium price. Once the people who want and can afford it have bought it, the price is lowered to target the next strata of customers – in other words the next level of customers who can afford it. This is akin to ‘skimming’ the cream off the top and then repeating the process.

Eventually the price of the product will come down to a more competitive price which will be affordable by the majority of consumers, the mass market.

For example when the PS3 was launched it was very expensive, but just in time for the Christmas market. It soon came down in price before the slimline version was launched which is viewed as a product extension.

It won’t be long though before we have a PS4 I am sure.

Trade Unions - Higher Business Management

A small question that may crop up in any exam could be about The Role of Trade Unions.

Trade unions are organisations that represent people at work.

q Their purpose is to protect and improve people's pay and conditions of employment.

q They also campaign for laws and policies which will benefit working people and working conditions.

q Trade unions exist because an individual worker has very little power to influence decisions that are made about his or her job.

q By joining together with other workers, there is more chance of having a voice and influence.

q This is known as collective bargaining.

Gross Profit Percentage - Higher Business Management

What is Gross Profit Percentage Ratio?

It is a ratio used to measure how many pence of Gross Profit is earned out of every pound of sales.

FORMULA

Here is a reminder of the formula:

Gross Profit      x  100

Sales (Turnover)     1

HOW IT WORKS

Here is a worked out example of how to do the Gross Profit percentage. We shall say sales are £8 million and the Gross Profit was £6 million.

GP = £6 million   x 100

S   = £8 million        1

= 75%

This means that for every £1  of sales revenue, £0.75 remains after direct expenses are deducted. 

WHO USES IT?

Managers/directors/ shareholders to make comparisons year by year and also with similar companies in similar industries.

ANALYSIS AND INTERPRETATION

This percentage should be high in order to leave profit to cover remaining expenses.

An increase in this ration maybe down to a rise in sales or a fall in the cost of goods or even an increase in selling price.

Decrease in this ratio may be due to the flip arguments of the ones above (lowering the selling price or a rise in cost of goods) but in addition we have issues like cash stolen from the till or stock going off or pilfering.

Higher Business Management - Ratio Formulae

Here are some Ratio formulae. I’ll look into what each of them mean in more detail over the Christmas holidays. Enjoy!

Gross Profit percentage

Gross Profit      x  100

Sales (Turnover)     1

Net Profit percentage

Net Profit         x  100

Sales (Turnover)     1

Profit Mark-Up

Gross Profit            x 100

Cost of Goods Sold      1

Return on Capital Employed

Net Profit before

interest & tax        x 100

Capital Employed         1

Current Ratio

Current Assets

Current Liabilities

Acid Test Ratio

Current Assets - Stock

Current Liabilities

Higher Business Management - Delayering and Downsizing

In Internal Organisation, a confusing topic seems to be Delayering and Downsizing.

Remember the definitions first of all:

DELAYERING means to remove levels of management. This results in flattening organisational structure. Think of the example in Scottish schools where Assistant Head Teachers and Senior Teacher roles were removed creating in effect only 3 promoted levels.

DOWNSIZING means laying off or closing down production of the company to cut costs, but usually they aim to keep output and production the same.

Communication and decision making should be increased and sped up if Delayering is used as you are removing levels of management which may have been unwieldy.

For both delayering and downsizing, a manager’s span of control may be widedned as jobs and maybe even whole departments can be removed. This will increase the manager’s workload and the number of people who report to him/her (span of control).

Delegation and empowerment may result from both delayering and downsizing as employees will be given more authority and responsibility to carry out tasks. This however, will increase their workload and potential for stress. But again it should increase their involvement and motivation.

Delayering should ensure the firm remains competitive as it is layers of management being removed whereas in downsizing the reduction of staff in perhaps key areas mean it may be difficult for output to remain the same, or at least in the same standard of quality.

Both delayering and downsizing are sometimes viewed as cost cutting measures, though in reality delayering is really about increasing organisational efficiency, whereas downsizing is aimed at lowering costs in order for the firm to remain competitive or even to avoid administration/liquidation.

Higher Business Management

Remember, in Section One, question 1, you are asked to identify problems only.

That means NO solutions & NO long winded answers. You can quote directly from the case study. It really is like a close reading exercise.

Also be aware that the headings that are given have to be written down and then you place your problems under those headings (ie Marketing, HR, Finance). If you don't you can only get a max of 3 marks. Which considering the first question is 10 marks that is throwing away a potential 7%!

If unsure of where one goes take a guess, as some go under more than one heading.

If you put more down you will not be negatively marked, but don't be excessive. Write down 12 answers in order to guarantee your chances of gaining 10/10.

Corporate Culture - What are the perks of the Googleplex: working at Google?

Google have often been cited as on one of the world’s best employers. They look after their employees and create a stimulating and exciting environment to work in.

Well one of the first things is that the food in the cafeterias is free. Yes free. But they counteract that with gyms and swimming pools so you can work off those donuts.

For the musicians among the staff, Google went one further than allowing employees to bring in their guitars. They built a state of the art music studio for use by employees to help de-stress themselves!

Google have plenty of sports and entertainments  for the employees including: table tennis, foosball, a climbing wall, and video games for those who like to sit for a bit.

They also have a medical facility where you can make an appointment with the doctor, and you can have a massage at the Googleplex if feeling stressed.

A free laundry service is provided as is free haircuts and if you can’t get a space in the underground car park, there is a free valet service to help!

Google do have a day care service (which isn’t free but subsidised) called the Kinderplex, so family needs are met there also.

Every year they take their employees on reward trips such as skiing or going to the casinos in Vegas! They also get a holiday bonus and a holiday gift (normally a new phone!).

Every Friday is TGIF day and here the two founders, Larry Page and Sergei Brin are joined at an All Hands meeting where people can ask them anything.

Finally, Google have what is called the 20% programme. This is when they let employees work on projects that they want to do and are interested in. This could be an entire day a week, but Google have benefited from this creativity in many key projects, one such example was the birth of Gmail.

So as you can see Google are certainly not your average employee, but then again with the advertising revenue they bring in they can afford not to be ordinary.

Higher Business Management - Wholesalers

What are wholesalers and what are their role in business?               

We can all name Wholesalers such as Booker, Makro and CostCo. A wholesaler is basically a middleman who provides a link between a manufacturer and a retailer.

Wholesalers buy in bulk from producers and then arrange the products into ‘pallets’, which are quantities that can be sold at a profit to a retailer.

This provides many benefits for the manufacturers. It saves the manufacturer having to make lots of small deliveries to retailers. Instead they can sell to the wholesaler and let them deal with it. Therefore it saves transport/fuel and admin costs.

The manufacturer will also benefit from not having to keep  a lot of stock (which in turn saves again on security, space and overheads).

The stock should also not become obsolete or out of fashion if it is sold on regularly and quickly in numbers to the wholesaler.

Some wholesalers also sell directly to customers, missing out the retailer. Others may label goods for retailers as well as packaging them into sizeable quantities for the retailer.

Higher Business Management - Role of the Manager in meeting objectives

What role does a manager play in meeting business objectives?

Sir Alex Ferguson, Manager of Manchester United

Firstly, the manager is responsible for the performance of his/her department or indeed the organisation, if the CEO.

Managers have to be able to motivate staff. Employees can easily become disillusioned or demotivated. Effective managers recognise this and invest in the potential of their people. As the boss of Southwest Airlines once said: “If we look after our employees they will then look after our customers.” Not every company or boss seems to take this to heart.

Managers also have to analyse, monitor and evaluate performance, and naturally act upon any issues that are highlighted.

Managers also have to plan. They plan ahead by setting business goals and objectives and then work out how these goals and objectives are going to be met. Who is to be involved? Which resources will be used? What is the timescale involved? And what is the budget?

This leads to delegation of tasks to department heads or team leader/supervisors and the organisation of roles, jobs and duties within departments.

Higher Business Management - Distribution Choices

Selecting a distribution channel is a vital ingredient of the Marketing Mix. What factors affect such decisions?

Firstly, the actual product in question is a factor. If the product is a perishable, then the supply chain has to be quick and preferably local. A direct distribution straight from manufacturer to the company would be ideal.

The quality of the product is also important. If the product is high quality then it is unlikely it will be bought from wholesalers who buy in bulk and arrange into manageable quantities for retailers. Again buying direct from a quality manufacturer would be ideal.

If other parts of the distribution channel are unreliable (the supply chain), then it may be wise to avoid them in future. You may have a wholesaler who cannot satisfy your lead times or the quantities you need, so you may have to look elsewhere.

The capital/finance and resources of the firm will be a factor also. If the company has limited resources and finance then they will have to look for the best deal, which may include moving online and selling as an etailer. This would reduce overheads and labour costs.

There are other issues involved also such as legal requirements, which affect distribution as certain goods may have to be packaged in a certain way or similar to perishables they have a sell by date.

Higher Business Management - Entrepreneurial Structure

The other day in class we were discussing different types of organisational structure and we got discussing the very informal structure used in small businesses and in particular sole traders.

This is often called the Entrepreneurial Structure.

Here is a representation of the structure from BBC Bitesize:

What happens is that there are no levels of management. The entrepreneur is the only person who is making decisions, and therefore decisions should be made relatively quickly.

Employees and staff have no quibbles or issues around who is actually the boss, because there is usually only the one head honcho!

There are some difficulties associated with this though, as the entrepreneur may become stressed with having to make all of the major decisions. It also perhaps stifles creativity and input from employees, which is normally to be encouraged and welcomed. This would in turn demotivate staff as they feel isolated and not valued.

LEVI ROOTS IS AN ENTREPRENEUR WHO MAY EMPLOY SUCH A STRUCTURE

Such an informal, entrepreneurial structure is almost impossible in larger organisations, although sometimes in highly creative artistic industries companies attempt to bring this kind of leadership and structure in, with varying effect.

Higher Business Management - Theory X and Theory Y - Douglas McGregor

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Douglas McGregor describes two different attitudes that employers have towards employees.

Theory X says that workers

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<![if !supportLists]>·  <![endif]>x  can't be trusted

<![if !supportLists]>·  <![endif]>x  have no initiative or ambition

<![if !supportLists]>·  <![endif]>x  must be watched all the time and forced to work

<![if !supportLists]>·  <![endif]>x  work only for money

Theory Y says that workers

<![if !supportLists]>·  <![endif]>y  like to work

<![if !supportLists]>·  <![endif]>y  want responsibility

<![if !supportLists]>·  <![endif]>y  can be trusted

<![if !supportLists]>·  <![endif]>y  will work hard for rewards, which are not only money

McGregor's believed that if bosses treated everyone as theory Y workers, employees will work harder and be more productive, because they are self-motivated. Theory Y believes employees want a say in the decision-making process. This is something that is becoming more common in today’s modern world. If employees are allowed to grow and develop their career, it should result in the business as a whole becoming more effective.

It may seem outdated, but Theory X is still practised by managers who like to retain their authority, and who make decisions then order workers what to do. Theory X assumes that employees will carry out their superior’s instructions. Firms and organisations who employ Theory X often have many internal disputes as employees need to be treated as individuals and human beings because they have needs which must be satisfied also.

Theory X style (authoritarian) is appropriate for factory supervisors or indeed army/police style hierarchies. X aims to control and direct employees.

Theory Y style is more suited in creative industries such as graphic designers, engineering, architects. Y offers more scope for freedom and expression.

Higher Business Management - Where does the money come to finance a business?

Businesses cost money to run. As well as paying workers and making products, they have overheads to pay. Where does the money come from?

Two main sources of finance:

<![if !supportLists]>n<![endif]>Internal

<![if !supportLists]>n<![endif]>External

Internal Sources of Finance

<![if !supportLists]>n<![endif]>Owner’s Capital – this is the money raised at the start of the business or funds invested later by the owner

<![if !supportLists]>n<![endif]>Retained Profit – monies saved up over the years, but depends on turnover, mark-up, and control of costs

<![if !supportLists]>n<![endif]>Efficient firms use profits to reduce external borrowing and provide cash to pay any outstanding liabilities

External Sources of Finance

<![if !supportLists]>n<![endif]>Shares – two types: Ordinary and Preference shares. Ordinary dividend depends on profits, while Preference shares have fixed dividends.

<![if !supportLists]>n<![endif]>Debentures – a long term fixed interest loan (20-25 years). Debentures have first claim on profits.

<![if !supportLists]>n<![endif]>Mortgage – a loan secured on property -usually 25 years. If borrower doesn’t pay mortgage back, then lender claims property.

External Sources of Finance

<![if !supportLists]>n<![endif]>Loan –money lent to a borrower

<![if !supportLists]>n<![endif]>Hire Purchase – buy an asset and have use of it buy pay it off over a period of time

<![if !supportLists]>n<![endif]>Factoring – using a third party to recall your debts.

<![if !supportLists]>n<![endif]>Overdrafts – spending more than you have in your bank account

<![if !supportLists]>n<![endif]>Leasing – renting an asset

<![if !supportLists]>n<![endif]>Trade Credit – customers buy goods and pay for them later

Government Assistance

Some areas need more help from the Government due to high unemployment, poor infrastructure etc. Government provides Central Government Support and Local Government Initiatives.

Central Government Support

<![if !supportLists]>n<![endif]>Assisted Areas – certain regions of UK have priority to boost local economy. There are two kinds: Development Areas and Intermediate Areas.

<![if !supportLists]>n<![endif]>Regional Selective Assistance (RSA) – businesses can qualify for selective assistance allowing for project and training grants.

<![if !supportLists]>n<![endif]>Regional Enterprise Grants (REG) – aimed at small businesses, given Investment grants or Innovation grants.

<![if !supportLists]>n<![endif]>Enterprise Zones – aim to keep firms in certain areas of country, may be given tax breaks as incentive

<![if !supportLists]>n<![endif]>Urban Development Corporations – they manage and develop land by providing buildings, roads and services

<![if !supportLists]>n<![endif]>Training and Enterprise Councils (TEC) – responsible for funding of training and vocational education

Higher Business Management - Empowerment

Empowerment can be defined as delegating responsibility to a subordinate in the organisation.

What are the benefits?

Hopefully by being engaged and involved in decision making, employees will be more motivated and their productivity will be higher. This in turn will create more loyalty among the employees and they will feel as if they have the trust of the firm and that they are making a valuable contribution. Employees will gain new skills through this process and that will inevitably ensure that they are in better shape for career progression and promotion.

And what are the disadvantages?

Not every employee will see delegation and empowerment as a good thing. In fact some might actively seek not having responsibility and the stress that comes with it. Other employees may simply be not up to the job and struggle with the extra responsibility. Finally, competition may result between employees as they vie for their managers approval.

Higher Business Management - Production Methods - Factors

When deciding on what production method to use, a firm must think about several factors that can influence their choice:

If we start off by using TCP (Time, Cost & People) then we can say that:

Cost - The finances the firm has will affect the method of production, if they are very healthy they could aim for the flow method which will involve machinery and automation.

People – the employees ability or their skills are important. If you have a highly skilled workforce then you may opt for job production, whereas if the employees are low skilled, then flow production may be a better option.

The technology available to the firm may also affect the method of production utilised. If it is more labour intensive, then job production would seem a logical choice.

Quantity - The volume that is needed or demanded will affect production methods, for high demand, flow is the best option and most economical in the long run.

Quality – the quality of materials bought from suppliers will affect production methods. Quality products may lend themselves more to job production, whereas cheaper materials may be easier to use in flow production. Also if high quality is needed, then job production would be best as it uses the expertise of the workers to maximum effect.

The type of product will affect the production method. A wedding dress or an Ocean liner will lend themselves to job production; rolls, sausages, and many other foods will lend themselves to batch production, and finally cars will be better suited to flow production.

The size of the business may affect the method of production. Larger firms will aim for flow production. Small businesses may only have the option of job production due to costs and labour.

Migration from countryside to metropolis

Click on this weblink to see the projected migration of people over the next few years from rural villages into urban megacities.

http://www.thefinancialist.com/the-great-urban-migration/

Higher Business Management - Japanese Words that have become part of the Business language

Kanban Cards – cards that display information showing where the parts should be delivered next in the production process or if a reorder is needed. Kanban means signboard in Japanese.

Kaizen – means continuous improvement and is a key concept of TQM. This was used extensively by Toyota and others in pursuit of satisfying customer needs with quality products.

Jidoka – this is defined by Toyota as automation with a human touch.

Andan – another word from Toyota, this means to pull the cord, in other words if a defect is found in production an assembly line worker may stop the line, which obviously places a great deal of responsibility on workers.