RDM

GOTTA HUSTLE

Unit 1.2 Types of organization

1. Private Limited Company (PLC)

A limited liability company where the ownership is shared upon a group of people
known as shareholders, upon introducing new shareholders there needs to be an
agreement between all shareholders. di

Advantages: Disadvantages:

● Limited liability for owners ● Limited ability to raise share capital as

● Easier loan
● Tax Benefit (certain cases)
● Continuity of the organization
PLC could not sell their shares on a
stock exchange
● If the organization is profitable,
dividends need to be distributed to
shareholders hence reducing the
company’s retained profit
● Restricted access to capital market
● Increase legal compliance

*Connection towards RDM

- Continuity in the event of the death of the CEO. For RDM, the business was able to
continue after the death of Dr. Kristian as Jan, his son took over the business.
- Give a sense of security as going public can make RDM vulnerable to takeover.

2. Public Limited Company

A limited liability company where its shares are publicly traded on a stock exchange
and are owned by many individuals, usually a large company.

Advantages: Disadvantages:

● Limited liability ● Expensive to set up (compared to

● Shares are freely transferable -
more liquidity to share it
● Gaining economies of scale
because of most being a
multinational
● Can easily dominate the market -
purchasing competitors
all other types of organizations)
● Strict controls and regulations to
comply
● May face management problems
(slow decision making and
industrial relations problems since
it’s in huge size)
 3. Private Sector Company
The part of the economy privately owned and in the control of individual companies

Advantages: Disadvantages:

● Independent management ● Loss government protection and

● Improved efficiency due to profit
incentives
● Reduces government’s political
interference
● Urges improvements in the
company through competition
might be hard to adapt to the
market
● The government loses dividends
● Privatization of certain entities
may lead to monopoly

4. Public Sector Company

A state-owned enterprise where the resources are owned and controlled by the
government. It usually has the objective to serve the public.

Advantages: Disadvantages:

● Provide some of its service to all ● Bureaucratic

consumer (no discrimination) ● No profit motive
● Little competition ● Lack of innovation
● Beneficial to the society ● Governmental changes will affect
the priorities
Unit 1.3 Corporate Objectives

1. Vision and Mission Statement

A ​Vision Statement is more forward-looking and speaks to the long-term aims and highest
aspirations of a business serve as a guiding principle

A ​Mission Statement is more grounded in the aim of accomplishing objectives to achieve

the mission, an intermediate step on the way to the vision

Possible Questions:
With reference to RDM discuss the usefulness of a vision and a mission statement

Vision statement is a written declaration of where the organization aspires to be in the

future, its long term aims, it sets the framework for daily business operations conducted by
managers and employees, while mission states the current goals and purpose of the
company, it inspire stakeholders and create a shared belief, giving the company a sense of
purpose, sense of motivation and sense of direction. It can improve productivity as
employees are more aware of what they do. The vision and mission statements provide a
local point that aligns everyone with the organization thus ensuring that everyone is
working towards a single purpose, it gives direction for executives, engineers and sense of
direction.

Connection to RDM
- “RDM has no corporate strategy either, apart from a vision in Jan’s mind. He
effectively communicates that vision to employees, but no written corporate
strategic plan exists to achieve that vision. RDM has an outdated name, a weak
brand identity, no relevant vision or mission statement and no written operations
management strategy or human resources plan.” (page 4).

Hence RDM should develop the marketing strategy that Jan wants by unifying under one
idea that will give sense of purpose.

2. CSR
CSR is a business approach that contributes to sustainable development by providing
economic, social and environmental benefits for the stakeholders, it is broader and less
specific than ethical objectives. A company committed to CSR is intending to act as a good
corporate citizen, in all matters acting responsibly in a manner that benefits society as a
whole.
Possible Questions:
With reference to RDM, explain the importance of corporate social responsibility (CSR)

RDM has a strong sense of CSR. CSR is a business approach that contributes to sustainable
development by providing economic, social and environmental benefits for the
stakeholders, it is wider and less specific than ethical objectives, A business committed to
CSR will not only obeys policies and laws but also interacts responsibly and honestly with
customers and reduces its impact on the environment. By recognizing its CSR, a business is
more than likely to have a sustainable business model. By building strong links with society
and the environment, the business is more likely to be valued in society.

RDM is being ethical towards everyone such as by providing fair wages and placing a strong
emphasis on care for the environment (Line 104) that will lead to an increase in the
employees’ motivation, improved brand image and also customers loyalty. Boosting
employee engagement is very crucial in business as when the employees’ are motivated in
RDM it is equal to better output. If a business is philanthropically minding, employees will
likely to stay longer and they will be more creative, which is exactly the type of employee
suited for Jan’s environment which fosters an atmosphere conducive to creativity.
Improving brand image is necessary as customers tend to feel better purchasing goods at
companies that help the community, it will increase the chance of RDM becoming favorable
in the eyes of consumers.

Many businesses and increasingly big businesses see themselves and want to position
themselves as role models as leading citizens, setting the standard for everyone or
responsible behavior. Moreover, RDM can stand out among other similar production
company such as RDM sourcing components firm who also have good CSR practices. (line
103).

Nevertheless, there’s always a drawback in every decision. It is found that CSR incurs higher
cost for RDM which makes them having a fewer profit and they have to operate under the
very strict ethical rules. In addition, This should not stop RDM from nurturing their CSR as
the advantages it has to outweigh the advantages.
 3. Ansoff Matrix
Ansoff's Matrix is a marketing planning model that helps a business determine its product
and market growth strategy.

Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend
on whether it markets new or existing products in new or existing markets. The output from
the Ansoff product/market matrix is a series of suggested growth strategies which set the
direction for the business strategy.

Market Penetration
Business focuses on selling existing products into existing markets. Riskier than market
penetration.
4 main objectives:
➔ Maintain or increase the market share of current products – this can be achieved by
a combination of competitive pricing strategies, advertising, sales promotion and
perhaps more resources dedicated to personal selling
➔ Secure dominance of growth markets
➔ Restructure a mature market by driving out competitors; this would require a much
more aggressive promotional campaign, supported by a pricing strategy designed to
make the market unattractive for competitors
➔ Increase usage by existing customers – for example by introducing loyalty schemes

Market Development
Market development is the name given to a growth strategy where the business seeks to
sell its existing products into new markets.
There are many possible ways of approaching this strategy, including:
➔ New geographical markets; for example exporting the product to a new country
➔ New product dimensions or packaging: for example
➔ New distribution channels (e.g. moving from selling via retail to selling using
e-commerce and mail order)
➔ Different pricing policies to attract different customers or create new market
segments

Product Development
Product development is the name given to a growth strategy where a business aims to
introduce new products into existing markets. This strategy may require the development of
new competencies and requires the business to develop modified products which can
appeal to existing markets.
A strategy of product development is particularly suitable for a business where the product
needs to be differentiated in order to remain competitive. A successful product
development strategy places the marketing emphasis on:
➔ Research & development and innovation
 ➔ Detailed insights into customer needs (and how they change)
➔ Being first to market

Diversification
Diversification is the name given to the growth strategy where a business markets new
products in new markets.
This is an inherently more risk strategy because the business is moving into markets in which
it has little or no experience.
For a business to adopt a diversification strategy, therefore, it must have a clear idea about
what it expects to gain from the strategy and an honest assessment of the risks. However,
for the right balance between risk and reward, a marketing strategy of diversification can be
highly rewarding.

Market Penetration Product Development

Coal Stoves (doesn’t sell anymore)
Kerosene Stoves
(lowers price in the long term, in quality
to compete internationally) (although
demand for them is decreasing)
Geographic Relocation
RDM has successfully carried this out through the:
- Implementation of Ergonomic Design
- Different Colours/Designs/Etc
→ RDM has successfully done this before, with
going from coal/kerosene stoves to healthcare -
machinery is flexible regarding the production of
products.
→ water bottle, as water bottles cater for a wider
market (not only baby-boomer generations) and are
a different product than healthcare devices or
stoves

Market Development Diversification

Expanding their healthcare RDM doesn’t do this now but it would involve a new
products/kerosene stoves to potentially product in one of their lucrative markets. E.g.
lucrative markets in Scandinavia, and Kitchen hardware in France (marketing
elsewhere in Europe (only 700 km radius) implementations would be weak)
(105, appendix 2) Aluminium water bottles
 4. SWOT Analysis
SWOT Analysis is a useful technique for understanding your Strengths and Weaknesses, and
for identifying both the Opportunities open to you and the Threats you face. Used in a
business context, it helps you to carve a sustainable niche in your market.
Strengths
- 100% family owned business full control
- Innovation and automation
- Customization and product development
- Democratic leadership style - Jan
- Qualified CEO
- Production system and supply chain
- Organizational structure- matrix (except
for aluminum water bottle - a new
division (hierarchical))
- Skilled workforce
- CSR- fair wages, sourcing raw materials
from local suppliers, sustainable
- Consistent profits
- Just in time
- Flexibility
- Competitive prices
Opportunity Threats
- Baby boom generation
- Increase automation further
- Relocation
- Globalization
(Market penetration/diversification)
- Innovation
- Stable economy
- Favourable trade relations
- Political stability
- Major tourist centre- Prague
- Growing technology
- Germany: Europe’s largest economy
- Increasing ageing population- growing
demand
- Free movement of labour within the
european Union
- Velvet revolution and its impact
Weakness
- No marketing plan
- No relevant vision or mission statement (line
123)
- No Brand identity
- Insufficient guidance and lacks focus (line
98)
- Lack of motivation - better leadership
could fix this
- The high cost of innovation and automation
- Possible working capital issues while
financing its expansion
- Stakeholder conflict due to the change in the
production process
- High dependency on technology
- Workers complain about the leadership style
- Poor marketing strategy (weak branding)
- Lack of a strategic direction
- Outdated marketing mix
- Can not employ economies of scale due
to non-standardised products
- High shipping costs
- Division of the country
- Rising competition from the Asian market
- Expensive factors of production
- Healthcare product regulation
- Community Ambivalence
- High transportation cost
- The vocational school no longer liaises with
the company - lack of support from the local
community
- Loan capital might be difficult to get as RDM
has no mission and vision statement making
the foundation of the business weak
- Land is expensive to purchase - Hard for the
company to relocate
Unit 1.4 Stakeholder

Stakeholder : an individual or group who has an interest, often financial, in the activities and
success of an organization.

Internal stakeholders : Individuals or groups that work within the business

External stakeholders: Individuals or groups that are outside the business

The interest of internal stakeholders

- Shareholders​ focus on returns on their investment
- The CEO or managing director focuses on coordinating the business strategy and
delivering profits and returns that satisfy the shareholders
- Senior managers ​focus on the strategic objectives or their functional areas
- Middle managers​ focus on the tactical objectives or their functional areas
- Foremen and supervisors focus on organizing tactical objectives and formulating
operational objectives.
- Employees and their unions​ focus on protecting their rights and working conditions

The interest of external stakeholders

- Government​ focuses on how the business operates in the business environment
- Suppliers​ focus on maintaining a stable relationship
- Customers and consumers​ focus on the best product that meets their needs
- People in the local community​ focus on the impact of their business in the local area
- Financiers ​focus on returns on their investments
- Pressure groups ​focus on how the business has impact on their area of concern
- The media​ focuses on the impact of the business in terms of news and stories

Stakeholder conflict
When stakeholders want different outcomes from a business activity and are unable to
meet or accomplish their needs or wants, this is referred to as a conflict of interest.

As we noted, each stakeholder has a different interest and the business organization cannot
treat all stakeholders equally. In addition, the decisions to continue operations are based on
the primary objectives of the business survival and profit maximization among others.
Therefore, conflicts of interest are inevitable, but the extent to which these conflicts are
allowed to inflict on the interest of stakeholders will be a predicate to the challenges that
the business will have to face.
 Possible questions:
1. Explain the stakeholder conflict that would have emerged due to the changes
made in the production process. [6 marks]
Possible changes in production process in RDM:
“To continue to grow and access these potentially lucrative markets, the chief financial
officer (CFO) has proposed that RDM build an additional production facility elsewhere in
Europe, which would extend RDM’s market area. Given that the entire
order/manufacture/delivery process could still be performed in Lobjanec, this new facility
would require limited staff and most of the work will be done by robots. RDM can finance
the expensive expansion through either share capital or loan capital. Relocation could be
very expensive and may be beyond what RDM could raise as a private limited company so
they may have to go public to raise sufficient finance.” (page 4)

Stakeholder Analysis
Person or group of Stakeholder Explanation of Stakeholder Interests
people Category
Internal / External

Radeki de Dovnic Family Long term aspirations for running their business.
Managers Reaping profits, need for power. Aristocratic family
started RDM in 1873. Regained control of RDM in 1990
after it was nationalised in 1949 by the communists.

Residents in 1873 Customers Provided demand for coal-burning stoves.

Communists Government Wanted to nationalize private sector companies

(1949-1989) including RDM.

Adriana Radeki de Managers Fondness of Czech Republic. An opportunist wanting

Dovnic (CEO) in 1990 to work in Prague. She added Healthcare product with
ergonomic designs to the product portfolio.

Baby boomer generation Customers Need for healthcare products as the baby boomer
generation has reached retirement age.

Educated Czechs Employees Monthly wages, respect of their opinions in a

democratic leadership, fear of being made redundant
as RDM have started recruiting engineers from
universities across Europe.

Czech Republic Government National firm with plans to diversify into other
Government countries leading to increased national reputation, the
larger the firm, the higher the corporate tax. An
increase in the amount of jobs in the Czech economy,
although a higher inflation rate due to the possible
increase in taxes/government revenue.
Dr. Kristian Radeki de Managers
Dovnic (CEO in 1995)
Professor in history, Austro Hungarian baron born in
1920. Fled Czechoslovakia in 1944 to the USA with
only the money in his pocket. Becomes CEO when
Adriana retires and was not prepared to be a CEO. Has
a paternalistic leadership style, which made the
working environment dull and depressing.

Jan (became CEO in Managers Son of Kristian, democratic leadership style. Born in
2001) the USA studied engineering at uni. CEO at age 38.
Seeking product innovation and process innovation to
compete with Asian manufacturers. Wants fun and
humour in the workplace. No mission statement, no
strategic plan, no HR plan.

Customers Customers Are interested in the production of goods by RDM

Engineers in RDM Employees Likely to be highly paid, democratic leadership style

appeals to them, matrix structure might appeal as well
as they are highly-skilled and therefore might prefer to
have some degree of autonomy (Pink’s motivation
theory).

Human accountants in Employees May not fear redundancies as RDM prefers to keep
RDM their accounts compiled by humans instead of
machines.

Lorry drivers Employees Fear of redundancy, loss of jobs due to possibility of

self-driven trucks

Asian manufacturers Competitors Upcoming stiff competitions, prospects of mergers

and acquisitions, higher chances of inter-firm
benchmarking

European Manufacturers Competitors Higher competition if RDM expands and starts a

production facility in some other EU country

Workers in the factory Employees Loss of jobs due to automation.

Computer experts Employees Likely to be highly paid and in high demand. May be
an increase in demand for them if RDM does expand
into lamerce.

The vocational school Potential Was favoured under Kristian but not under Jan after
employees, local he implemented automation. Loss of information from
community a company that had previously allowed them to
fine-tune the skills of their students and prepare them
for the current employment sector.

Universities across Society RDM is a possible employer for international

Europe graduates.
New facility staff Employees Highly paid staff, specialised in automated machinery
maintenance, reduces the amount of workers needed
for the new facility.

CFO Managers In charge of finance. Will have to cost everything to

obtain an accurate prediction of total costs for
products, manufacturing, delivery, relocation. Have to
determine sources of finance for all of this. Wants to
sell shares on the public market to obtain share capital
for relocation.

Stakeholders:
● Internal:
○ Employees and managers: major conflict would be regarding job
security but RDM would “new facility would require limited staff”...
the case study is not explicitly stating what will happen with current
employees and managers at Lobjanec.
■ But we can assume that it will create new jobs in the new area
in Europe, which would mostly bring positive impacts
● But even though it will be in Europe, different zones
may bring culture clashes
○ Shareholders: as long as they get their profit and dividends, there will
be no major conflict
● External:
○ Suppliers: no conflict but they will have to adapt to delivering raw
materials to RDM on the new zone. This means that adapting might
make it uncomfortable for them, and thus cause a conflict on a small
scale.
○ Customers: interested in value for money, as long as they get a fair
price, no major conflict
○ Government: will depend on which country RDM is planning to
expand
○ Special interests groups: pressure groups such as environmentalists
may go against RDM new facility if RDM is not being socially
responsible (taking care of water, land, or is not paying a fair wage to
workers)
○ Competitors: if RDM (given that it seems as RDM is successful and
gets profit), it may present a potential threat for local businesses in
that new area.
 Unit 1.5 External Environment

1. STEEPLE

Social 1. Ageing population → more demand for healthcare products (Line 13)
2. Demands for kerosene stoves have been declining for many years;end of product life
cycle. (Line 4)
3. Impact of tourism has aided the Czech economy. (Line 19)
4. Many Czech also speak German, this means that they have positive relations with
Germany - Europe’s largest economy. Which also impacted the IT infrastructure,
making Czech’s IT infrastructure among the best in the world. (line 21)
5. Automation forces people to quit their job and not to have a job since all functions of
the business are done by robots. (Job redundancy)
6. “ Rarely do humans have to intervene.” (Line 46).‘RDM’ progressively employs fewer
workers as they move toward automation (threat to workers).
7. Line 81: Vocational school relation with RDM worsen since highly trained engineers
are required instead of skilled manual laborers (which is available in the vocational
school); resulting in the loss of RDM’s local influence.
8. Changing trends of products can also be considered in social
9. The change from the paternalistic to the democratic style of leadership led to
complaints of lack of focus on the part of the management, which depicts that there
was some resistance to the change. (Line 97)
10. RDM liaised with a vocational school, which provided opportunities for local workers
to enhance their skills.
11. Their attitudes, aspirations and motivations differ significantly from the workers who
survived the Second World War and had worked under the Communist regime. With
the 76.6% reduction in, and transformation of, ​RDM’​ s labour force, the company no
longer has the level of local influence that it formerly had. The vocational school no
longer liaises with ​RDM ​regarding the required skills of worker after the significant
reduction in labour workforce.

12. Czech’s IT among the best in the world (line 21)

Technologi 13. Potential widespread use of Computer Aided Manufacturing (CAM) and Computer
cal Aided Design (CAD) could drastically reduce manufacturing costs for RDM
14. Most ordering (purchasing) is done digitally and contacts between customers and
engineers are also done digitally - making this process faster and more efficient
15. Demand for ergonomic/personalized healthcare devices grow.
16. Diversified into aluminum bottles. (Line 60-64)
17. The gradual growth rate of self-driving cars can be cost-effective. (line 48-49)
18. (line 21-22 “Czech”) potential for e-commerce & trading → , therefore, don’t need a
physical store, therefore reducing a lot of their expenses (both Variable and Fixed)
 19. such as AI, robots etc.
- As demand for kerosene stoves had been declining for many years, in 1993,
Adriana decided to add health devices using ergonomic designs to RDM’s
product portfolio. (Line 10)
- The Czech Republic now has an IT infrastructure that ranks among the best in
the world.
- Jan began to introduce a highly automated manufacturing process in 2006 that
was operational by 2009.
- Jan wonders whether it will be long before self-driving lorries will replace
current human-driven ones for delivery (line 49).
- In addition, digitized​ communication between robots allowed RDM
- to be responsive to customers’ requirements. As RDM improved its
automation processes and integrated cloud computing, mobile devices, big
data, artificial intelligence and three-dimensional (3D) printing, its ability to
customize products improved dramatically regardless of the size of the order.
- Given that the entire order/manufacture/delivery process could still be
performed in Lobjanec, this new facility would require limited staff and most
of the work will be done by robots.

20. Fierce Asian competition → In general, Asian companies can produce goods at a
Economic cheaper cost which are highly competitive to ‘RDM’
21. Lucrative markets in Europe i.e. Germany
22. The Czech Republic is one of the most stable economies in the world
23. Competitive pricing zone within a 700-km radius
24. The economic growth rate in Czech is 4.4%, making the Czech economy the highest
growth in Europe.
25. Trade Blocs ​economics stuff, like fiscal or monetary policies: certain legal
restrictions to be able to trade with other countries (i.e. tariffs (taxes on imported
goods)) .​Since the Czech Republic is part of the Monetary Union (EU), it enjoys the
advantages of the highest level of economic integration (i.e. reduced tariffs, free
movement along member countries or an easy access to skilled labour from
prestigious member countries´ universities).
26. Recession in many European countries (Portugal, Italy, Greece, Spain) may reduce
RDM’s growth (which is a reason for their planned expansion)
27. Low levels of unemployment and inflation.
○ Transition from labour intensive to capital intensive means they do not need
as much work force
28. Communist takeover: 95% of private sector commercial enterprises were
nationalised in 1949
 29. In 1989, Velvet Revolution: businesses went from state-owned to privately owned
30. Czech economy had a smooth transition
31. Stable market economy and democracy
32. Prague is a tourism magnet
33. Positive trade relations with Germany
34. RDM employed a large unionized labour force
35. Because of globalization and fierce competition from Asian manufacturers, which
had lower cost structures
36. Free movement of labour throughout the European Union
37. Capital intensive business can be expensive to maintain (depreciation of assets)
38. Euro still not used widely in the Czech Republic, exchange rates can still impact costs
and prices for RDM
39. Tourism aids RDM’s economy

40. Pioneering CSR activities to RDM stakeholders

Ethical 41. Fair wages (line 104)
42. Emphasis on the care of the environment (line 104)
43. Has relationships with suppliers that also maintain their CSR, and hence, fosters
community services
44. The rise in consumers opting to invest/ purchase products that come from ethical
sources. This places pressure on businesses like RDM to adapt by obtaining raw
materials from suppliers known to be ethical and treat employees fairly.
45. Job production manufacturing method minimizes wasted products and materials on
the company’s behalf (excess could be bought by customers and wasted), abiding by
the ethical environmental standards.
46. Strong emphasis on automation and the use of novel AI technologies (potentially self
driving cars) may raise ethical concern in the future, both by the public and legislative
entities

47. Free movement of labor in the EU allows highly specialized workers to be recruited
Political around Europe → RDM has a wide pool of applicants to choose from
48. Czech used to be a communist state but has transitioned to a free market
49. Brexit may negatively impact the market growth of RDM.
○ Won’t be able to sell products to UK
○ Tariffs and other fees will increase their prices in the UK → A stable
government in the Czech Republic is beneficial for the market drivers in the
economy
50. Globalization - forcing lower costs of production
51. In 1949, following the Communist takeover of what was then Czechoslovakia, over 95
% of private sector commercial enterprises, including RDM, were nationalized.
Following the Velvet Revolution of 1989 when Communism in Czechoslovakia
collapsed, many companies moved from being state owned to privately owned.
 52. Post-revolution good Economic growth-stable market economy + democracy
post-communism.
53. Post-revolution, tourism has surged and there is greater economic integration within
European countries.
54. democratic governance which facilitates stability in the country necessary for
business to thrive (line 18)
55. Part of this success stems from the relatively smooth transition, compared to some
other former Soviet bloc countries, to a stable market economy and democracy.
56. For decades, ​RDM ​employed a large unionized labour force, mass-produced stoves
and sold its product to wholesalers. Because of globalization and fierce competition
from Asian manufacturers, which had lower cost structures, in the early 2000s, Jan
determined that European manufacturers would have to lower costs.

57. Cost of transition from private limited to public involves legal formalities and
Legal structural changes
58. Many countries have their own consumer and employee protection legislation. RDM
is at an advantage here since they have automated process
59. Different consumer protection laws across Europe in non-EU countries.
60. There might be restrictions on healthcare products in different countries.
61. Labor laws in an integrated system like the EU allow for easier mobilisation of labor
62. Import and export restrictions are greatly reduced within the EU, allowing for goods
to be competitively priced with domestic ones.

63. Pollution from delivering products in using of lorries can result in negative CSR for
Environme RDM
ntal 64. Coal burning and kerosene stoves (previously)
65. The carbon footprint from production methods as Euro Standards are high for
pollution
66. Medical devices are based on the cradle-to-cradle method of production, which can
protect the environment.
67. Use of AI (robots) leads to minimum wastage of scarce resources (e.g. metals), and
hence, optimising the production process.
Unit 1.6 Growth and Evolution

1. Multinational Company
A multinational corporation (MNC) has facilities and other assets in at least one country
other than its home country. Such companies have offices and/or factories in different
countries and usually have a centralized head office where they coordinate global
management.

Advantages: Disadvantages:

● Broader market base, they increase ● Culture clash causing instability

of reaching out to ​customers on a ● Threat to local business
global scale. ● Loss of local jobs to expats
● Tax cuts in certain countries for
imports and exports
● Job production for the country
● Transfer of skills and knowledge
● Cheaper Labour

Unit 1.7 Decision tool (HL)

1. Decision tree
It is similar to a probability tree used in mathematics. By providing a clear visual structure, a
decision tree can help managers make sensible strategic decisions. Or basically it’s like the
probability tree in mathematics

Steps to be followed in creating a decision tree

a) Decisions are represented as squares and the options or possible choices are
represented in a line
b) In every choice there are outcomes and this is represented by a circle and possible
outcomes by lines
c) The manager then would use available data to estimate probability of outcomes
d) the manager must then make an estimate of the values of that outcome actually
happening. These values are written at the end of the line represented by that
outcome
e) Then the manager estimates the costs of the choices being considered
f) The manager can now calculate the results, known as the expected values (EV) base
on the formula

g) The decision would normally be the outcome that gives the highest EV.
 2. Force Field analysis
A method used by organizations to find the positive and negative things that influence a
situation, especially a planned change, in order to help them make the right decisions.
RDM Force Field Analysis:
GLOBALIZE TO LUCRATIVE MARKETS ELSEWHERE IN EUROPE
Scor RESTRAINING FORCES
e
Relocation could be very expensive
and may be beyond what RDM could
raise as a private limited company.
4 They might have to go public to raise GLOBALIZE
sufficient finance or either go for TO
share or loan capital. LUCRATIVE
MARKETS
Due to democratic leadership, some ELSEWHERE
of RDM’s employees have complained IN EUROPE
that there is insufficient guidance and
the business sometimes lacks focus
2 which can impact the way they
globalize.
5 RDM has an outdated name, a weak
brand identity, no relevant vision or
mission statement and no written
operations management strategy or
human resources plan, affecting their
appeal to new lucrative market.
3 There is competitive pressure on RDM
because there might be possible
competitive markets in Europe. If the
globalization fails in Europe and there
is no cash flow, the business might
close and end up in bankruptcy.
Total Restraining Forces: 14
DRIVING FORCES Score
Would extend RDM’s market area. They
could be the first one to introduce an
innovative business idea in the European
lucrative market (Scandinavia, the 5
Netherlands, Belgium, France and etc.)
Enhance brand image in Europe. RDM
has a strong sense of CSR where they
have a caring and altruistic attitude
towards their workers. They also have a
strong emphasis on care for the 3
environment. This can attract customers
who are ethically and environmentally
concerned.
Processes except delivery and
manufacturing can be in the first
production facility in Lobjanec.
3
Since the company enjoys healthy profits,
they can easily obtain finance.
2
The company sells products at a
competitive price directly to their
consumers. There is no intermediate
wholesale. RDM is also responsive to
customer’s needs. 3
Total Driving Forces: 16
Unit 2.1 HR planning

Unit 2.2 Organisational Structure

1. Tall Organization VS Flat Organization

Tall Flat

● Have many levels in the ● There are fewer levels in the

organizational hierarchy
● Managers tend to have a narrower
span of control
● Centralised decision making
● Long chains of command
● Autocratic leadership
● Limited delegation
organizational hierarchy
● Managers tend to have wider span
of control
● Decentralised decision making
● Shorter chains of command
● Democratic leadership
● Increased delegation

2. Delayering
Delayering is the process of removing layers of hierarchy between the highest and lowest
levels in order to boost operational efficiency, decrease the wage bill and remove red tape.
Delayering typically removes middle managers, providing senior managers easier reach over
the organisation as a whole.

Advantages: Disadvantages:
 ● Reduces costs by removing levels of ● Creates anxiety and a sense of
management insecurity, e.g. redundant and
● improves the speed of demoted.
communication flow by flattening ● Overloads staff – may
hierarchical structures (chains of counter-productive effect on quality
command are reduced) of work and staff motivation
● Encourages delegation and ● Longer decision-making as
empowerment: more opportunities managers deal with larger teams,
for wider responsibilities may create problems with meeting
deadlines

3. Bureaucratic
Bureaucracy is the execution of tasks that are governed by official administrative and formal
rules of an organization.

Within an organization, this might include:

a. The frequent requirement to fill out unnecessary or tedious paperwork
b. Staff working in multiple departments and report to several managers
c. Too many committees set up to investigate issues of concern to the organization
d. Long, official chains of command
e. Managers with duplicate or overlapping roles and responsibilities

4. Centralization
Centralization refers to the process in which activities involving planning and
decision-making within an ​organization are concentrated to a specific ​leader or location. In a
centralized organization, the decision-making powers are retained in the head office, and all
other offices receive commands from the main office.

Advantages: Disadvantages:

● Clear chain of command ● Bureaucratic leadership (resembles

● Focused vision a dictatorial form of leadership)
● Reduced costs ● Pressure and stress for senior staff
● Quick implementation of decisions ● Lack employee loyalty
● Improved quality of work ● Lack of employees motivation

5. Decentralization
Decentralization is a type of organizational structure in which daily operations and
decision-making responsibilities are delegated by top management to middle and
lower-level managers. Decentralisation can be viewed as an extension of delegation
-> normally occurs with wide span control & democratic

Advantages: Disadvantages:

● Greater autonomy empowers ● Problem of Coordination as

employees authority lies dispersed widely
● Reduce the burden on top ● Costly
● Inefficiencies
executives
● Greater chances of mistakes
● Facilitates diversification ● Loss of control
● Preparing for emergencies ● Communication issues
● Motivates employees ● Uniform and standardised
● More efficient decision-making procedures are not followed
(quicker)
 6. Delegation

Delegation is the assignment of any responsibility or authority to another person (normally

from a manager to a subordinate) to carry out specific activities. It is one of the core
concepts of management leadership. However, the person who delegated the work remains
accountable for the outcome of the delegated work

7. Project Based
Project-based organizational structures borrow from those based on hierarchies, functions
and operations. They use a matrix organization where essential company functions are
maintained in a management structure, while the work is carried out in project-based
groups that have a hierarchical structure.

Possible questions:
1. Explain one advantage for RDM of implementing another project based
organization structure [4 marks]
- Improved communication between workers from different areas (Matrix structure)
- Benefit from the broader range of skills and expertise of people across the
organization
- Improved sense of teamwork, which can increase motivation and productivity at
RDM
- Culture of teamwork and collaboration can be formed which could potentially
decrease costs

Unit 2.3 Leadership Style

1. Autocratic
Autocratic leadership is the leadership style that holds full or as much power on decision
making authority. They do least to no consultations when making decisions.

Advantages: Disadvantages:

● Quick in making decision ● Employees can be demotivated as

● Clear lines of authority and order
● Effective for inexperienced workers
(low skilled workers)
they feel like they do not have a say
● Bad for highly skilled and motivated
worker
● Leader dependence
● Can make decisions that might not
in the stakeholder's best interest
 2. Paternalistic (Kristian)
The leader has considerable authority over the employees and has great concern for the
employees.

Advantages: Disadvantages:

● Employees take great pride in the ● Playing favorites hence being taken
organization (motivation to make advantage
the organization better) ● Leader don’t have a fully objective
● Leader has a considerable authority critical eye when evaluating
over employees employees’ performance
● Employees are seen as family
(hence motivated *connected
towards the 3rd stage of maslow:
Love and belonging needs)
● Get loyalty from employers and
even blind trust

3. Democratic (Jan)
They involve employees in the decision making process and informs the employees about
the issues and the effect.

Advantages: Disadvantages:

● Stable and efficient firm when ● Employee's ideas that are not
equipped with chosen by the majority might be
● Involves employees in decision demotivated
making and keep them informed ● Relatively slow process
● Motivated employees as they have
a say in the decision making
● Effective when used with
experience subordinates

4. Laissez Faire
It means to “leave alone”, This leadership style gives freedom to the employees on how to
do their work. This also includes they make decisions on their own and resolve problems as
they see fit.
 Advantages: Disadvantages:

● Foster creativity and innovations
● Motivated employees since they
feel trusted to make their own
decisions
● Good for high skilled labour or
employees
● It supports the inner growth of each
and every employee
● Lose focus on the visions and aims
since the employee’s interest is too
different
● Low accountability over low
performance
● Exclusivity tends to exist in teams

5. Situational Leadership
Situational leadership rests on the notion that different situations require different styles of
leadership. Thus, no one style of leadership would ever be deemed “the best”.

This is influenced by:

- The skills,age, education, expectations and motivations of subordinates
- The aspects of a decision whether it is urgent, important or consequential
- The leader’s characters, values and experience
- The environment of the workers whether it is creative, standardized, repressive or
democratic
Possible Questions:
1. With the reference to the case study describe two advantages of democratic
leadership style [4 marks]
Democratic leadership style is referring to a leadership style that enables employees to be
included in the decision process. Jan used democratic due to the benefits of democratic
leadership style for RDM. Democratic leadership is beneficial due to the fact that it is
motivation aspect for RDM, on a democratic leadership employees are motivated through
the sense of being valued because their opinions, ideas and aspirations are listened to and
taken into consideration in the decision process; hence employees feel they belong and they
become more loyal. Moreover, since RMD hires skilled employees the collaborative
environment often results in better informed solutions to challenges and problems.
2. Identify and discuss Jan’s leadership style in comparison to his father’s leadership
style. [10 marks]
Jan used a democratic leadership style and democratic leadership style is referring to a
leadership style that enables employees to be included in the decision process and they are
informed of the outcomes of the collective decision. Meanwhile his father used a more
paternalistic approach where employees are guided through decisions. Democratic
leadership style is suitable for a project based and short term.
Unit 2.4 Motivation

1. Herzberg's theory
The two-factor theory (also known as Herzberg's motivation-hygiene theory and dual-factor
theory) states that there are certain factors in the workplace that cause job satisfaction
while a separate set of factors cause dissatisfaction, all of which act independently of each
other.

Hygiene Factors Motivators

aka Maintenance Factors

These are factors do not motivate - Factors that can lead to psychological
however they must be met in order to growth of workers and hence increase
prevent dissatisfaction satisfaction

● Company policies, rules and ● Job Enlargement - more variety in

regulation
● Relationships with
subordinates and supervisors
● Salary and wages
● Security
● Status
● Supervision and coordination
● Working conditions
● Lack of resources
tasks to make job more interesting.
peers, Not necessarily harder work
● Job enrichment - More complex
challenges and tasks which should
contribute to a sense of
achievement as they are able to
exploit their potential
● Job empowerment - delegating
decision making power to workers
which should boost morale
● Achievement
● Advancement
● Interesting tasks
● Opportunities for promotion
● Personal growth
● Recognition
● Responsibility
● Work itself
 2. Pink’s theory
Pink argues that traditional rewards are dulls
3 innate factors that drive people at work:

A. Autonomy
According to Pink, autonomy is the desire to direct our own lives. Pink argues that allowing
employees autonomy runs counter to the traditional view of management which wants
employees to "comply" with what is required of them. However, if managers want
employees to be more engaged in what they are doing (and they should - as tasks become
more complicated) then allowing employees autonomy (self-direction is better).

Pink provides some examples of what he means by autonomy, summarising them into four
main aspects: ​Time, Technique, Team and Task

B. Mastery:
Pink argues that humans love to "get better at stuff" - they enjoy the satisfaction from
personal achievement and progress. Allowing employees to enjoy a sense of progress at
work contributes to their inner drive.

C. Purpose
Pink describes purpose as the desire to do things in service of something larger than
ourselves. Pink argues that people intrinsically want to do things that matter. For example,
entrepreneurs are often intrinsically motivated to "make a difference" rather than simply
aiming for profit maximisation. Most of us spend more than half our working hours at work.
We want that time to matter.
 3. Taylor’s theory
Taylor put forward the idea that workers are motivated mainly by pay.

His Theory of Scientific Management argued the following:

● Workers do not naturally enjoy work and so need close supervision and control
● Therefore managers should break down production into a series of small tasks
● Workers should then be given appropriate training and tools so they can work as
efficiently as possible on one set task.
● Workers are then paid according to the number of items they produce in a set period
of time- piece-rate pay.
● As a result workers are encouraged to work hard and maximise their productivity.

Taylor's methods were widely adopted as businesses saw the benefits of increased
productivity levels and lower unit costs. Taylor's approach has close links with the concept
of an autocratic management style (managers take all the decisions and simply give orders
to those below them) and Macgregor's Theory X approach to workers (workers are viewed
as lazy and avoid responsibility).

However workers soon came to dislike Taylor's approach as they were only given boring,
repetitive tasks to carry out. Firms could also afford to lay off workers as productivity levels
increased. This led to an increase in strikes and other forms of industrial action by
dissatisfied workers.

Possible Questions:
1. What motivation theory is applicable to the employees of RDM in 2019? Why? [2-4
marks]
Pink's Theory (Autonomy, Mastery, Purpose) is applicable to the employees of RDM in 2019,
because they are recruited straight out of universities throughout Europe, meaning that
they are likely younger and trying to establish themselves further. This is unlike the factory
workers who used to work with RDM, as they were more motivated using Maslow's
Hierarchy of Needs or Adam's Equity Theory

Fayol: RDM needs division of labour, specialization, military like structure, as 3D printing
needs to be very precise

Taylor: scientific management, standardization of work practice, workers are chosen based
on their ability, paid extra hours

Maslow: even though needs cannot be quantified, RDM needs to assure that physiological,
security, social, esteem and self actualisation are fulfilled for workers to be efficient
Unit 2.5 Corporate Culture (HL)

1. Types of organizational cultures

● Charles Handy’s 4 Types of Culture

○ Power culture
■ Power is centralized, quick decision making
■ Results-based, likely flat
○ Role culture
■ Jobs are clearly stated, little creativity
■ Highly structured, tall organization/bureaucratic
○ Task culture
■ Focuses on getting results from work done
■ Individuals and teams are empowered and given flexibility
■ Decentralized power
○ Person culture
■ Staff have similar positions with similar expertise
■ Staff form groups to share knowledge
■ Individual may benefit which may carryover to firm
● Edgar Schein’s 3 levels of corporate culture:
○ Artifacts (e.g. history, facilities, buildings, dress code, etc.)
○ Espoused values (e.g. mission, branding, slogans, etc.)
○ Basic assumptions and values (values in behavior/action)
● Deal and Kennedy
○ Corporate culture is the way things get done
○ Two dimensions feedback/reward and risk
■ Rapid feedback means bad culture is quickly removed
■ High risk businesses needs people that fit well in their
culture
○ 4 types of culture:
■ Tough-guy Macho (rapid feedback, high risk)
■ e.g. stock market, police force
■ Work-hard, Play-hard (rapid feedback, low risk)
■ Stress from pace of work instead of risk (e.g.
hotel)
■ Bet-the-company (slow feedback, high risk)
■ e.g. oil exploration, pharmaceuticals
■ Process (slow feedback, low risk)
■ e.g. governments, insurance (bureaucracy)
● Knotted and Heskett
○ Adaptive cultures – flexible work practices, entrepreneurial
○ Inert cultures – strict work protocols
 ● Goffee and Jones
○ Sociability – extent of concern for colleagues
○ Solidarity – cohesiveness/unity in the organization
○ Ideal culture will have high sociability and solidarity
● Gerry Hofstede
○ Several factors in culture:
■ Power distance – extent of unequal power distribution
■ High – centralized
■ Low – decentralized, delegation
■ Individualism vs. collectivism
■ Masculinity vs. femininity
■ Uncertainty avoidance
■ Long-term vs. short-term

2. Culture Clash
Occurs when there conflict between subcultures in an organization
● May lead to lowered productivity, staff walkouts, losses
● Happens during times of change
○ e.g. takeovers, acquisitions, mergers, expansions
● Common causes
○ High cost of implementing change
○ Resistance to change from workforce
○ Public opinion
○ Difference in national cultures (e.g. job practice)
Unit 3.1 Sources of Finance
1. External Finance
Internal sources of finance :
Organic sources of finance are a means of Inorganic or external sources of finance are
raising resources from within the business means by which firms seek finance that are
organization external to the business organization.
1. Personal Funds
2. Retained Profit ​is the profit
remained after a business paid tax
and dividend. Used often for
purchasing fixed assets
3. Sale of assets, selling old machinery
and computer equipment. Relocate
to raise finance through sale of land
and buildings. Extreme cases, they
can raise finance by selling fixed
assets to survive liquidity problem.
External sources of finance :
1. Share Capital ​is the money raised
from selling shares. Provide huge
amount of finance. It can dilute
ownership and control of business.
2. Loan Capital is a long-term source
of finance from banks. Interest
charges, mortgage , business
development loan , debentures
3. Overdrafts ​allows business to
overdraw on its bank account. Can
demand high rate of interest and
more cost effective than bank loans.
a. Suitable for large cash
outflow.
4. Trade credit ​allows for buy now and
pay later (creditors)
5. Grants ​are non-repayable funds
given by the government to
stimulate economic activity in
regions that face high
unemployment.
6. Subsidies ​are repayable funds to
reduce the cost of production and
provide extended benefit to society.
(farmers to stabilize food prices)
7. Debt factoring is by not collecting
the money on their own, a company
can sell the account receivable to a
3rd party for 80-85% of the value

More specified: (since these two are inside the case study)
- Loan Capital
Advantages:
● Purchase with no liquid assets​. The
premise behind a bank loan is to
provide financial assistance to
people who do not have the cash. It
can help either a business or
individual purchase a home or car,
or businesses to purchase
machinery. A borrower can apply
for a varying amount, up to their
creditworthiness.
● Can help drive growth. A bank loan
can help drive business growth,
especially for private and public
sector businesses. Very few
businesses likely have enough cash
flow to finance a large-scale
expansion.
● Better interest rates. Bank loans
typically offer better finance rates.
8. Leasing is a form of hiring whereby
a contract is agreed between a
leasing company and the customer
to “lease” assets from the lessor.
9. Venture Capital ​is a form of
high-risk capital in the form of loans
or shares invested by venture
capital firms.
10. Business angels are wealthy
individuals who choose to invest
their own money in businesses with
high growth potential
Disadvantages:
● Businesses need good credit for a
loan.
● The borrower pays more than
purchase price when getting a loan.
● Loans have a strict repayment
schedule to adhere to.
● Loan terms can include a partial
funding requirement that says if you
want to borrow an amount, you
need to invest a certain amount of
your own money.
● Some loans include prepayment
charges and penalties.
● Risk of interest rate rising if your
loan includes floating rates, which
could make your project no longer
viable.
● Many loans include added
processing charges.
● Bank may recheck credit points at
loan renewal.
 ● More flexibility. There is additional ● Failure to pay can lead to seizure of
flexibility with a bank loan that can firm’s assets.
have long-term benefits.
● Necessary capital for daily
operations. Banks may offer special
loans that can help a business fund
day-to-day operations as well.
● The borrower retains ownership.
With a bank loan, the company
retains ownership instead of
alternatives like raising equity or
using venture capital.
● Accounting and taxes. Interest from
a loan is deductible, and the
borrower can plan and budget for
monthly loan expenses.
● Cash discount. Some creditors
provide an allowance for cash
discounts, which is only an option
when you have cash. A loan can
provide that cash.

- Share capital

Advantages: Disadvantages:

● No repayment requirement ● Ownership dilution

● Lower risk. In general, a business
that uses more equity than debt has
lower risk of bank.
● Bringing in equity partners
● Higher cost. Although equity does
not require interest payments, it
typically has a greater overall cost
than debt capital. Stockholders
shoulder more risk from their
perspective compared to creditors
because they are last in line to get
paid if the company goes bankrupt
● Time and effort to get the loan
application
Unit 3.3 Break-even Analysis

Break-even quantity (BEQ):​ The level of sales or output where costs equal
revenue and the firm is therefore making neither
a loss nor a profit.

Break-even revenue (BER): ​The level of sales revenue being earned by the
firm at the break-even level of output.

Break-even point (BEP):​ The position where TC and TR lines cross.

Breakeven Chart
Things to Include:

1. Y (Revenue) and X (Output) axis

2. Fixed Cost = Basically a straight line when X=0. Y value is the value of FC.
3. TVC = Start from Origin and up
4. TC = MUST start from FC as the origin
5. TR / Revenue = Also start from origin
6. The line where TC and Revenue intersects = BEP
7. Put a dotted line at the Y Axis at where the BEP is all the way down to the X-axis...
and LABEL BEP
8. LABEL The BEP ~~ Maximum Output = MOS (Margin of Safety).

Formulas​:

F ixed Costs
B reak Even Quantity = Contribution per unit
C ontribution per unit : Selling price − Average variable cost

Or TR=TC rule
Px Q = TFC + TV C

M argin of saf ety : Level of demand − Break Even Quantity

F C + T arget prof it
T arget P rof it Output : Contribution per unit

Advantages​ of B.E: Disadvantages​ of B.E:

● provides a focus for the business
● provide a clear, visual
demonstration of some vital
financial information
● not complex, expensive or time
consuming process
● shows the financial impacts of
changes in costs and selling price
● predict whether further investment
in the product is worthwhile
● Do not take into account possible
changes in costs over the time
period.
● Analysis only as good as the quality
of information.
● Do not allow for changes in market
conditions in the time
Unit 3.4 Final Accounts

1. Balance Sheet construction

● A balance sheet is one of the annual financial statements that all companies are
legally required to produce for auditing purposes.
● It contains information on the value of an organization’s assets, liabilities and the
capital invested by the owners.
● It is often described as a ‘snapshot’ of a firm’s financial situation.
● It is called a balance sheet because the document shows a firm’s sources of finance
(shown as the equity) and where that money has been used (shown as the net
assets), i.e. it reveals where a firm’s money has come from (e.g. share capital and
retained profit) and what it has been spent on (assets).
● Thus the balance sheet helps to ensure that all monies within the organization are
properly accounted for.
 2. Profit and Loss construction
also known as the income statement (I/S) and shows the records of income and expenditure
flows of a business (trading activities) over a given time period.
* Profit is the positive difference between a firm’s revenues and its cost.
* Revenue is the inflow of money from ordinary trading activities, e.g. cash sales, credit
sales, charges/fees and royalties.
* Costs are the outflow of money from a business due to its operations, e.g. wages,
salaries, rent and the purchase of stock.
* Profit creates an incentive for most businesses to do well. If a business does not earn
profit, it could struggle to survive.

Formulas

C OGS = Opening stock + P urchases – Closing stock

Gross P rof it = Sales revenue – Cost of goods sold (COGS)
N et P rof it = Gross P rof it − Expenses
 3. Depreciation - straight line and declining balance method (HL)
Depreciation Is the decrease in the value of a fixed asset over time, It is non-cash expense
that is recorded in the profit and loss account in order to determine the net profit before
interest and tax.

Two reasons why assets depreciate include the following:

- Wear and tear – the repeated use of fixed assets such as cars or
machinery causes them to fall in value and more money is needed to
maintain them.
- Obsolescence – existing fixed assets fall in value when new or improved
versions are introduced in the market. With time these “old” assets
become obsolete or out of date and are eventually withdrawn.

Depreciation - straight line method

This is a commonly used method that spreads out the cost of an asset equally over its
lifetime by deducting a given constant amount of depreciation of the asset’s value per
annum.

It requires the following elements in its calculation:

● The expected useful life of the asset,i.e. the length of time it intends to be used
before replacement
● The original cost of the asset,i.e. Its purchase or historical cost
● The residual or scrap value of the asset, i.e an estimation of its worth or value over
its useful life.

Formula
Original cost − residual value
Annual depreciation = Expected usef ul lif e of asset

Advantages Disadvantages

● It is simple to calculate as it is ● It is not suitable for expensive assets such

predictable expense that is spread
over a number of years
● It is mostly suitable for less expensive
items, such as furniture, that can be
written off within the asset’s
estimated useful life
as plant and machinery as it does not cater
for the loss in efficiency or increase in
repair over the useful life of the asset
● It is known to inflate the value of some
assets which may have lost the greatest
amount of value in their first or second
years, such as motor vehicles
● It does not take into account the
fast-changing technological environment
that may render certain fixed assets
obsolete very quickly
 Depreciation - reducing balance method
The method applies a percentage depreciation rate over the useful life of the asset.

It adopts an accelerated depreciation technique whereby the depreciation amount charged

to an asset declines over time, i.e. higher depreciation is charged at the beginning of an
asset’s lifetime and less is charged at the end. Under the reducing balance method net book
value in Year 1 may be calculated as:

Formula
N BV in year 1 : cost of original asset − (cost of original asset x rate of depreciation %)

Example

Year Opening value of asset Depreciation charge on that Book value at the end of
reducing balance year the year

1 200000 80000 120000

2 120000 48000 72000

3 90000 36000 44000

4 44000 17600 26400

5 26000 10560 15840

Unit 3.7 Cash Flow

1. Cash Flow forecast

● Cash flow forecast : ​financial document that shows expected movement of cash into
& out of a business
○ Cash inflows : ​sales revenue, payments by debtors, loans from bank, interest
, sale of fixed assets, (any type of income)
○ Cash outflows : ​cash that leaves business (expenses)
○ Net cash flow : ​difference between cash inflows and outflows. + , possible for
a firm suffering from - net cash flow to survive temporarily
*assess financial health of the business seeking external finance. Identify periods of
potential liquidity problems, cash deficiency.
Working capital
refers to the cash or liquid assets available for the daily running of a business.

Formula
W orking capital = Current assets − current liabilities
CAUSES OF CASH FLOW PROBLEM :

MAIN CAUSES DESCRIPTION

Overtrading This situation occurs when a business attempts to expand too

quickly (or aggressively), without the sufficient resources to do so.
For example, it accepts more orders than it has the capacity to
handle. The excess orders ​add to p ​ roduction costs ​without any
corresponding ​revenue (which comes after the product has been
manufactured and sold to customers)
The purchase of fixed assets as part of a rapid expansion also
consumes cash thus reducing the working capital of the business.

Overborrowing The larger the proportion of capital raised through external

sources of finance the higher the cash outflow on loan interest
payments.
Reason: during times of rising interest rates, cash outflow on loan
interest increases, putting further pressure on a firm’s working
capital and liquidity position.

Overstocking Business holds too much stock as a result of an ineffective stock

control system. (Stocks cost money to buy, produce and store.)

Poor credit control When a firm offers customers an extended credit period, leading
the business to trade for long periods without cash inflows.
It can also arise if to many customers are offered credit, which
increases the chances of ​bad debts ​being experienced, i.e. debtors
who fail to pay.

Unforeseen changes Unexpected and erratic c​ hanges in demand can cause serious cash
flow problems.
Example:
Ømachinery breakdown, which lengthens the working capital
cycle
ØConversely, ​seasonal fluctuations i​ n demand can cause
temporary, albeit perhaps predictable, cash flow issues.
Strategies -> ​reducing cash outflows, improving cash inflows, alternative sources of finance

Reducing Cash Outflows Strategies:

- Seek preferential credit terms : negotiate with suppliers or creditors for a delay
payment. Alternatively, it can seek alternative creditors who can offer preferential
credit term.

Drawback: may affect future relationship, including their refusal to supply in the
future.

- Seek alternative suppliers: different suppliers may be able to offer more competitive
prices, which would help to reduce cash outflows.

Drawback: cheaper raw materials and stocks could equate to lower quality.

- Better stock control: reducing stock levels by using a just-in-time system can help to
reduce liquidity being tied up in stocks. This method works well for manufacturers of
mass market products such as motor vehicles and consumer electronics. However, it
might not work as well for businesses that offer a service and do not hold much
stock, such as airline carriers and hair salons.

- Reduce expenses: Scrutinising expenses can help to identify overhead costs that can
be reduced, without compromising quality.
For example: airlines have saved huge amounts of money by reducing the number of
drinks and snacks that are available on economy class travel.
Some costs might not be necessary at all, including extravagant (non-essential)
expenses for senior executive such as luxury company cars.

- Leasing: this reduces the burden on cash flow. Buying land, machinery, vehicles and
capital equipment will clearly be more expensive than renting or leasing, at least in
the short to medium term.

Improving cash inflows strategies:

- Tighter credit control: firms can limit trade credit to their customers or reduce the
credit period. Both methods mean that the business receives cash sooner which
helps to improve its cash flow.
Drawback: customers might switch to rivals due to the worsened trade credit terms.
Solution: debtors can be encouraged to pay earlier or on time by offering incentives,
such as price discounts. Accepting interim payments can also help.

- Cash payments only: Requiring customers to pay by cash only removes the delay in
receiving cash from credit sales.
 Drawback: customers might prefer to buy from competitors who offer trade credit.

- Change pricing policy: cutting prices can help to convert stocks into cash. In addition,
it can help to offload excess stock. This tactic works best for products that have lots
of substitutes or are at the end of their product life cycle.

- Improved product portfolio: by providing a wide and varied product portfolio, a

business is more likely to generate increased sales revenue. Poor sales in one
product market can be offset by better sales in other markets.
Drawback:broadening the product portfolio raises costs and risks, yet does not
guarantee higher net cash inflows.

Seeking alternative source of finance:

- Overdrafts: short-term loan facility that allows firms to overdraw from their
accounts.

- Selling fixed assets: the focus should be on selling obsolete fixed assets to generate
cash. Selling assets that are still needed could lead to reduced production.

- Debt factoring: external debt-collecting companies can purchase the bills owed by
customers in a business, thereby providing immediate cash to the business.

- Government assistance: struggling businesses can apply for grants and subsidies to
help increase their cash inflows. The drawback is that these sources of finance come
with specific conditions that have to be met before money is guaranteed.

Limitation of cash flow forecasting:

- Marketing
- Human resources
- Operations management
- Competitors
- Changing fashion and tastes
- Economic change
- External shock

Capital expenditure
Capital expenditure refers to ​money spent by a business or organization on acquiring or
maintaining fixed assets, such as land, buildings, and equipment.
Unit 3.8 Investment Appraisal

Investment appraisal refers to the quantitative techniques used to calculate the financial
costs and benefits of an investment decision ie. the different methods used to assess the
risks involved in investment decision-making.

2. Payback Period (PBP)

Payback period (PBP) refers to the amount of time needed for an investment project to earn
enough profit to repay the initial cost of the investment.

→it looks at how long a business will take to recover its principal investment amount from
its net cash flow.

Initial Investment Cost

P BP = Contribution per month

Investment
P BP : annual cash inf low

• Payback period method estimates the length of time required for an investment
project to pay back its initial cost oulay.
• Most investment projects would only be considered if they have a relatively short PBP.
Advantages
● PBP is the simplest and quickest
method of investment appraisal;
hence it is the most commonly used
method
● It can be useful for firms with cash
flow problems as they can identify
how long it would take for the cash to
be recouped
● It allows a firm to see whether it will
break-even on the purchase of an
asset before it needs to be replaced.
● The payback period can be used to
compare different investment projects
with different costs by calculating the
quickest PBP of each option
● It helps to assess projects which will
yield a quick return for shareholders
Disadvantages
● Contribution per month is unlikely to be
constant as demand is prone to
seasonal fluctuations so the PBP might
take longer.
● PBP focuses on time as the key criterion
for investment rather than on profits –
the main aim of most private sector
business.
● It can encourage a short-termism
approach to investment, i.e. managers
only focus on the short-term benefits
and ignore the potential gains in the
longer term
● PBP might not be highly suitable for
some firms, e.g. property developers
and airline manufacturers are unlikely
to recoup their investments for many
years
● Calculations are prone to errors as it is
difficult to accurately predict future
cash flows
 3. Average Rate of Return (ARR)
The average rate of return (ARR) calculates the average profit on an investment project as a
percentage of the amount invested.

(T otal returns − capital cost)

Y ears of usage
Average Rate of Return : Capital cost x 100

• The main advantage of the ARR method is that it enables easy comparison (in
percentage terms) of the estimated, returns different investment projects.
• However, a weakness of the ARR method is that it ignores the timing of cash inflows
and hence is prone to forecasting errors when considering seasonal factors.
• Errors are more likely the longer the time period under consideration (example: less
sure of events in five years from now.
• As a basic benchmark, the ARR can be compared with the Interest rate to assess the
rewards for the risk involved in an investment.For example, if the ARR of a project for
a large established multinational such as McDonald’s is 7% whilts the interest rate on
savings is 3%, then the real rate of return is 4%.

Advantages Disadvantages

● ARR shows the profitability of an ● The likeliness of forecasting errors.

investment project over a given period
of time
● It allows for easy comparisons with
other competing projects, for better
allocation of investment funds
● A business can use its own criterion
rate and check this with the ARR for a
project, to assess the viability of the
venture
Long-term forecasts decrease the
accuracy of results
● It does not consider the timing of cash
inflows. Two projects might have the
same ARR but one could pay back more
quickly despite this.
● The effects on the time value of money
are not considered.
Unit 3.8 Investment Appraisal (HL)

4. Net Present Value (NPV)

Discounted cash-flow methods = a technique that considers how interest rates affect the
present value of future cash flows (e.g.represent inflation and or interest rates.)

→it uses a discount factor that converts these future cash flows to their present value
today. This discount factor is usually calculated using interest rates and time.

→to get the present value of future cash flows, the appropriate discount factor is multiplied
by the net cash flow in the given year.

• The NPV is the sum of all discounted cash flows minus the cost of a particular
investment project.(e.g. the longer the time period under consideration , the lower the
present value of that future amount of money.)

Formula
N P V = Sum of present values − cost of investment

• The original amount invested is often referred to as the principal.

• The NPV will be positive (greater than the principal) if the discounted (future) cash
flows are enough to justify the initial investment.
• If the NPV is negative, then investment project is not worth pursuing.

Advantages Disadvantages

● The opportunity cost and time value of
money is put into consideration in its
calculation
● All cash flows including their timing
are included in its computation
● The discount rate can be changed to
suit any expected changes in
economic variables such as interest
rate variations
● It is more complicated to calculate than
the payback period or ARR
● It can only be used to compare
investment projects with the same
initial cost outlay
● The discount rate greatly influences the
final NPV result obtained, which may be
affected by inaccurate interest rate
predictions.
Unit 4.5 The 4 P’s

1. Product Portfolio (BCG Matrix)

A product portfolio is a collection of all the product or services offered by the company.

BCG Matrix
-> used in order for a business to analyze their product portfolio better. The model takes
two things into consideration when analyzing how well managed the product life cycle is,
which is the market growth and the market share

Star Question Mark

High market share, high market growth Low market share, high market growth

Ergonomic healthcare products Aluminum customizable bottle

Cash Cows Dog

High market share, low market growth Low market share, low market growth

Healthcare products Coal- burning and Kerosene Stoves

2. Product lifecycle
This is showing the course a product takes from its development to its decline in the market.
It is categorized into six stages which are development, introduction, growth, maturity,
saturation, declining.

Development
Products are designed through the following steps: ​generating ideas at this step it is
basically brainstorming on what would satisfy consumer’s need and they would also consult
with stakeholders of the business. Then ​screening the ideas at this step the ideas are sorted
out between good ones and bad ones. After the screening, an idea would be picked to
create a prototype. ​Followed by ​Market testing and Launch

Introduction
Setting the right price to introduce the product under certain circumstances
Growth
The process of increase in revenues which means sales would increase then the product
could potentially reach economies of scale

Maturity
The decrease in the rate of growth, and at this stage product would possibly have significant
market share resulting in positive

Saturation
At this stage, many competitors have entered the market hence it gets saturated or the
market has reached its maximum capacity. At this stage, sales would be the highest before
they start the decline.

Decline
This stage signifies that the product has lost its appeal over the consumer’s eyes. This is
shown by the steady drop in sales but the cash flow is still positive.

3. Pricing Strategy

Pricing strategies
● 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
● Competition-based pricing
○ Price leadership
■ Set by the market leader and other firms simply follow
○ Predatory pricing
■ Temporary reduction in price to drive away competition
■ Can be as aggressive as to sell below cost/at a loss
 ○ Going-rate pricing
■ Simply pricing at about the average price level of most
products in the market
● Market-led pricing
○ Penetration pricing
■ Newcomers set their prices low to entice people to buy
■ Price changes from low to high
■ Risk: lower prices = lower reputation
○ Price/market skimming
■ Get a feel for what the market is like, set the price high,
then as you understand the market better your prices will
slowly decrease
■ Prices changes from high to low
○ Price discrimination
■ The price of a product varies per country, which depends
on the market; however, the products should not be easily
traded
■ Results to the government applying taxes/tariffs
○ Loss leadership
■ Products are sold at a loss, but regain their losses through
their other products
■ e.g. PS3 sold at a loss, but profits are gained through
games
○ Psychological pricing
■ Some numbers are more appealing
○ Promotional pricing
■ Offer discounts, rebates, promotions, etc.
■ Assure that your market likes discounts, otherwise there
will be no reason in offering the promotions
 4. Branding
A brand may be defined as a name, symbol, sign, or design that differentiates a firm's
product from its competitors. Branding is the process of distinguishing one business’s
product from another and can add great value to a product.
Brand Awareness
This refers to the ability of consumers to recognize the existence and availability of a rm’s
good or service. To effectively promote a product, creating brand awareness is a major step
businesses should take
Brand Development
This is any plan to improve or strengthen the image of a product in the market. It is a way of
enhancing the brand awareness of a product by increasing the power of its name, symbol,
or sign, ultimately leading to higher sales and market share.
Brand Loyalty
This is when consumers become committed to a rm’s brand and are willing to make repeat
purchases over time. Brand loyalty is a result of brand preference, where consumers prefer
one brand over another
Brand Value
This refers to how much a brand is worth in terms of its reputation, potential income, and
market value. Brand value is the extra money a business can make from its products
because of its brand name. Brands that have a high value are regarded as considerable
assets to a business.

Possible questions:
1. Explain the usefulness of branding to RDM. [6 marks]
RDM has a weak brand identity, therefore rebranding RDM would enable the business to be
more up to date thus new customers as they would be fascinated by the brand that depends
highly on job production, which is not labour intensive and rather capital intensive.
Rebranding, would add to the value of the brand, as brand name could have a price which
could move the company higher up in hierarchy as it would value more.While also, branding
could give RDM a boost in the market enabling it to grow as it would make it stand out.
(important for customer loyalty and brand recognition)
4.8 E-Commerce

The features of E-commerce

- Ubiquity
It is accessible widely available at any time and everywhere
- Customization
individuals can personalize their messages and decide how they will be delivered to other
individuals or groups.
- Global reach
also known as the worldwide web, the Internet traverses many national boundaries.
- Integration
the Internet allows the combined use of audio, video, and text messages to deliver a
marketing message.
- Universal Standards
there is only one set of Internet standards globally.

Marketing mix of e-commerce

- Product
With e-commerce, businesses such as Amazon can sell to a wider customer base than ever
before. This also allows them to stock a wide range of products to meet demand, which
could lead to higher sales and profitability
- Price
Consumers can make an easy comparison of price in search engines such as google hence
there would be a competitive global advantage
- Promotion
E-commerce has provided an additional medium for businesses using traditional promotion.
Many businesses are now supplementing their current promotional methods with online
advertising.
- Place
E-commerce has definitely reduced the need for intermediaries in the chain of distribution.
This has led to cost savings for manufacturers of various products.
Types of e-commerce
- B2B (business to business)
Goods and services are bought and sold from one organization to another. This could
involve producers transacting with wholesalers or wholesalers with retailers in a chain of
distribution.
- B2C (business to consumers)
These transactions are more visible to the public compared to B2B transactions. Successful
B2C businesses include Amazon, eBay, Priceline, and Google.
- C2C (consumer to consumer)
C2C businesses provide opportunities for individuals to interact and exchange with one
another in addition to selling or buying products to or from each other. Examples of
businesses that t well into these criteria are eBay and Craigslist.

Advantages Disadvantages

- Firms can reach a wide target - Payment process of e-commerce

audience resulting in the increase in
customer base
- A more effective cost and method
for advertisement compared to
Television
- Direct review from customers
- Locational benefit of being
accessible in all places
are a huge concern for consumers
for the safety
- Setup and maintenance of website
can be expensive
- Vulnerable to competitors since
product data is accessible by
everyone
- Consumer’s doubt since they can’t
try the product beforehand
- Chance of information overload
Unit 5.2 Production Method

1. Mass Production
This is production on a large scale, with a single stage to the production process. The
products tend to be standardised. There are good economies of scale due to the high level
of productivity. The business can also be highly specialised with the specific equipment.

Advantages Disadvantages

● Less waste as this employs just-in-time
techniques
● Lower labour costs as robots and good
planning are used
● Quality can be easily detected by
deviations in the line and controlled
● Less work-in-progress, therefore lower
storage space and there is less
handling
● Average costs are considerably lower
● Faster conversion from raw materials
to sales
● The work can easily become boring and
repetitive
● Breakdowns or delays will have a huge
impact on productivity
● Almost no flexibility, so the customers’
tastes are not always met.
● Operations must halt for problems to
be rectified
● Lots of storage due to the large
production
● High set up costs for the business

2. Just in Time

Advantages Disadvantages

● Less space needed ● Risk of running out of stock

● Waste reduction: Faster turnaround of
stock prevents goods becoming
damaged or obsolete while sitting in
storage.
● Smaller investments
● Rely on the timeliness of suppliers for
each order puts you at risk of delaying
your customers’ receipt of goods.
● understand their sales trends and
variances in close detail.
 3. Mass customization

Advantages Disadvantages

● Forges loyalty with consumers ● Requires a highly flexible

● Detect certain trends production technology, this can
be expensive and
time-consuming
● High warehousing costs

4. Highly Automated Manufacturing Process

Advantages Disadvantages

● Less error and the quality of ● High cost of purchasing

product is more consistent machines
● Less cost for long run ● Machines can be redundant to
● No labour crisis changes in the product
● Increase of productivity ● work force decreased

5. Batch production
Advantages Disadvantages

● Reduces cost ●

Possible questions:
1. Explain the factors which forced RDM to invest in automation. [6 marks]
- The changes in the market as well as the competitors. This results from globalization,
fierce competition is developed and these competitors have processes of production
which are very low cost. This led to Jan determining that in the 2000’s European
manufacturers would also have very low cost structures. In order to stay competitive
RDM had to invest in this as well. Technological changes also encouraged this change
since it made it a more achievable possibility.
- Type of product and business
- Good IT infrastructure in the Czech Republic
- Reduce labour cost
Unit 5.3 Lean Production (HL)

● Lean production
○ Process of streamlining operations and processes to reduce waste
○ Leads to improved quality and reduced costs
○ Forms of waste: materials/resources, time, energy, human effort
○ Principles to be followed:
■ Waste minimisation – remove processes that don’t add value
■ ‘Right first time’ – zero defects
■ Flexibility
■ Continuous improvement
■ Supply chain management – develop good working relationships
● Methods of lean production
○ Kaizen/continuous improvement
■ Productivity/efficiency gains from small/continuous improvements
■ Involves forming small groups/Kaizen groups
■ Identifies changes and improvements to establish steady flow
of small improvements
■ Easier to manage change if it is small; less resistance
■ Continual improvements in quality and eliminate waste
■ Different from quality circles since suggestions can come
from anyone

Benchmarking
● Comparing products, operations, and processes to similar businesses
● Stages:
○ Identify area
○ Measure internal performance using set criteria
○ Identify most appropriate competitors to benchmark with
○ Measure external performance of rivals
○ Use comparative data to find main weakness of firmr
○ Set standards for quality improvements
○ Implement change
○ Evaluate outcome and check for improvements
● Can be either historical or inter firm benchmarking

Advantages Disadvantages

● Close performance gap ● Costs and time implications

● Eliminates guesswork ● Can discourage innovation
 ● Allows perception of customers to be ● Time and finance must be used to
heard implement change
● Help lower costs and improve
competitiveness

Unit 5.4 Location

Factors Affecting Location Decisions

Quantitative Reasons for a Specific Location

Availability, Suitability and Cost of Land

The business must consider the land available to them, and whether it is affordable and
suitable for their operations. Land in prime locations is often very expensive, so the business
will have to do a trade-off based on which option will hold the greatest benefit for the
business in the long term. The nature of the business will determine the type of land they
should have, and how far from the city.

Availability, quality and cost of labour

Labour is also another thing for the business to consider. Depending on the nature of the
work, the business will require different levels of skill. The production facilities should be
located close to areas where the appropriate labour is in supply.

Proximity to market (customers)

- Bulk increasing businesses
Mining Copper

Proximity and access to raw materials

​Production facilities near ​raw materials can save on transport costs. However, this need to
be balanced against the need to be near to the market. A ​bulk reducing business, whose
products are less to transport than the original parts, should be located close to the raw
materials as these transport costs will be higher. On the other hand, ​a bulk increasing
business should locate closer to the market, as the transport costs to the market are greater
than for the raw materials.
Government incentives and limitations
In some countries, the government has incentives and policies that are beneficial for
business a​ctivity. For a business operating nationally, they may be eligible for grants or
subsidies to support local business. In addition, if the move to a location where the
government is trying to encourage growth, they may also receive other benefits.
Government policy might be good for business, too. Assisted Areas are regions identified by
the government to be suffering from relatively high unemployment and low incomes, so are
in need of regeneration through financial assistance.

Feasibility of E-Commerce
E-commerce can also be a way for businesses to reduce their costs. The internet is much
cheaper than physical land, especially considering they can reach people who do not live in
that area. However, this is not appropriate for all businesses.

Qualitative Reasons for a Location

Management preferences
The management of the firm will have personal preferences of location for a number of
reasons. This will affect their decision.

Local Knowledge
The business should also consider the local knowledge they have of various areas, which
gives a competitive advantage. If they know it well, they reduce their risks and will be able
to make better ​decisions.
Do the citizens of Windsor have any particular local knowledge that would be appealing for
an international business? How did the citizens of this region acquire this knowledge?
What other regions might have a high concentration of the labour force with a distinct
skill-set or body of knowledge?

Infrastructure
The area will have a certain level of infrastructure, which will directly affect the business’
ability to do business. If there is no electricity or road access for deliveries of raw materials,
then the business will not be able to operate effectively.
The communication links vary depending on the area, and can be an essential deciding
factor for the business. They will need to be able to access the internet or telephone lines.

Political stability
In countries that are politically stable and have a sound economy, business can be done
safely. A war-torn country with poor infrastructure, corrupt government, high taxes and
poor exchange rates will not benefit the firm. The political stability of the country will affect
the business, as will its economy. These things can alter employment and costs of
production. Taxes and infrastructure are affected by this.
Government restrictions and regulations
The business may have to obtain licences and permits for many of their activities, and the
longer the time delay for receiving these, the greater the delay on commencing operations.
Other government restrictions and regulations will have similar effects.

Ethical issues
The business should ensure that their activities are ethical and comply with industry
standards. Unethical behaviour can cause problems with the local people and earn the
business a bad reputation.

Comparative shopping (clustering)

Finally, the firm may try to locate near other businesses with similar operations, called
clustering, in order to attract customers to their store.
Unit 5.6 Research and development

Research and development (R&D) is a form of innovation directly associated with the
technical development of existing products or processes, or the creation of new ones. R&D
is important as it can help extend the product life cycle by developing new ways to use
existing products

- Patents
When individuals or businesses invent products or production processes, they should take
out a patent to protect their idea. Patent is usually for a period of up to 20 years. After that
time, the individuals or business can of course renew the patent.

- Copyright
Copyright is similar to a patent. It originally applied to written material but has now been
extended to cover other artistic forms of media presentations such as cartoons, music, and
lms.

- Trademarks
These are split into two general forms. Conventional trademarks include logos, slogans,
designs, and phrases.

All these intellectual property rights help to ensure that the business can:
- have first mover advantage
- increase profit margins
- safeguard continuity of production
- develop brand loyalty
- have time to develop new products
- financially benefit from its creativity, innovation, and R&D.