IB Business paper 1- terminology that relates most to pre-seen case

private limited company

• owned by shareholders

• can not raise finance from general public

• shares are typically sold to family, or friends

• Advantages

  • Limited liability – when the company is sued or incurs losses, all a shareholder will lose is his stock in the business.

  • Higher capital, higher capacity for expansion

• Disadvantages

  • More restrictions

  • Corporate taxes (higher)

public limited company

• owned by shareholders

• Able to sell shares to the public

• Required by law to publish their complete and true financial position

• flotation(when the business sells part or all of itself to the public) or an initial public offering (IPO)

• Advantages

  • More capital raised from selling stock

  • Limited liability

  • Continuity after death, freely transferable

  • Higher capacity for expansion

• Disadvantages

  • Possibility of a hostile take-over through shares, control can change unexpectedly and be lost by the original owner

  • Much more restrictions

  • Corporate tax

expansion

• the growth of a business due to an increase in the size of the organisation itself or/and growth in the market

• usually measured by an increase in sales revenue, market share, or profits

Average cost

• the cost per unit of production

• derived from total cost of output/ number of units produced

• this tends to decrease as business increases due to economies of scale

Greenwashing

• misleading marketing tactic that falsely portrays sustainable practices or describe products to be more environmentally friendly than they actually are

permanent employees

• these workers have an employment contract on a continual basis

• contract only ends if workers resign or the employer terminates the contract

Temporary workers

• employees hired for a limited period of time or until the completion of a project

freelancer

• a self-employed individual who provides services to their clients rather than work for an employer

• work on specific projects instead of long-term employment commitments

mission statement

a simple declaration of the company’s underlying purpose and its core values

aims

• general and long-term goals of the organisation

objectives

short-to- medium term specific targets to achieve the aims

strategies

medium-to-long-term plans of action to achieve the strategic goals of the organisation

business strategies

operational strategies-

• day to day methods to improve efficiency

genetic strategies-

• affect business as a whole

• to gain competitive advantage

corporate strategies-

• long term goals

tactical objectives

survival-

• to establish the business

• to recover and get back to profitability

• prevent hostile takeover

sales revenue maximisation -

• grow and achieve recognition

• become more efficient through economies of scale

• not profitability

strategic objectives

profit maximisation-

• maximising profits tends to be the main goal of all businesses

growth-

• market share/sales revenues/helps achieving EOS

market standing-

• presence in an industry

image and reputation-

• Good image helps grow the business, attracts new customers, make employees proud

the need for changing objectives

• Companies change objectives when responding to internal and external changes

• Internal factors

  • Corporate culture – way the organisation works

  • Type and size of organisation – small or big businesses run differently

  • Age of organisation – change must be consistent with times

  • Financial status – profit goals, how much money the business has to use

  • Risk profile of shareholders – If investors are risk-averse or risk-loving

  • Private/Public sector

• External

  • State of economy – strong or depressed economy affects the company too

  • Government constraints – government telling you not to expand somewhere

  • Presence and power of pressure groups – (e.g. not to expand in the endangered locations)

CSR

• Concept whereby organizations consider the interests of society by taking responsibility for the impact of their activities on various stakeholders

• Benefits:

  • Better employee recruitment and retention

  • Boosts company’s image/reputation

  • Risk management against scandals, accidents, etc.

  • Brand differentiation and smoother operations

  • Customer loyalty & goodwill

• Disincentives:

  • High compliance costs can lower profits

  • Forced to use materials that are specialised and may reduce profit

  • Ethics are not universal or unchanging anyway

• Attitudes change over time; acceptable practices before are unacceptable today.

• CSR objectives adapt to changes in social norms

SWOT analysis

• Guides management for future strategies- useful decision making tool

• assesses current situations

• considers internal and external factors

Strengths – advantages that are basis for developing competitive advantage e.g. highly skilled employees, brand awareness

Weakness- negative factors e.g. low quality products, bad reputation

Opportunities- potential areas for expansion of the business and future profits e.g. political/economical policies, social statistics & trends

Threats- hindrances to the business e.g. economic environment, market condition competitors.

Ansoff matrix

• Analytic tool to determine growth strategy by focusing on product/market combination

• Growth strategies

• Existing product + existing market = Market Penetration (low risk)

  • price adjustment

  • increase of market promotion

• New product + existing market = Product Development (medium risk)

  • Innovation to replace existing products

  • Focusing on consumer needs

  • Brand extension

  • Capitalize on technology

  • Consumers in existing market may not like the new product

• Existing product + new market = Market Development (medium risk)

  • New distribution channel

  • Expanding geographically

  • Attract new market segments

  • New consumers may not like the product

• New product + new market = Diversification (high risk)

• If successful, higher gains can be reaped from various industries

• Spreads out risks and safeguards against economic shocks over diverse product portfolio

stakeholders

• People who can be affected by and therefore have interest or stake in actions of the business

• there are internal and external stakeholders

internal stakeholders

• employees

• shareholders

• managers/directors

external stakeholders

• customers

• suppliers

• pressure groups

• competitors

• Government

stakeholder conflict

• inability of organisation to meet all stakeholders competing interests

STEEPLE

• Business tool for understanding a business’ external environment (opportunities and threats)

• Stands for Social, Technological, Economic, Environmental, Political, Legal, and Ethical analysis (of the industry)

• External environmental factors are analysed in decision making and strategy development because they can heavily influence the business

Social

• Attitude of society towards wide range of issues

• Population demographics (more young/old, more women/men, etc.)

• Roles and attitudes of people

• Cultural and religious beliefs

• Security and education

Technological

• Use of tools and machines

• Information technology

• Innovations in technology

Economic

• State of the economy

• Interest and tax rates

• Exchange rates and foreign relations

• Inflation rates, unemployment rates

Environmental

• Abundance of natural resources or raw materials

• Threats from nature (or natural disasters)

• Waste disposal/recycling

political

• Laws (employment, consumer, business) & policies (fiscal and monetary)

• Changes brought about by new government

• Possible effects of political unrest

Legal

• Employment or contract laws

• Trade unions

• Environmental protection regulations

Ethics

• Client confidentiality

• Bribery and other forms unethical (and possibly illegal) business transactions

• Fair competition

How changes in STEEPLE factors affect a business’s objective and strategy

• Changes in trends, social norms, public opinion, views on ethics can affect the company’s products, business activities, and the way they market their products

• Changes to legal or political factors may force businesses to change the way they operate to comply with new laws or regulations

• Changes to technological factors could result to the company adopting newer technology or machinery to increase efficiency or keep up with industry standards

• Changes to environmental factors could force companies to adapt to scarce raw materials, frequent natural disasters, etc.

• Changes to economic factors (economic growth, interest rates, etc.) could affect the costs of operations of the business, spending attitude of consumers, etc.

economies of scale

• Increase in efficiency of production as the number of output increases

• Average cost per unit decreases through increased production

• Fixed costs decline and there is an increased number of output

internal economies of scale

• achieved by the organisation itself

  • Purchasing economies

    • Wholesale discounts

  • Technical economies

    • Investing in technology to reduce costs

  • Financial economies

    • Easier for large companies to receive loans from banks

  • Marketing economies

    • More efficient to advertise a large number of products

  • Managerial economies

    • Larger firms are able to hire specialists who help improve efficiency

external economies of scale

• External

  • Improved infrastructure (e.g. transportation)

  • Advances in the industrial efficiency due to better training, innovations in processes/machinery, etc.

  • Growth of other industries that support the organisation

internal (organic) growth

• internal (organic) growth - the business grows through its own capabilities and resources

• Methods used to achieve internal growth:

  • Change of pricing strategies

  • Increase advertising and promotions

  • Offer flexible financing schemes

  • Improve and innovate the product or service

  • Sell in different locations

  • Increase capital expenditure on production and technologies

  • Train and develop staff

advantages

• control and coordination

• inexpensive

• corporate culture

• less risky

disadvantages

• diseconomies of scale

• need to restructure

• dilution of control and ownership

• slower growth

external (inorganic) growth

• The business grows through dealings with outside organisations

ways to grow:

• horizontal integration - companies in the same industry

• vertical integration- businesses in a different stage of production

• lateral integration- firms with similar operations but not in direct competition

• conglomerate- businesses are in different industries

advantages

• faster

• reduces competition

• greater market share

• sharing ideas

• firm evolves- risk is spread across more markets

disadvantages

• costly

M&A

• merger- two or more firms agree to join together

• acquisition(or takeover) - a company buys controlling interest in another company

• could be hostile takeover when unwanted

Joint-venture

• Two or more businesses split the costs, risks, rewards of a business project

• two or more business becoming a new legal entity

advantages

• spreading costs and risks

• entry into foreign markets

• relatively cheap

• competitive advantage

• exploitation of local knowledge

• high success rates

disadvantages

• rely on goodwill and resources of other organisations

• culture clashes

strategic alliances

• Like a joint venture, but NO new legal entity is created (only for a specific project or product)

• Profit is split between the two companies

franchise

An original business, known as the franchisor, that developed the business concept and product, then sells to other businesses (franchisees) the right to offer the concept and sell the product

HR planning

• Process of anticipating current and future demand for workers in both the short and long term

• A workforce plan includes

  • Careful consideration of current abilities and what will be needed in the future (short-term or long-term)

  • Identifying gaps and considering ways of addressing them

  • Noting any training needs

  • Developing training, recruitment and other personnel policies

CLAMPS

• why people tend to leave their jobs

• Challenges

• Location

• Advancement

• Money

• Pride

• Security (job security)

Internal/external factors that influence HR planning

Internal: organisation size, strategies, structure, finances, motivation, corporate culture
External: demographic change, change in labour mobility, immigration, flexi-time, gig economy

Gig economy*

• Labour market in which workers are given short-term contracts, paid for each individual job (freelancers)

• a market system in which temporary positions are common and organisations hire independent workers for short-term commitments
  + work and life balance, reduced costs for businesses
  - lack of job security, limitations in career development, lack of social benefits

Centralisation and decentralisation

• Centralisation: decision making is predominately made by a very small group of senior managers at the top of the organisational hierarchy

• Decentralisation: decision making authority is delegated throughout

handy shamrock organisational structure

• People – important resource

  • Have to be satisfied through job enrichment and flexible practices

• 3 main groups of staff

  • Core staff (full time)

    • Managers, technicians

    • E-commerce and teleworking have reduced core staff – implies downsizing

  • Peripheral workers (part time, contractual)

    • Employed only when required

    • Less job security and morale but offer more flexibility

  • Outsourced workers (subcontracting)

    • Paid to do specialised tasks e.g IT, accounting

Leadership style

• The ways in which a manager and leaders provide direction for others

job security

• The assurance given to employees that they will keep their current jobs for the foreseeable future

Sources of conflict in the workplace (& impacts)

Conflict occurs as a result of opposing goals between two or more parties
- can cause miscommunications, misunderstandings, stress, grievances, and power struggles

collective bargaining

• The process of negotiation of working conditions and pay between employees and employers

internal sources of finance

• personal funds- personal savings of owners and risk for owners

• Retained profits- Value of profit kept by the business after paying off the tax, interest, and dividends (to the shareholders) to use within the business

• Often used for purchasing and/or upgrading fixed assets which will increase returns

• advantages- cheap, permanent source, flexible, controlled by owners

• Disadvantages- start ups are rarely profitable at first, might be insufficient for expansion, might be used up

• Sale of assests- Businesses can sell their unused assets, such as selling old machinery and computer equipments that have been replaced

• advantages- no interest or borrowing costs

• disadvantage- available to established businesses only

External sources of finance

• share capital- money raised from selling shares in a company

• Loan

• Overdrafts

• Grants

• Debt factoring

• Trade credit- payment made a later stage agreed upon between seller and buyer

• Leasing- the lessee pays rental income to hire assets from the lessor, who is the legal owner of the assets.

• venture capital- a form of high-risk capital, usually in the form of loans or shares, invested by venture capital firms, usually at the start of a business idea

overdrafts

When a lending institution allows a firm to withdraw more money than it currently has in its account

grants

Funds usually provided by a government, foundation, trust, or other agency to businesses which does not need to be repaid.

subsidies

Financial Assistance granted by a government, NGO, or an individual to support businesses that are in the public interest

loan

Money sourced from financial institutions such as banks, with interest charged on the loan to be repaid

short-term finance

• Day to day running of business

• one year or less

• examples- overdrafts, trade crediting, debt factoring

medium- term finance

• 1-5 years

• equipment, machinery, vehicles

• examples - leasing, grants, loans

long-term finance

• expansion of business

• 5-30 years

• examples - loans, share capital

fixed cost

• costs of production which have to be paid regardless of output level

• Examples- rent, interests, lease payments

• independent of output level

variable cost

• cost of production which change in proportion to output level

• Examples- raw materials, packaging

revenue stream

Revenue streams are the sources of revenues or incomes for a company or a business

Firms utilising different sources/methods to generate income

revenue streams examples

• Advertising revenue: this is when an organisation is offering advertising space and charges other organisations for posting ads in this space

• Royalties/franchisor: royalty payments are made to artists for the use of their artworks or to franchisors for the use of franchise

• Sponsorship deals: the way it usually works is sponsor gives you financial support in exchange for an extra advertising space and publicity.

• Subscriptions: use or access goods or services

• Merchandise: in addition to the main trading activity, some organisations sell their souvenirs or clothes to get extra revenues

• Dividends: companies that own stock/shares within another business can also get dividends

• Donations: charities and non-profit

• Interest earnings: on cash deposits in banks

• Subversions: Government subsidies- aimed at benefiting society

wholesale market

• a market where a trader buys goods from a manufacturer in bulk and re-sells the goods to business houses or retailers to further sell the goods to end consumers

Dividends

A sum of the money paid to shareholders which is decided by the board of directors

Balance Sheet

a statement of the financial position of a business in terms of assets, liabilities and owner's equity at a particular point in time

Assets

all items of value that are owned by the firm, such as cash or buildings

Profitability Ratios

show a company's overall efficiency, performance and financial position

liquidity ratio

ability of firm to pay its short-term liabilities

For BON issues may occur because of the absence of sales revenue between the months April - September

current ratio

looks at whether a company can pay/cover its short-term debts

current assets/current liabilities

short-term liquidity problems

occur due to-

• poor credit control

• expanding too quickly

• hence cashflow management is key

cash flow

• Financial document that shows expected movement of cash inside and outside of a business per time period

• Cash inflows – usually from sales revenues when cash payment is received

• Cash outflows – payment of bills, usually itemised expenses

• Net cash flow – the differences between cash inflow and outflow

reasons for cashflow

• business planning

• is the business financially healthy

• plan for and alleviate liquidity crisis

causes of cashflow problems

• overtrading

• over borrowing

• overstocking

• poor credit control

• unforeseen changes

strategies to deal with cash flow problems

• reducing cash outflows

• improving cash inflows

• seeking alternative sources of finance

marketing goods and service

• Promotion- to build brand recognition, awareness and trust

  use physical environment

  make it easy to visualise service quality

  branding, logos, celebrity endorsement, slogans

• Product strategy - a tangible good or intangible services that satisfies the needs and wants of a customer (attracts more customers)

• Price strategy- The amount paid for a particular good or service that should entice customer yet allow the firm to be profitable

  source of value to customer- used to price product

• Place strategy- Distribution channels that enable customers to conveniently buy the product

  online

  customers would not go to inconvenient and remote location

marketing goods vs service

Goods: Use of the 4Ps (place, price, product, promotion)
- Services: Use of the 7Ps (place, price, product, promotion, process, people, physical evidence)

Market research

• Market research is essential in helping businesses to identify products/services they can develop in response to the needs and wants that their customers have
   

• Market research is the process of systematically gathering data from consumers which can be used to influence the business decisions

marketing plan

• The process of formulating the marketing strategies and tactics that will help a business to achieve its marketing objectives

• Three tools of marketing planning include

  • Market segmentation

  • Market mapping

  • Market positioning

• marketing audit- review of current position of an organisation’s marketing- once completed marketing plan is prepared

Marketing objectives

• These are specific SMART (specific, measurable, achievable, relevant, time bound)

Research

• Marketing research identifies the factors expected to impact upon the marketing plan such as

  • Market size and growth

  • Market segments

  • Competitor positioning- SWOT

  • Customer tastes, preferences and views

  • The nature of distribution channels

The marketing mix

• This involves planning the medium- and short-term marketing activities the business intends to undertake

  • Pricing strategies and tactics

  • Promotional activity

  • Distribution and logistical plans

  • Product specifications, features and packaging

  • Physical evidence such as branding

  • How people and process are developed to support delivery of the rest of the marketing mix

advantage and disadvantages of market planning

advantages-

• improves chances of success

• clearer idea of objectives

disadvantages-

• no time

• inflexible

• Quickly outdated

Marketing objectives

• Targets the marketing departments aims to achieve

• These are specific SMART (specific, measurable, achievable, relevant, time bound)

Ansoff matrix

Market development-

• selling existing products in new markets

• e-commerce- selling over the internet

• internationally

Product development-

• new products in existing markets

Diversification-

• new products in new markets

• high risk

• stable businesses looking for growth

Product innovation-

• original or new product launch

• first mover advantage

Unique selling point

• A unique selling point (USP) is a distinguishing factor or characteristic of a product, service or brand that sets it apart from its competitors

• The USP helps a business to differentiate itself and give customers a reason to choose one product or service over others because it offers something distinct and valuable

There are a range of reasons why businesses develop a USP which can include

• Developing a brand identity

• Achieving a competitive advantage over rivals

• Effective communication with customers

• The attraction and retention of customers

• Achieving power over pricing

• Encouraging innovation and adaption

Differentiation

• Product differentiation is an attempt by a business to distinguish its products from those of competitors

reasons for differentiation

• Strong product differentiation helps the firm to develop its competitive advantage

• The development of product differentiation often helps a firm to create a unique selling point for its product which can be used in marketing

Common methods used by businesses to differentiate products include

• Marketing and branding activities

• Eye-catching packaging

• Attractive functions and features

• Product customisation

• Excellent customer service

Commercial marketing

• marking strategies that focus on meeting the demands of customers in a profitable way

• the main purpose is to generate benefits for the owners of the business

Four P's of marketing mix

Marketing mix: Key elements of a marketing strategy that ensure the successful marketing of a product

• Product: a tangible good or intangible services that satisfies the needs and wants of a customer

• Price: The amount paid for a particular good or service that should entice customer yet allow the firm to be profitable

• Promotion: communicating relevant products information to inform and persuade customers to buy the good or service

• Place: distribution channels that enable the customers to conveniently buy the product

Market segment

• A distinct group of customers with similar characteristics, tastes, preference

Targeting

• Targeting is the marketing practice of creating and using an appropriate marketing mix and marketing strategies to cater for different marketing segments

Target market

• The group of customers that an organisation focuses on selling its product to

Niche market

• marketing approach that focuses on supplying highly specialised products to cater to a small and select target market

Mass market

• industries that buy and sell mass market products, catering for a broad range of target markets

people

• the employees who deliver the customer service element of the extended marketing mix

physical evidence

• the observable and tangible aspects of a service

psychographic segmentation

• segmentation that involves characterising consumers according to people’s lifestyle choices and personal values

BCG matrix

Visual marketing management tool used to analyse a firm’s product portfolio

• Stars: High market growth and high market share

• Cash cows: Low market growth and high market share

• Question mark: High market growth and low market share

• Dogs: Low market share and low market growth

Cost plus pricing

• Adding a percentage or predetermined amount (markup) to average cost per unit to set the selling price

• Ensures a product will produce contribution