STUDY

ARU
BA (Hons) in Marketing
Business Strategy and Entrepreneurship

Exam Prep Kit

Contents

Creating, designing and running an entrepreneurial venture

25%

Business behaviour and global environment

25%

Firms objectives, strategies, policies and factors affecting the new venture

25%

Corporate performance, measurement and economic analysis

25%

Contents
1

Creating designing & running an entrepreneurial venture ................................................... 6

1.1

Entrepreneurial process ............................................................................................................ 6

1.1.1 The stages of an entrepreneurial venture ...................................................................... 6

1.1.2 Planning stage and implementation stage ................................................................... 11
1.1.3 Managing stage........................................................................................................................ 17
1.2

Opportunities & challenges .................................................................................................... 26

1.2.1 Opportunities ........................................................................................................................... 26

1.2.2 Challenges ................................................................................................................................. 30
1.3

Personal traits & behaviour.................................................................................................... 31

1.3.1 Entrepreneurial personality traits .................................................................................. 32

1.3.2 Entrepreneurial behaviour................................................................................................. 33
1.3.3 Entrepreneurial leadership attributes ........................................................................... 35
1.4

Entrepreneurial culture ........................................................................................................... 39

1.4.1 Culture ........................................................................................................................................ 39

1.4.2 Creating an entrepreneurial culture ............................................................................... 42
1.5

Creativity & innovation in entrepreneurship .................................................................. 45

1.5.1 Creativity & innovation ........................................................................................................ 45

1.5.2 Challenges to entrepreneurial learning and understanding ................................. 47
2

Business behaviour & global environment ................................................................................ 54

2.1

Business behaviour of organisations & factors influencing behaviour ................. 54

2.1.1 Business behaviour ............................................................................................................... 54

2.1.2 Factors affecting general business behaviour............................................................. 56
2.2

Resources, productivity & managerial competence ..................................................... 60

2.2.1 Resources & productivity .................................................................................................... 60

2.2.2 Issues related to productivity............................................................................................ 64
2.2.3 Overcoming productivity issues ....................................................................................... 66
2.3

Growth of companies ................................................................................................................ 67

2.3.1 Methods of growth ................................................................................................................. 67

2.3.2 Multinational enterprise ..................................................................................................... 70
2.3.3 Foreign direct investments ................................................................................................ 72
3

Firms objectives, strategies, policies & factors affecting the new venture .................... 79
3.1

Implementation of policies ..................................................................................................... 79

3.1.1 Policies........................................................................................................................................ 79
3.1.2 Government policies ............................................................................................................. 81
3.2

Objectives of organisations..................................................................................................... 86

3.2.1 Objectives of firms and the government impact ........................................................ 86

3.3

Strategies of organisations ..................................................................................................... 89

3.3.1 Levels of strategy ................................................................................................................... 89

3.3.2 Strategies ................................................................................................................................... 95
3.4

Alliances ...................................................................................................................................... 106

3.4.1 Corporate alliances ............................................................................................................. 106

3.4.2 Types of strategic alliances ............................................................................................. 108
4

Corporate performance, measurement & economic analysis .......................................... 113

4.1

Analysis on the economy ...................................................................................................... 113

4.1.1 Economic analysis ............................................................................................................... 113

4.2

Company performance .......................................................................................................... 116

4.2.1 Factors influencing corporate performance ............................................................. 116

4.2.2 Analysing company performance through Gap analysis ..................................... 119
4.2.3 Analysing company performance through balanced scorecard ....................... 122
4.2.4 Financial performance ...................................................................................................... 125
4.3

Micro & macroeconomic policies ...................................................................................... 128

4.3.1 Micro economic policies ................................................................................................... 128

4.3.2 Macroeconomic policies ................................................................................................... 130
4.3.3 Economic reforms ............................................................................................................... 134
5

Warm up questions ................................................................. Error! Bookmark not defined.

Frequent questions........................................................................................................................... 145

Tough questions ................................................................................................................................ 149

Preface
About this Exam Prep Kit
We would like to take this opportunity to welcome you to the Business Strategy and
Entrepreneurship module of the BA (Hons) in Marketing programme and wish you
every success with your studies.
This Exam Prep Kit is designed to support students in revising the syllabus according to
module specifications. It will summarise the entire syllabus in a manner that will help
you grasp the areas you are expected to address in your studies in a thorough manner.
We hope that you will find the materials of this Exam Prep Kit useful in your learning
endeavours and we wish you the very best in not only achieving a pass, but passing with
distinction.

How to use this Exam Prep Kit?

This Exam Prep Kit has been divided into the main syllabus elements with each element
split into subsections. The theories and concepts pertaining to each sub section have
been covered through various illustrations. At the end of each subsection, you will be
given an activity, which will help you assess your understanding and knowledge.
Furthermore, examples have been provided to help you fully understand the theories
and concepts involved from a practical perspective.
However, whilst the material gives you a comprehensive outlook into the areas that you
are expected to address in your answer, it is important that you bear in mind that this is
only an outline in a context and that you are expected to elaborate your discussions
using your own understanding of the requirements.

Before you read this Exam Prep Kit

Please note that it is important to bear in mind that this Exam Prep Kit is only a broad
outline of the syllabus and should only be used as a revision aid in conjunction with
your studies. You are expected during your exams or assignments to elaborate your
discussions using your own understanding and knowledge gained from the
comprehensive study of the required syllabus elements.
To conclude, once again, we wish you all the very best indeed and hope you achieve a
rewarding career in entrepreneurial management.
LS Business Publishing Team

1 An Entrepreneurial Venture
Entrepreneurship involves planning and organising innovative ideas to be put into
action by maximising available opportunities. This section describes each stage of the
entrepreneurial process, from idea generation to commercialisation. Under this section,
the candidate will gain an understanding of the entrepreneurial process and other
factors important in designing and running an entrepreneurial venture.

1.1 Entrepreneurial process

Entrepreneurship involves greater risk as capturing a new market is uncertain. Greater
uncertainty leads to greater strategic challenges. As the environment is dynamic, the
entrepreneur must respond to changes rapidly. The entrepreneurial process helps to
understand the stages an entrepreneur goes through in successfully creating a new
entrepreneurial venture.

1.1.1 The stages of an entrepreneurial venture

Entrepreneurship deals with new products, methods, markets, practices and new forms
of managing an enterprise. Entrepreneurship involves greater risk as the environment
is highly uncertain, dynamic and complex. Individuals create new entrepreneurial
ventures for many reasons, which differ from one individual to another. Such reasons
include personal factors (education, creativity, opportunities, and values),
environmental factors (availability of adequate resources) and sociological factors (age
and family responsibilities).
Knowledge
An enterprise is an undertaking that encourages individuals to come up with their own
innovative ideas and take measures to put these ideas into working reality.
Entrepreneurship is the creation of new business using the enterprise.
Characteristics of entrepreneurs include being self-motivated, self confident, optimistic,
ability to work on own initiative, ability to plan, efficient and committed and willing to
take risks.
Types of entrepreneurs include social, serial, lifestyle and cooperative entrepreneurs.

Social entrepreneur

Creation of social value is the ultimate objecive.

Serial entrepreneur

He creates new business ventures by utilising new innovative ideas.

Lifestyle entrepreneur

He is motivated in creating a longterm, sustainable and profitable working field where certain
knowledge, interests and expertise are involved.

Cooperative entrepreneur

He works in collaboration with other entrepreneurs.

Different forms of Entrepreneurial Ventures
Small business entrepreneurship

Today, the overwhelming number of entrepreneurs and startups are still small
businesses.

Small businesses are grocery stores, hairdressers, consultants, travel agents,

internet commerce storefronts, carpenters, plumbers, electricians, etc.

They are anyone who runs his/her own business. They hire local employees or
family. Most are barely profitable. Their definition of success is to feed the family
and make a profit, not to take over an industry or build a $100 million business.

As they cant provide the scale to attract venture capital, they fund their
businesses via friends/family or small business loans

Scalable Start-up Entrepreneurship (e.g. Silicon Valley entrepreneurs)

Unlike small businesses, scalable startups are what Silicon Valley entrepreneurs
and their venture investors do. These entrepreneurs start a company knowing
from day one that their vision could change the world. They attract investment
from equally crazy financial investors venture capitalists. They hire the best
and the brightest. Their job is to search for a repeatable and scalable business
model. When they find it, their focus on scale requires even more venture capital
to fuel rapid expansion.

Scalable startups in innovation clusters (Silicon Valley, Shanghai, New York,

Bangalore, Israel, etc.) make up a small percentage of entrepreneurs and startups
but because of the outsize returns, attract almost all the risk capital (and press.)

Large company entrepreneurship

Large companies have finite life cycles.

Most grow through sustaining innovation, offering new products that are
variants around their core products. Changes in customer tastes, new
technologies, legislation, new competitors, etc. can create pressure for more
disruptive innovation requiring large companies to create entirely new
products sold into new customers in new markets.

Existing companies do this by either acquiring innovative companies or

attempting to build a disruptive product inside. Ironically, large company size
and culture make disruptive innovation extremely difficult to execute.

Constantly changing environments bring more challenges to entrepreneurs. Therefore,

it becomes essential for entrepreneurs to take necessary steps to develop, manage and
enhance the new entrepreneurial venture.
The formation of an entrepreneurial venture involves three stages as follows: planning,
implementation and management.

Diagram - Stages involved in the formation of a new venture

Planning

Implementing

Managing

Assessment of the available opportunity

Preparation of a business plan

Acquisition of resouces
Creation of the new venture

Making strategic decisions

Leadership

To be a successful entrepreneur, it is vital to go through the above three phases as the

entrepreneurial process involves creating innovative products, methods and practices
by undertaking financial, environmental and psychological risks. In order to make the
new business venture successful, it is important to start with a business plan as it helps
to develop an appropriate business strategy thereby providing a roadmap for the
ventures success. The business plan should be prepared for three to five years ahead
explaining the operations of the venture and how it plans to generate revenue.
Under the implementation phase, the location of the business, purchasing of necessary
resources, obtaining business license if required and marketing of the business should
be taken into consideration. An implementation plan would provide investors a
roadmap about the business development.
Finally, the management of the entrepreneurial venture depends on the personality and
the leadership of the entrepreneur. Skills, various techniques and practices are
mandatory to manage the growth of a new business venture in an uncertain business
environment.
Advantages of starting a new venture

When engaging in your own business venture, it helps to accomplish personal

benefits. By efficiently managing the new venture, benefits could be enjoyed by
the entrepreneur as the income is not limited to a monthly salary.
Achieving personal interests and satisfaction
Flexible working hours would be available and the entrepreneur could decide on
the work hours, place and the environment.
It facilitates career development through the enhancement of talents, creativity
and ability.
Freedom to take decisions is the greatest advantage that you experience when
starting and managing you own business venture.

Disadvantages of starting a new venture

Risking money, energy, and time

Must be 100% dedicated and committed
Need to have good relations with suppliers and customers
Recruiting and selecting human resources can be a difficult task
Retention, utilisation, improvement and disposal of human resources will be a
crucial task
The entrepreneur should learn ways of managing funds, human resources and
new venture activities.
It can be stressful.

Reasons for failure of new ventures

Improper planning

The entrepreneurs enthusiasm alone would not help to succeed. It requires thorough
planning which could be used as a yardstick to monitor the business performance.
Inadequate planning will drive you out of the market.

Selling at a lower price

Having a low price will not make you successful. The business should generate sufficient
profits and cash flows to run the venture.

Improper ways of managing finance

Improper management of resources
Inadequate advertising
Lack of skilled staff

Example - Stages of an entrepreneurial venture

To make the venture successful, it is vital for every entrepreneur to go through the
planning, implementation and the managing phases. If an entrepreneur is interested in
running a hotel, he has to go through the process of planning with a carefully prepared
business plan, implementing and managing it.

Activity - Stages of an entrepreneurial venture

Identify the errors that could arise in a business plan.
Answer:
Many entrepreneurs fail to develop a plan due to time limitation, not knowing how to
prepare it or believe that a business plan is of no use.
Inadequate market research is another common error in a business plan. Entrepreneurs
may fail to identify the customer needs and wants, response of the competitors and
reaching the market.
Many entrepreneurs lack objectivity. It is important to figure out the market and the
business idea.
Information overload is a common error in many business plans. A business plan is a
tool that guides how the business should be launched and hence should be clear and
concise.

1.1.2 Planning stage and implementation stage

Planning begins when new ideas are evolved and opportunities are identified. The
business plan becomes important as it describes the business goals, reasons and a plan
for achieving them. The business plan needs to be understandable, credible and
attractive to potential investors. Entrepreneurs can use the business plan to set out
specific details about the business. Once the planning is complete, implementation of
the venture begins.
Knowledge
In order to maximise the opportunities identified, the entrepreneur has to begin with a
business plan mentioning the business goals, how they are attainable and a plan for
achieving them. In addition, strategies for marketing, finance, operations, human
resources and legal plan are required. A good business plan should be understandable,
credible and attractive to all the potential investors.

Diagram - Business plan

Business
description
Market
strategies

Financial
plans

Business
plan
Operation &
management
plans

Competitive
analysis
Design &
development
palns

The business description should explain about the industry to which the business
venture belongs and its status and future possibilities. In addition, legal form of the
business, target customers, principal shareholders, product description, distribution
methods and the support systems should be taken into consideration.

Market analysis will enable to establish pricing, promotional and distribution strategies
and under competitive analysis, Porters competitive forces can be used to determine
the state of competition.
According to Porter, a firms ability to make high economic profits is dependent on two
factors:

The profitability of the industry

The firms positioning within the industry through its choice of a generic strategy

The profitability of the industry does not depend on the nature of the product, but
rather combined effects of the five forces he refers to as the Rules of competition. How
favourable the forces are to the firm operating in the industry now determines
profitability.
Diagram - Porters five forces model

Threat of new
entry

Bargaining
power of
buyers

Existing rivalry
between firms

Threat of
substitutes

Bargaining
power of
suppliers

Threat of new entry

New entrance to an industry could affect profitability for incumbent firms in several
ways.

By losing market share, economies of scale are lost

Prices may fall
Increased advertising and promotion costs
Greater demand for factors of production push up production cost

The threat of entry however depends on the existence of barriers to entry. Barriers to
entry could be:

High capital investments

Legal barriers that include patents and government licenses
Brands and product differentiation
Access to distribution channels
Economies of scale - the new firm may find it difficult to match the existing firms
cost structure
Cost advantages independent of economies of scale
Barriers to exit - this could include long-term agreements, redundancy costs and
assets with no resale value

Bargaining power of buyers

It could relate to both consumers and industrial buyers. When buyer power is high, they
could force down prices, ask for improved quality, more favourable credit terms or even
play suppliers against each other. This power would be strong when:

there are a few large buyers

there are a large number of sellers and the supplying industry is fragmented
the switching cost to the buyer is low
the product supplied is undifferentiated
buyers have the potential for backward integration

Bargaining power of suppliers

The bargaining power of suppliers is likely to be high when:

the supplying industry is concentrated

the product supplied is differentiated
the supplier considers the buyer to be insignificant

the component supplied is an integral part in the buyers business

the suppliers have the potential for forward integration
buyers have a high switching cost

Threat of substitutes
Substitutes could pose the following problems.

It places a limit on the companys pricing strategy

It forces product improvement and quality
Substitutes could make some industries technically obsolete

The threat of substitutes however depends on:

the degree of substitution

the switching cost to substitute

Existing rivalry between firms

The balance four forces could make this stronger or weaker. The stronger it is, the
competition would be cutthroat.
The existing rivalry would be strong when:

the market has matured

competitors are of equal size
there are high exit barriers
the industry has high operational gearing
the industry has low potential for product differentiation
there is strategic stakes present - that is when the success in one market affects
the success in others.

The design and development plan should give a description of the product design to
investors, chart its development, and evaluate with the development budget . The
operations and management plan should specify management team responsibilities,
divisional tasks and capital and other expenditure required to run its operations.
Finally, at the end of the business plan, there appears the financial information.
Financial projections are also required as they are vital for investor decision making.
In order to implement the action plan, the entrepreneur needs to acquire necessary
resources. Primary resources include capital, human resources and time. Capital can be
financial, intellectual (patents, copyrights, brand names) and technical (innovation in
production, which competitors do not have).
Human resources include individuals who help to exploit opportunities.

The entrepreneur should have the capability to manage all these resources in an
efficient and effective manner to bring benefits to the business. The entrepreneur can
make use of an implementation plan to provide a roadmap for the investors about the
business development.

Example- Planning & implementation stages

An entrepreneur is willing to start a new restaurant business and his business plan
should have the following:
Business idea - To start a new restaurant business
Business description - To offer high quality food to customers
Marketing strategy - to build a strong relationship with all stakeholders
Pricing strategy - To match revenue with costs and charge a reasonable price
Promotion strategy - Advertising in media
Funding strategy - To use personal savings and bank borrowings
Human resource strategy A rational and logical approach for recruiting, retaining and
utilising human resources and adequate training are provided as the business is in the
hospitality industry and key employees should be rewarded and retained.
Competitor analysis Porters five forces model is used to understand the state of
competition in the restaurant industry.
Threat of new
entrants is very
high

Bargaining power
of customers is
medium

Competitive
rivalry is high as
many restaurants
are competing
with each other

Threat of
substitute product
is high

Bargaining
power of
suppliers is weak

Example- Planning & implementation stages .cont

Implementation plan of the restaurant
Months
Activity
Obtaining approval from relevant
authorities
Developing the premises
Developing the supplier base
Marketing
Building a good relationship with
customers
Developing a marketing campaign
Management
Recruiting staff
Training staff
Building teams
Setting operations
Financing
Milestone

10

11

Launching of the restaurant

Example Planning & implementation stages

Tesco faces a very high competitive rivalry in the food retail industry. Its main
competitors include Waitrose, Sainsbury, Morrison and Asda. Competition exists in
terms of product, price and promotion. Further, Tesco has competition with petroleum
suppliers. They compete through special fuel brands and price wars.
Tesco has an advantage of operating large supermarkets, as people tend to do their
shopping at big supermarkets. This gives Tesco the ability to dictate prices among
suppliers. If the suppliers do not agree with Tesco, they would not have a retailer to do
business.
If the prices are too high at Tesco, customers could exercise their power to shift to
another supermarket.

Activity- Planning and implementation stage

What are the factors that entrepreneurs should consider when solving major issues?
Answer:
Entrepreneurs should ascertain if their goals are well defined. They need to consider
personal desires and aspirations, business size and sustainability and the level of risk
tolerance.
Moreover, entrepreneurs should focus on their strategy. It has to be clearly defined,
durable, profitable and the potential for growth.
Finally, entrepreneurs should identify if they could execute the strategy with the
resources and organisational infrastructure.

1.1.3 Managing stage

This is the last stage in the entrepreneurial venture. Managing the new entrepreneurial
venture is somewhat crucial, as the entrepreneur has to play different roles, i.e. the
creator, promoter and leader. If proper attention is not given to the management of the
venture, it could lead to the closure of the business. Therefore, the management strategy
becomes a vital factor in enhancing business performance.

Knowledge
The managing stage is the final phase of the entrepreneurial process. Efficient
management is essential to carry out business operations and to prosper in the long run. The following aspects should be taken into consideration for efficient management:

Making best use of resources available

Minimising wastage and failures
Maintaining of quality
Application of suitable control systems
Compensating and rewarding workers
Culture management
Leadership
Budgets
Economies of scale

Various sources of information in managing an enterprise

Corporate annual report
market analyses
stock market data
governmental publications
Diagram - Different roles of an entrepreneur when managing the venture

Role of a Creator
Set the philosophy
Strategic focus
Educate new
employees

Role of a promoter
Maintain good
relations with
employees, bankers,
customers and
suppliers

Role of a leader
Making strategic
decisions
Be a role model

Role of a creator

As the initiator of the entrepreneurial venture, the entrepreneur needs to set the
philosophy of the organisation and establish the strategic focus. In addition, he has to
educate employees about his vision, business goals and objectives in order to guide
them in the correct direction, which in turn helps to create the appropriate corporate
culture for the organisation.

Role of a promoter

The entrepreneur acts as a promoter by building and maintaining a strong relationship

with all the stakeholders.

Role of a leader
The entrepreneur should be a role model or a mentor to others in the organisation. He
has to be a manager as well as a visionary leader to build up the organisation. The
entrepreneur should have the talent to handle the activities of a leader as well as
managerial duties. It needs to introduce new products, new methods, new markets and
new practices throughout the life of the organisation to prosper. In addition, the policies
of the venture should be flexible and support innovation.

Further, it is imperative for the entrepreneur to have a clear vision without interfering
too much in the details of management.
Leadership is vital in motivating and encouraging employees to proceed in the desired
direction and therefore the entrepreneur should build trust and confidence among
workforce and take action to improve communication among the workforce.
Classical theories on leadership

Trait based theories

These theories attempt to identify the personal qualities and characteristics
leaders possess. They argue that leaders are born and not made. However, the
weakness of the trait-based theory is that not all leaders possess all traits and
many non-leaders possess most of them. The trait based approach gives no
guidance as to how much of any trait a person should have. Starting with the
Great Man Theory, researches have attempted to identify the physical, mental
and personality traits of various leaders. Traits identified include energy,
appearance, height, adaptability, aggression, enthusiasm, self-confidence,
intelligence, persistence, initiative and inter-personal skills.

Style based theories

These are concerned with the behaviour leaders adopt towards their followers.
They attempt to identify what style is most appropriate in motivating followers.
The chosen style is greatly influenced by the personality of the leader.

Contingency theories
These argue that there is no one best style or approach to leadership but it is
dependent on situational characteristics in which leadership occurs. They
suggest that just because a leader is successful in one situation, it does not
guarantee success in another. However, effective leaders adapt their behaviour
to the specific situation.
To exploit opportunities available, an entrepreneurial leader would blend
creative ideas to add value to operations and use innovative methods and
practices.

Stakeholder management
Stakeholder management is imperative, as stakeholders are the people who have an
interest in an organisations activities. They can also be defined as groups of people who
have an interest in the activities and strategy of the organisation.

Diagram - Stakeholders

Local government

External national
government

Internal

Employees
Management

Connected
Shareholders

Suppliers
Distributors
Creditors/lend
ers
Customers

Industry
regulators

Competitors
Super national
bodies

Pressure
groups

Stakeholders could also be classified as primary and secondary. Primary stakeholders

are capable of being influenced by the firm because there could be some form of
operational relationship.
Analysing stakeholders prior to strategy development is vital as:

They can influence the mission and objectives of the firm;

They can be antagonists or protagonists for a particular strategy;
Meeting stakeholder needs should also be in line with social responsibility and
governance.

Diagram - Managing stakeholders

Managing
stakeholders

Map the
stakeholders

Identify their
sources of
power

Identify the
stakeholder's
values,
concerns &
interests

Identify
them

Mandelows Matrix can be used to map the stakeholders.

Diagramme- Stakeholder mapping

Low

Minimal effort

High

Keep informed

Low
Keep satisfied

Key players

High

Vertical Matrix = Stakeholder level of power

Horizontal Matrix = Stakeholder level of interest

Determine the
course of action to
deal with them

Following are the strategies used in determining the course of action to deal with
stakeholders:

Minimal effort group

Direction is required for the minimal effort group, i.e. they are likely to listen to what is
said and follow instructions. Therefore, this group requires minimal effort and
monitoring.

Keep informed group

This group of stakeholders is interested in the strategy of the organisation but lacks the
power to take action. Education and communication is required as they could be
important in influencing powerful stakeholders.

Keep satisfied group

Intervention is required for the group of stakeholders included in this category, i.e.
taking courses of action to ensure that their level of interest does not change.

Key players group

Participation and involvement is necessary, as these are the key players of the
organisation. Strategies adopted by the organisation should be acceptable to them. If
they are unsatisfied, they could even stop the management plans.

When managing the new venture, the entrepreneur should give due consideration to
human resource management. Human resource management includes all activities that
managers engage in to attract and retain employees and to ensure they perform at high
levels and contribute to the accomplishment of organisational goals.
Strategic human resource management is the process by which managers design the
components of the human resource management system to be consistent with one
another and with the organisations strategy and goals.
The objective of strategic human resource management is the development of the
system so that it enhances an organisations efficiency, quality, innovation and
responsiveness towards customers.

Example- Managing stage

To perform responsibly, Tesco always listens to its stakeholders and ensures that their
concerns are addressed. Tesco obtains customer views on how it serves its customers.
The company treats its suppliers the way it would be like to be treated. The investor
relations team of Tesco often meets the firms shareholders. Tesco also conducts
meetings on a regular basis with non-governmental organisations to identify and act
upon matters of concern.

Activity- Managing stage

Explain the important characteristics of a leadership role.
Answer:
A good leader would always be clear and consistent in his/her directions to
subordinates. If not, the subordinates would be confused of what they should actually
achieve.
Further, performance reviews should take place on a timely basis with constructive
feedback.
A leader should possess a good understanding of what his/her team should achieve.
Measurement and monitoring of objectives should take place on a continuous basis.
Good leaders should be capable of creating personal relationships with the
subordinates. It makes them feel appreciated and accepted.
A leader should be capable of building trust and loyalty in the minds of the
subordinates. Good leaders would always engage in effective communication and share
knowledge, thereby encouraging subordinates to spend their time and effort to realise
the targets.

Stages of developing a new Entrepreneurial Venture

1. Idea generation
Ideas are generated through the following steps:
Observation of a need or difficulty.
Analysis of the need
A survey of all available information
A formulation of all objective solutions
A critical analysis of these solutions- Rigorous analysis of the technical and
commercial feasibility of surviving solutions.
The birth of the new idea
Experimentation to test and refine the most promising solution.
Every new venture begins with an idea. In our context, we take an idea to be a
description of a need or problem of some constituency coupled with a concept of
a possible solution
Brainstorming is the key to concept creation. You must also keep track of all the
ideas that are generated.
At this point all the ideas will be varied and potentially relevant. You must then
review each idea to determine its appropriateness. Evaluate each idea and
determine which one is most valuable and will generate the most profits.
Concept assessment involves market research where information about your
idea is collected and analyzed to determine whether the concept is viable. The
owner must understand his target market, what the market needs and is looking
for. You must assess all aspects of the idea before moving on to the next stage.

2. Opportunity evaluation

Once entrepreneurs have developed the idea(s) for the new ventures, they must
begin the process of assessing whether or not the idea is in fact a viable business
Opportunity.

This is the step where you ask the question of whether there is an opportunity
worth investing in.

Investment is principally capital, whether from individuals in the company or

from outside investors, and the time and energy of a set of people. But you
should also consider other assets such as intellectual property, personal
relationships, physical property, etc.

it is important to assess feasibility as early as possible to avoid the much costlier

effects of failed implementation.

3. New product/ service planning

Once you have decided on an opportunity, you need a plan for how to capitalize
on that opportunity. A plan begins as a fairly simple set of ideas, and then
becomes more complex as the business takes shape.

In the planning phase you will need to create two things: strategy and operating
plan.

You must create a thorough business plan. Within your business plan, you must
clearly identify your businesss goals. A well-defined business plan will steer the
business in the right direction and will increase the chances of having a
successful product launch.

4. Marketing launch

Once there is a sufficiently compelling opportunity and a plan, the

entrepreneurial team will go through the process of choosing the right form of
corporate entity and actually creating the venture as a legal entity

A successful product launch should address whether the appropriate number of

products exists, whether you have correctly planned and executed your
marketing activities, whether all of the appropriate documentations have been
developed and whether your employees are properly trained and ready to
support the product.

5. Implementation

An implementation stage is where necessary resources are acquired to start the

business and where the business is actually started.

Once the planning is completed, entrepreneurs are ready to begin implementing

their plans by gathering the necessary resources. After entrepreneurs have the
necessary resources, they can start operating their businesses. Without a
sufficient supply of resources the opportunity might never be turned into a
business that makes money for the entrepreneur. In the resource gathering stage
entrepreneurs begin to assemble the tools that they will need to profit from the
opportunity. In order to create a viable organization an individual entrepreneur
has to be ready and able to manage the resources at his or her disposal, bringing
them together in ways that are advantageous and efficient

6. Growth

After launch, the company works toward creating its product or service,
generating revenue and moving toward sustainable performance. The emphasis
shifts from planning to execution.

7. Commercialisation

Commercialization is the process or cycle of introducing a new product or

production method into the market.

1.2 Opportunities & challenges

Entrepreneurship is exposed to many opportunities and challenges. To manage a
venture successfully, the entrepreneur should recognise the right opportunity and take
steps to exploit it while overcoming the challenges ahead. This section will help to
understand the opportunities and challenges that entrepreneurs face.
1.2.1 Opportunities
Opportunity can be defined as a situation that exists or which we bring into existence or
a situation that could occur in the future. Opportunities enable entrepreneurs to come
up with new products/services, markets, innovative methods, styles and new ways of
managing an enterprise, which can be sold at a profit. It becomes important to recognise
opportunities and take steps to exploit them, as they are the most critical aspect
(identifying the right opportunity) in the entrepreneurial process.

Knowledge
Opportunity is a situation in which new products, services or methods can be offered at
a profit. To exploit an opportunity, it becomes essential to identify it before rivals.
Opportunities display positive trends in the external environment, which can be
exploited to gain competitive advantage over rivals.
Opportunities occur:
When there is a mismatch between demand and supply of products and services;
When there is a gap in the market;
When a problem can be solved by the application of new methods;
When applying new technology and innovative methods.
An entrepreneur can work on an opportunity when such opportunity matches his skills,
interests, talents and capabilities. A SWOT analysis could enable the entrepreneur to
determine the strategies to be used for the entrepreneurial venture. After having
performed the SWOT analysis, strategy will attempt to achieve the following.

Matching strengths to opportunities

Converting weaknesses to strengths or threats to opportunities
Remedy- Removing weaknesses that lead the firm exposed to threats

Diagramme- SWOT matrix

Internal forces
External forces
Opportunities
(O)

Threats
(T)

Strengths
(S)

SO strategies
Ways to use strengths to
grasp opportunities
(Matching)

Weaknesses
(W)

WO Strategies
Attempting
to
take
advantage
of
opportunities
by
addressing weaknesses
(Converting)
ST Strategies
WT Strategies
Ways to use strengths to Defensive strategies to
neutralise threats
minimise
weaknesses
(Remedy)
and threats
(Remedy)

Once the opportunities have been identified, the entrepreneur should decide as to
whether to act upon it or not. If he decides to act upon such opportunity, it will be
essential to narrow it down to the most profitable customers.
When exploiting an opportunity, the following should be taken into consideration:
Observe and study the action you plan to make;
Ensure that opportunities are in line with your business objectives and goals;
Ensure that your interests, skills and capabilities match the opportunity.
To obtain the maximum benefit from the opportunities available, it would be much vital
to monitor the actions of competitors so that you could identify the areas where they do
not operate as well as their target customers and evaluate whether such customers
could be potential customers to your business.
Diagramme- Taking advantage of new opportunities

Monitor your
competitors

Looking for
changes that
require the
need for
new product
or service

Obtaining the
advantage of
new
opportunities

Possibility of
working in
partnership

Look beyond
the present
market

Example- Opportunities
A SWOT analysis would enable to determine whether opportunities could be exploited
with the available strengths. The following is the SWOT analysis of Coca Cola:

Strengths
Best global brand
Largest market share
Strong marketing & advertising
Extensive distribution channel
Customer loyalty

Weaknesses
Focus on carbonated drinks
Negative public image
Massive debt levels
Failure in brands
Undiversified product portfolio
S
O

Opportunities
Growth in bottled water usage
Great demand for Nourishing food & drinks
Growth through acquisitions

W
T
Threats
Changes in customer preferences
Scarcity of water
Legal requirements
Competition from Pepsi

Activity - Opportunities
Identify the factors that affect the international business opportunities.
Answer
International business opportunities depend on a number of factors. In some countries,
it would be much easier to start up a business and continue than in others countries.
Further, flexible trade policies would enhance the process of buying and selling among
the willing parties. Economic growth is another important factor that affects
international business opportunities. A high economic growth would enhance the
purchasing power of buyers and increase the number of suppliers.

1.2.2 Challenges
Creating the appropriate environment is very important when designing and running an
enterprise. The enterprise should be designed in a manner that encourages the needs of
the environment as well as the entrepreneurial behaviour. When starting a new
entrepreneurial venture, the entrepreneur faces many challenges that have to be taken
into consideration when designing and running an entrepreneurial venture.
Knowledge
When starting an entrepreneurial venture, there may be several challenges to
overcome. Especially when moving from idea generation to implementation, the
entrepreneur face many challenges.
Challenges in designing
It requires lot of hard work in planning and conducting research on the
entrepreneurial venture;
It should have favourable access to capital, human and technological resources;
It involves high risks in terms of time, money and energy;
It is a time consuming exercise.
Challenges in running
Ability to handle the entrepreneurial experience
Management of cash and time
Creation of a conducive environment for the enterprise
Greater responsibility in managing the enterprise
Adaptation of an appropriate marketing strategy
Be aware of competitor's actions
Transforming a business problem into a business opportunity is a challenge for new
entrepreneurs.
Identifying a problem
Looking for a opportunity in the problem
Solution

Building the opportunity in to a business idea

Integrate solutions to a business plan

Example- Challenges
When creating a new business venture from scratch, entrepreneurs face many
challenges, which include:

Developing the enterprise vision and business idea

Financing the venture
Finding an appropriate business location
Finding right workforce
Attracting customers
Coping with competition
Tracing and keeping up business changes and trends

Activity- Challenges
Identify the global trends that exist around the world.
Answer
Social technologies shape both personal and work life of people all over. Companies
create and deliver value to their customers through social networks.
The use of smart machines and robots has brought an industrial revolution. Robots are
now positioned to perform the work of professionals.
Retaining control over knowledge and information becomes a major challenge due to
mobility of societies.
Financial systems require reforms and redesigning, as customers require alternatives,
businesses require new methods of financing and regulators require change.

1.3 Personal traits & behaviour

As the environment in which entrepreneurs have to deal is uncertain and complex, the
organisation and its environment have to be designed in a way, which encourages
entrepreneurial behaviour. This section aims to give the students an understanding of
various personal traits and behaviours required to design and run an entrepreneurial
venture.

1.3.1 Entrepreneurial personality traits

The organisation and the environment have to be designed in a manner that encourages
effective entrepreneurial behaviour. The environment in which entrepreneurs deal is
uncertain and complex. Therefore, entrepreneurs should possess certain traits and
behaviours to cope up with uncertainty and complexity. Entrepreneurial personality
traits will help to determine the individual characteristics of entrepreneurs.
Knowledge
Entrepreneurial behaviour can be defined as the way in which you uplift the lives of
individuals through the work performance of the organisation, which in turn helps the
organisation to rise. Entrepreneurial behaviour has to be morally and ethically accepted
by the society and such behaviour should help organisations as well as individuals to
accomplish their objectives.
Personal traits include:

Self confidence
Self belief
Self sufficiency
Motivation to achievement
Creativity
Hard work
Commitment

No entrepreneur holds similar personalities, which vary from one individual to another.
However, they should have important inbuilt personality traits if they are to succeed in
the industry. Such personality traits include ambition, being passionate and creative,
perspiration, optimism and leadership.

Example- Entrepreneurial personality traits

Great entrepreneurs possess unique personality traits. They provide opportunities for
others and revolutionise the ways of doing business. Their spirit, determination,
ingenuity, self-belief and commitment are important traits that make them the best in
their field. The names of great entrepreneurs are Henry Ford (From1863-1947), J.P.
Morgan (From 1837-1913), Bill gates and Steve jobs.

Activity- Entrepreneurial personality traits

Identify the skills that most entrepreneurs lack.
Answer
Most entrepreneurs fail to manage themselves and their time. It is due to focusing on
major organisational goals. Entrepreneurs require assistants in their day-to-day
activities.
Entrepreneurs often make quick decisions. They may not have enough time to obtain
and analyse data. Entrepreneurs possess a vision but require employees to execute the
strategy.
Furthermore, entrepreneurs find it difficult to plan and organise organisational
activities due to time limitations.

1.3.2 Entrepreneurial behaviour

Entrepreneurial behaviour refers to the ways of practicing as to how such behaviour
can enrich the lives of individuals as well as the life of firms. Personal traits come from
the individual personality while entrepreneurial behaviours are observed and skills are
developed.
Knowledge
The organisation and the environment have to be designed in a manner that encourages
effective entrepreneurial behaviour. Complexity and uncertainty prevailing in the
environment has made it difficult for the entrepreneurs to understand as to how they
should behave. Therefore, entrepreneurs should possess certain traits and behaviours
to cope up with uncertainty and complexity.

Diagramme- Personal behaviour

Looking for
opportunities

Being able
to handle
risk

Grasping
opportunities
Personal
behaviour

Perseverance

Strategic
thinking

In addition, the following skills can be developed to enhance entrepreneurial behaviour.

Negotiation
Persuasion
Selling
Proposing
Time management
Creative problem solving
risk measurement and management
coping with uncertainty,
social networking

A highly uncertain and a complex environment create a challenge for individuals and
organisations to learn and enhance knowledge and understanding so that they could
build up confidence to tackle uncertainty.

In order to achieve this, you have to move from the narrow paradigm of
entrepreneurship to a wider notion of entrepreneurial behaviour (Allan Gibb, 2002).
Further, he stated that a conducive environment for entrepreneurship and learning
could be developed through stakeholders. Understanding the needs of each stakeholder
would reduce the transaction cost and increase the organisational efficiency that would
intern enhances the future of the organisation.
Example- Entrepreneurial behaviour
The act of creating something new leads to entrepreneurial behaviour. Creating a novel
product, bringing up innovative ideas, application of new methods and creation of a new
computer programme are examples of entrepreneurial behaviour. The desire for change
motivates trendsetters and there is great interest to be different and to change the
status quo. The key to innovation is the behaviour of entrepreneurs.

Activity- Entrepreneurial behaviour

Identify the characteristics of an entrepreneurial process.
Answer
An entrepreneurial process arises at an individual firm level. It is a result of a human
desire. An entrepreneurial process involves a change of status quo. It is a discontinuing
process with dynamism. Each entrepreneurial process is unique from one another.

1.3.3 Entrepreneurial leadership attributes

Entrepreneurial leadership is vital in managing an entrepreneurial venture. It is about
directing, communicating goals, motivating, inspiring and energising subordinates.
Knowledge
According to Kotter, leadership is about creating a sense of direction, communicating
the goals and motivating, energising and inspiring subordinates.
An entrepreneurial leader should have a good understanding of the market in order to
satisfy the needs of customers, which would in turn help in realising the organisational
goals.

Entrepreneurial leaders possess certain leadership attributes. They would take the
initiative, risk, responsibility and demonstrate entrepreneurial creativity to set the
appropriate path for the organisation to succeed.
Sometimes leaders could also be considered as transformational leaders.
Transformational leaders see their role as inspiring and tend to motivate others
towards achievement of goals. It is said that only transformational leadership is able to
change team/organisational cultures and create a new direction.
A transformational leader can be an entrepreneurial leader, as he/she does not see
his/her relationship in terms of a trade where followers are rewarded in exchange of
their services rendered.
The entrepreneurial leader would try to maximise opportunities by applying:
Creative ideas to add value to the business operations
Innovative methods
Diagramme- Path-goal theory

Leadership style

Directive
Supportive
Achievement
oriented
Participative

Leader
effectiveness

Situational contingencies
1. Subordinate
Ability, experience
Self confidence
Locus of control
2. Environment
Task structure
Work group
Authority

As per the path- goal theory of Robert House, an effective leader is one who clarifies
paths through which followers can achieve task related and personal goals. Good
leaders therefore help people to progress along the path removing any barriers and
providing appropriate rewards for task accomplishment. Accordingly, House identifies
four styles of leadership as follows.

Directive leadership
It involves letting subordinates know what is expected of them, giving directions on
how to do tasks, who has to perform it, and scheduling the work to be done and
maintaining the standard of performance.

Supportive leadership

It is about treating subordinates as equal, being friendly and approachable, showing

concern for them by making work more pleasant.
Achievement oriented leadership
Achievement oriented leaders set challenging goals, expect the highest level of
performance and emphasise on continuous improvements.
Participative leadership
It is about involving subordinates in decision making, asking for their opinions and
using them in decision-making.
Leadership is a vital process that encourages entrepreneurs to influence their work
force towards the achievement of organisational goals and objectives. For this purpose,
it is essential for the entrepreneur to build trust and confidence among the workforce
and improve effective communications with them.
Diagramme- Attributes of an entrepreneurial leader

Ability in
identifying
opportunities

Ability to learn
fast within the
uncertainty and
complexity in
the environment

Entrepreneurial
leadership attributes

Ability to take
risk

Ability to
respond to
change

Example- Entrepreneurial leadership attributes

Michael Marks is the founder of Marks & Spencer. Simon Marks is the son of Michael
Marks who subsequently took over the business. Marks & Spencer appeared as a family
run business for many years and dominated by the personality and power of the
founder. Simon Marks had an aggressive attitude towards the business. Simon brought
in new ideas by studying other markets and set strategies for the business. He gave due
consideration to customer needs and trends. Simon was meticulous and gave attention
to detail. Further, he possessed a strong sense of personal control. Simon ideally
followed a top-down approach.

Activity- Entrepreneurial leadership attributes

Explain the importance of inner passion of an entrepreneur for his/her business.
Answer
The passion and enthusiasm are key features of successful entrepreneurship. Inner
passion cannot be taught or learnt through training and development programmes.
Each entrepreneur should possess, maintain and enhance the desire and concern
towards his/her business. It would in turn lead to successful management and growth
of the business.

Activity- Entrepreneurial leadership attributes

What is the difference between an autocratic leader and a democratic leader?
An autocratic leader commands and expects compliance. He/she is dogmatic, positive
and leads by the ability to withhold reward and give punishment. Communication of
such leaders may be primarily top-down in the form of instructions.
A democratic leader consults subordinates on proposed actions and decisions and
encourages participation from them. Such leaders could range from the person who
does not take action without subordinates views to one who makes decisions but
consults subordinates before doing so.

1.4 Entrepreneurial culture

Paying attention to entrepreneurial culture becomes important as it a vital factor in
enhancing an entrepreneurial venture. This section would brief out the importance of
an entrepreneurial culture.

1.4.1 Culture
Culture is a system that shares values and beliefs and guides the behaviour of the
members of a firm. Entrepreneurial culture is important to guide the behaviour of
individuals. The culture begins from the first day on which the entrepreneur starts the
business. It is part of the organisational strategy, which helps it to meet the expectations
of stakeholders.

Knowledge
The culture of the organisation provides a clear vision of what the organisation is
attempting to achieve. The core culture of an organisation comprises values, beliefs and
taken for granted assumptions by the people in that culture. This would therefore,
determine why things are done this way. It could emphasise on values of performance,
excellence, innovation, social responsibility, integrity, customer service and team
working.

The internal culture of an organisation has the potential to:

Shape attitudes
Reinforce common beliefs
Direct behaviour
Establish performance expectations
Motivate employees

Diagramme - Observable culture

Stories

Routines and
rituals

Core culture

Heroes

Core values- beliefs

about the right way
to behave

Symbols

The observable culture is part of the culture that people see and hear when they walk
around the organisation as a visitor. It is the way people dress, how they arrange their
office, the cars they use, how they behave towards one another and how they address
one another.

These would consist of the following.

Stories
The oral histories and tales told about dramatic sagas and events of the organisations
life amongst members.
Routines and rituals
These are planned and spontaneous ceremonies and meetings that celebrate important
occasions and performance accomplishments.
Heroes
Heroes are people singled out for special attention and whose accomplishments are
recognised with praise and admiration amongst other members.

 Symbols
Symbols could include the use of language and other non-verbal expressions to
communicate important themes of an organisations life.

Diagramme Culture, environment and strategy

Organisation

Environment
Strategy

Culture filters
information
Information
Organisation

Environment

Strategy

Culture
limits
choice of
strategy

Culture is able to sort out and interpret important information of the environment.
Furthermore, it filters a variety of strategic choices.

Example- Culture
Novelis offers unique rolled aluminum products and is the market leader. The corporate
culture of Novelis guides all what the company does. The products of Novelis represent
the unique characteristics of their corporate culture. The corporate culture of Novelis
provides evidence on the value created for customers. Furthermore, the corporate
social responsibility towards the employees and society proves the same. Novelis
believes in continuous innovation in quality products for future success. The company
attempts to create leaders who would make that happen.

Activity- Culture
Identify the weaknesses that could exist in an entrepreneurial culture.
Answer
Inadequate motivation would lead to a poor entrepreneurial culture. Generating
financial returns should not be the only motivation for an enterprise. Apart from
financial success, the employees require other types of motivation to be proud of what
they do.
Lack of focus is another weakness that could exist within an entrepreneurial culture.
Such enterprises do not have and or do not follow a formal business plan. As a result,
the employees would not be aware of the priorities of the business and its goals.
Departmental autonomy would lead to a poor entrepreneurial culture. When
departments become independent from one another, employees of each department fail
to realise that they thrive to achieve a common goal.

1.4.2 Creating an entrepreneurial culture

Culture is a very much essential component for any organisation to prosper. As culture
guides the behaviour of individuals, it is imperative to share right attitudes and values
among all the people in the organisation. The entrepreneur should have the ability to
create a culture, which is entrepreneurial to remain successful.

Knowledge
An entrepreneurial culture is a system that shares values, attitudes, beliefs, norms and
expects every member to behave accordingly in case of environmental uncertainties
and competitor threats. Culture reflects the values of the entrepreneur and helps to
socialise the workforce of the business venture. Further, it teaches as to how the
business should deal with customers, how to treat each other, job responsibilities and
how to fit in and be a successful employee to the organisation.

For the culture to be entrepreneurial, the following have to develop within the entity.

Treat every individual with respect

Each individual of the organisation should be treated equally and trust should be
developed for the creation of a proper base for a sustainable corporate culture.

Health of employees

It is necessary to encourage employees to be healthy, e.g. the organisation could provide

health insurance to employees.

Effective communication

It is important to create an environment where the people could interact with each
other.

Conducting off-site meetings to discuss the progress of the organisation and to

share business plan

Once a healthy culture is created, it has to be closely monitored. To maintain the

entrepreneurial culture, the following steps could be taken.

Allow employees to grow together so that they could share their knowledge and
learning;
Allow the culture to grow without trying to control it;
Employees should be appreciated and treated well. Politeness and friendly
atmospheres could make them feel that they are part of the organisation.

Benefits of having an entrepreneurial culture

The organisation would have an efficient and a loyal set of employees. When the
employees are treated with respect, they tend to give their level best to the
organisation.

Greater innovations by letting the workforce grow in a comfortable, open

environment that gives the freedom to come up with creative and innovative
ideas.
The workforce would be motivated towards achieving their goals as they are
rewarded for their performance.
Autonomy could be enjoyed by leaders and managers.
People in the organisation have the opportunity to interact, share and support
each other in generating positive returns.

Example - Creating an entrepreneurial culture

Chrysler had a bad period during 1990s with out of date products and poor customer
service. Further, the company was facing high costs and the market share was falling.
The president of the company during that time had a clear vision to be the technology
and quality leader in trucks and cars. The cultural change of Chrysler provided for a
clear vision of what the organisation was attempting to accomplish allowing individuals
to rally around the vision and work hard to support and achieve it. The new ideas and
values brought in by the employees of a small company acquired by Chrysler assisted in
its recovery. After a period of four years, Chrysler was able to make profits. The
company made use of the same employees but used different ways to work.

Example - Challenges
When creating a new business venture from scratch, entrepreneurs face many
challenges, which include:

Developing the enterprise vision and business idea

Financing the venture
Finding an appropriate business location
Finding right workforce
Attracting customers
Coping with competition
Tracing and keeping up business changes and trends

Activity- Creating an entrepreneurial culture

Identify the difficulties in developing an entrepreneurial culture.
Answer
In most instances, people fail to recognise the importance of entrepreneurship. Some
entrepreneurs are reluctant to take risks. Some societies always require assistance to
perform tasks from various bodies such as the government, tax authorities etc. There
could be cultural and religious barriers that may hinder the development of an
entrepreneurial culture.

1.5 Creativity & innovation in entrepreneurship

The number of entrepreneurs have increased over the years and they have been
identified as the creative destructionists of products or services. Entrepreneurs bring
about new innovative ideas and methods thereby making the previous ideas or methods
obsolete. This could results in the closure of some companies working with old ideas
and methods.
1.5.1 Creativity & innovation
Creativity and innovation help entrepreneurs to bring novelty to products and services.
Innovation begins with creative ideas. Creativity is the ability to bring something new
through imaginative skills. New ideas would be generated by combining, evaluating,
changing and reapplying current ideas. It is an attitude, which accepts change and
newness.
Knowledge
Creativity is an ability that enables individuals to think differently by imagining or
inventing something. New ideas would be generated by combining, evaluating, changing
and reapplying current ideas. It is an attitude that accepts change and newness. In
addition, a long process involves a lot of hard work, dedication and commitment.
Moreover, ideas should be continually improved to develop solutions and come up with
better products or services. Essential componenets of creativity includes expertise,
motivation and creative thinking skills.
Creative results could be generated from the following methods.

Evolution

Evolution involves making improvements to the product or service through previous

experiences, e.g. the automobile industry, which brings systematic improvements to
new models based on previous models.

Revolution

Revolution brings a complete change through new methods, conditions or substitutes.

Synthesis

Synthesis involves the combination of two or more ideas.

Reapplication

Reapplication involves discovering how a new look could be given to previous methods.
Direction change
This is where the focus is changed on one direction to another.
Innovation could be in any form and deals with new product and process designs, production
methods and new ways of managing the firm. Innovation involves a lot of analysis.
Furthermore, innovation is now part of business strategy and entrepreneur should have
a strategic vision as to how the new venture would be developed.
Innovation helps to create more value by converting ideas into valuable products. For it to be
successful, the innovator should carefully look, ask, listen, and then analyse as to how
the innovation should address the available opportunity.

Example- Creativity & innovation

Apple Incs iPhone 5c and 5s came with new casing and began to create new features,
that in turn encouraged consumers to change their understanding of the products
possibilities. iPhone came out with better versions of iPhoto, iMovie, GarageBand,
numbers, pages and key notes. By adding such features, it encouraged customers to
meet their needs successfully.

Activity- Creativity & innovation

How would an enterprise overcome the barriers to creativity and innovation?
Answer
The first step should be to identify the barriers to creativity and innovation. Most often,
old guidelines and procedures would suppress new idea generation. Entrepreneurs
should always welcome new ideas and encourage change to take place. An enterprise
should establish an environment that would value, consider and execute new ideas. It
would generate trust and passion for creativity. Moreover, the capacity for innovation
and creativity should have a measuring system. The leaders of the enterprise should
always have positive attitudes towards innovation and creativity.

1.5.2 Challenges to entrepreneurial learning and understanding

There is a challenge to individuals and organisations to learn and enhance knowledge
and understanding so that they could build up confidence to tackle uncertainty. In order
to achieve this, you have to move from the narrow paradigm of entrepreneurship to a
wider notion of entrepreneurial behaviour (Allan Gibb, 2002).

Knowledge
Learning could be facilitated through better relationships with stakeholders. It gives an
opportunity to the entrepreneur to learn from customers, suppliers, banks, peers,
competitors and the government. Furthermore, there are challenges related to the
entrepreneurial approach to learning.

Challenge one is related to the entrepreneurial approach to learning (Allan Gibb,

2002) which includes creating the learning environment to learn key aspects of
how entrepreneurs way of life would change. When starting your own business
venture, you would have to move from present employment to self-employment,
which would bring greater freedom, autonomy and responsibility.

Challenge number two would be sharing of cultures and values. Therefore,

different actions are required to suit the situations. Hence, relationship building
becomes important in building up trust and confidence.

Challenge number three requires behaviours, skills and attitudes to be enhanced.

Behaviours such as looking for opportunities, grasping these opportunities,
strategic thinking and risk taking could be observed while skills are developed.

However, the challenge is to create a learning environment to practice such

behaviours and develop skills.

The fourth challenge is to create the organisational environment that is

conducive to entrepreneurial learning. The next challenge is to develop the
learning to learn capacity. Entrepreneurs should learn to learn from
stakeholders so that efficiency could be enhanced. Sensitivity to context is
another challenge that involves adapting to different contexts where
entrepreneurial learning could be introduced. The first step is to re-examine the
customer base to identify the needs. The final challenge deals with how the
entrepreneurial experience would add value.

Example - Challenges to entrepreneurial learning and understanding

Coca-Cola carries out training programmes for their leaders across every level on a
regular basis. The company intends to build up feedback and coaching skills of their
managers. The training focuses on developing plans for leadership and managerial
skills. The University Talent Programme (UTP) attempts to attract and retain a good set
of employees. UTP is a three-year programme that gives graduates the chance of
working at Coca-Cola. The training and development programme of Coca-Cola is called
'Coca-Cola University and provides training for all employees. The training takes the
form of classroom and elearning. Through training, Coca-Cola intends to build
leadership, personal development and functional expertise of their employees.

Activity- Challenges to entrepreneurial learning and understanding

Identify different learning styles that could exist among entrepreneurs.
Answer
Theorists: They require logical argument and seek understanding by taking an
intellectual approach. Theorists think in terms of equations and are not interested in
practicality.
Pragmatists: They are not interested in theory but rather in the direct link with practical
problems. Pragmatists require practical examples to reinforce the theory.
Reflector: They observe phenomena, think about it and choose how to act. Reflectors
attempt to understand the theory in their own way.
Activists: They require active problems and like to deal with practicality. Activists do
not have patience with theory.

Mini test
MCQs
1. Which of the following factor is not considered under the planning stage?
a.
b.
c.
d.

Identifying and evaluating opportunities

Preparation of a business plan
Analysis as to how the business gives a competitive edge
Gathering of resources

Answer
Correct answer - d
Only answer d is not taken into consideration under the planning stage. Gathering of
resources is considered at the beginning of implementation stage once the planning
stage is complete.

2. An important factor in creating an entrepreneurial culture is:

a.
b.
c.
d.

Recruitment of young employees

Treating every individual of the organisation with respect
Allocation of multi-tasks to employees
Encouraging long working hours

Answer
Correct answer - b
Answer b is an important factor in creating an entrepreneurial culture as it helps the
organisation to develop a sustainable corporate culture.

3. Which of the following statement is not true?

a. Successful entrepreneurs are inspirational and motivational leaders.
b. An entrepreneurial leader maximises opportunities by applying innovative
methods.
c. To prosper, an entrepreneurial leader should be risk averse.
d. Leadership attributes differ from one person to another.

Answer
Correct answer - c
Statement c is not true as an entrepreneurial leader should have the ability to take
risks when developing, managing and enhancing the entrepreneurial venture.

Short questions
1. Explain the importance of developing a business plan.

Answer
A business plan is a document used by organisations to plan the specific details of their
activities. The main purpose of a business plan is to provide a clear direction as to what
the business intends to achieve over time.
Importance of a business plan:

It helps to understand what improvements are required for the business.

It helps the organisation to adapt to the changes in the market place as well as
trends.
It gives the organisation a sense of direction.
It provides boundaries for the firms direction.
It helps to attract finances for the business as it provides information as to
whether the organisation has the potential to make profits.
The business plan gives the opportunity for investors to review data and
information to get a better view of the business.
It could be used to create motivation as it gives the possibilities of reaching the
desired vision.
It helps the entrepreneur to develop a cohesive strategy.
It helps the entrepreneur to review weekly the tasks and activities to be done so
that he/she could be on the right track.

2. What factors should be taken into consideration when identifying business

opportunities?

Answer
An opportunity is a situation that exists or which we bring into existence or a situation
that could occur in the future. There are many opportunities in the market place and it
is essential to identify which opportunity would give us better results than the rest of
opportunities.
Following are some of the factors that could be taken into consideration when
identifying good business opportunities.

Stability of the company in associating such business opportunity

Assessing the products or services offered by the company

Seeing whether the opportunity is related to the business offering

Evaluating whether such opportunity helps the organisation to offer

something that is demanded or desired by consumers

Assessing whether business opportunities have well defined systems for

reaching target customers

The return expected

It is also important to assess the return you would receive by exploiting
particular business opportunities.

Scenario based question

Tec Inc. is a business that manufactures fabric paint. The company was formed some
years ago. It purchases all its raw materials from local suppliers. Due to infrastructure
development in that particular region, it has now become a popular residential area.
Until recent past, Tec Inc. was able to manage its waste and garbage successfully
without any damage to the environment.
Excessive demand for fabric paint has resulted in more production of various types of
paint. However, Tec Inc. has now failed to manage its waste successfully. In the recent
past, the residents of the area had made a complaint with respect to the waste and
garbage being dumped to the environment.
Tec Inc. is in the growth stage of its business with great amounts of cash and profits
flowing into the business. A member of the trade union of Tec Inc. is also a member of
the local environmental council in the area where Tec Inc is situated. Customers of Tec
Inc. place great value to the products offered by the company.

Required:
Assume that you are an external consultant to Tec Inc. and you are required to analyse
the key stakeholders of Tec Inc. and recommend strategies to be taken into
consideration with respect to stakeholder analysis.

Answer
The key stakeholders of Tec Inc. could be analysed with the use of Mendelows Power
interest matrix.
The trade union representative would have a great interest in the business with respect
to job security. Further, he would have high power due to his membership in the local
environmental council.
As the trade union representative has high power and high interest, he should
participate and involve in discussion and decision making with respect to the views of
both employees and the local environmental council.

The residents around Tec Inc. have high interest as the dumping of waste and garbage
to the environment has resulted in pollution. However, they have low power to affect
Tec Incs operations.
The residents should be kept informed through education and communication to ensure
that their interest does not allow them to gain power.
The customers would have high power as they could switch to other suppliers if they
are unsatisfied with the products of Tec Inc. However, it is unlikely that the customers
would have high interest in the activities of Tec Inc. as long as they are happy with the
quality and the price of the product.
The customers should be kept satisfied by communicating to them the future expansion
of the business and hence, how it would add value to product range. This would avoid
the customers taking more interest in the business activities even if they hear of any
pollution.

2 Business Behaviour & Global Environment

This section of the module will focus on the factors, which affect general business
behaviour in a constantly changing global environment. To survive in the industry, it is
crucial for a business to behave ethically and responsibly.

2.1 Business behaviour of organisations & factors influencing behaviour

This section highlights the importance of having good business practices and the factors
influencing general business behaviour. It is important to have an in depth knowledge in
these key areas when managing an organisation.

2.1.1 Business behaviour

Business behaviour can be defined as the way in which the business acts in the
environment in pursuing its goals and objectives. In order to gain public respect and
confidence, business organisations have to behave in a responsible manner.
Knowledge
To exist in the environment, it is imperative for businesses to behave in an ethical
manner. Application of favourable business practices involves the use of appropriate
codes of conduct with respect to the environment, labour and the public. Codes of
conduct have been introduced to set rules for good business behaviour. The behaviour
of the organisation has to be transparent to all stakeholders. Further, many
organisations have been formed to monitor the behaviour of companies. In addition,
there are organisations that provide their information through an environmental
report.

Stakeholders pay more attention to the following areas where businesses could behave
in an unethical manner.
Labour/employee issues
Environmental issues
Preservation of natural resources

Ethics and social responsibility

Ethics is concerned with morally right or wrong decisions made by individuals and
organisations. Society, based on its prevailing values, would judge the behaviour of
organisations.

Social responsibility is the need for an organisation to think beyond its immediate
shareholders when making decisions. It calls for organisations to maximise all the
positive impact on stakeholders while minimising negative impact.
An organisations approach towards social responsibility would be judged by the extent,
to which it makes:
Its economic duties - contribution towards GDP (Gross Domestic Product),
employment;
Its legal duties - being in line with the law of the land;
Its ethical duties;
Its philanthropic duties - donations and social welfare

Benefits of being socially responsible include the creation of a sustainable enterprise. It

also helps the organisation to carry out its activities continuously. In addition, it builds
reputation and support of stakeholders. By gaining support from all the stakeholders,
the organisation could perform better. Moreover, it attracts socially conscious
customers who are willing to pay a premium price as well as socially conscious
investors. Further, it could be used as a marketing tool and as a way of differentiating
product offering.
However, there are drawbacks of being socially responsible. These include higher cost
structures as the organisation would have to incur additional costs to engage in socially
responsible activities.
It also results in lesser returns to shareholders as money is diverted to social projects,
which makes it difficult to maximise shareholders wealth.
In addition, the firm may keep away from markets for ethical reasons or price their
products to be more accessible for customers, which would in turn give the firm lesser
returns.

Example - Business behaviour

Starbucks practices corporate social responsibility by taking action to reduce water, by
using a dipper well, which runs at a very low pressure. This has helped the company to
balance water conservation. It also offers a ten cent discount to customers who bring
their own reusable cups and provide free coffee grounds for those who wish to use
them for compost that would in turn encourage their customers to be more
environmentally conscious.
The commitment of the Body Shop towards human rights has influenced how the
company deals with their suppliers all over the world. The Body Shop builds up close
relationships with the suppliers to ensure that both the company and their suppliers
give top priority to ethical trading. The Body Shop strongly believes that ethics is the
way to carry out business. Through the ethical trade programme, the Body Shop works
with suppliers to enhance the working conditions of the employees who make their
products. The Body Shop attempts to implement their supplier code of conduct at the
workplaces of the suppliers.

Activity- Business behaviour

Explain the relationship between business ethics and corporate responsibility.
Answer
Business ethics is all about applying ethical values and corporate responsibility is the
expression of those ethical values with respect to key business strategies, loyalty and
duties towards stakeholders. Corporate responsibility focuses on what the organisation
is responsible for, to whom and why it is responsible. Corporate responsibility is
supported by the ethical values, policies and procedures designed.

2.1.2 Factors affecting general business behaviour

Many factors affect the general business behaviour of organizations. They include
include consumer behaviour, cultural, economic, political and environmental factors.
Before making business decisions, it is imperative for organisations to be aware of the
factors affecting their business behaviour so that it would help them adopt a pro-active
approach to changes taking place.
Knowledge
In order to practice good business behaviour, it is essential for organisations to identify
the factors affecting their general business behaviour.

Diagramme- Business behaviour

Economic
factors
Political
factors

Cultural
factors

Consumer
behaviour

Business
behaviour

Environmental
factors

Consumer behaviour
This refers to the way in which consumers act when purchasing goods or services. It is
difficult to predict consumer behaviour as it is influenced by cultural, social,
psychological and personal factors. Cultural factors include values, beliefs and
preferences while social factors include activities and beliefs of family and other
reference groups. Motivation, beliefs and attitudes come under psychological factors
and finally occupation, lifestyle, age fall under personal factors.
It becomes essential to understand the buyer behaviour to cater to the market.
Businesses should find out why, how, when and on what conditions consumers
purchase their product or service. According to the buyer, business behaviour has to be
adjusted.

Cultural factors
Culture consists of shared values, beliefs and attitudes and guides the behaviour of
individuals. Culture would influence the way customers think and behave. Therefore,
businesses should behave in a manner that is accepted by the particular culture of that
society.

Economic factors
Economic conditions differ from one country to another. For example, when there is an
economic recession in a country, businesses would not focus on luxury needs. Rather
they would try to offer basic needs at a reasonable price. Changes in interest rates,
inflation and wage rates also affect business performance.
Political factors
Political factors would facilitate certain industries while discouraging some others.
Political instability would discourage business persons to engage in business activities.
For businesses to flourish, political stability is necessary. Some governments would
bring favourable policies to encourage certain industries. For example, a policy could
discourage imports in a bid to protect local business activities.
Environmental factors
Natural resources are a significant factor in determining business behaviour. For
example, an entrepreneur would build a hotel where there is natural beauty. Thus, it
becomes important to know about the environmental trends to make business
decisions. Environmental factors affecting businesses could be either internal or
external. Internal factors could be leadership, culture of the organisation and
manufacturing. However, these internal factors are within the control of the entity when
compared to the external factors like resources in the economy, political stability of the
country, social environment, government rules and regulations and actions of
competitors.

Example- Factors affecting general business behaviour

Social trends could influence the behaviour of business through an impact on the
demand for the organisations products. Ageing population is a known fact in the UK,
and this has caused to increase the costs for organisations that are committed to
pension payments. On the other hand, the demand for toys is decreasing while the
demand for sheltered accommodation and medicine are increasing.
The EU takes many different initiatives to improve the social environment. They design
schemes to improve health and safety of working environments, improving health,
creating better jobs, promoting research and ensuring social benefits to people who
travel between countries. An important objective of the EU health strategy is to reduce
health inequalities. The EU attempts to develop a health information system to provide
a better understanding of health inequalities.

Activity- Factors affecting general business behaviour

1. Explain the importance of an environmental analysis for a business.
Answer
A business needs to understand the current position of its environment and how it may
develop in the future so that a strategy could be developed to help it achieve a strategic
fit within its environment.
Understanding the environment is crucial as it is both a source of threats and
opportunities. The strategy should ideally use the firms resources and competencies to
capilalise on opportunities and neutralise threats.
2. Explain the meaning of scenario planning and list out the steps involved in it.
Answer
Scenario planning helps firms develop future orientation of their business
environments. In doing so, strategy could be developed well in advance.
Scenario planning involves:
Defining the scope of the scenario, i.e the extent of the products and markets to be
considered.
Identifying the major stakeholders. The stakeholders in this case are likely to drive
change in the future and would have the greatest influence on events.
Identifying the trends. Looking at the past and the present, the kind of trends
developing in the PESTEL factors.
Identifying key uncertainties. These events or points cause trends to alter their basic
patterns.
Construction of initial future scenarios based on the trends and uncertainties. These are
often given catchy names by strategists.
Checking for consistency and plausibility. This is the process of re-examining the initial
scenarios constructed to assess if they make sense. For example, in a single scenario, it
may not be possible for there to be high interest rates and low inflation.
Developing learning scenarios. Out of the remaining scenarios, management attempts to
understand the scenarios better. This could involve doing future research to flesh out
the scenario.
Developing mathematical models to understand and forecast the scenarios.

Developing strategic courses of action and contingency plans to be prepared in case the
scenarios materialise.

2.2 Resources, productivity & managerial competence

Resources are scarce (land, labour and capital) and have to be used effectively to satisfy
unlimited needs and wants of people. This section deals with the role of resources,
productivity and managerial competence in enhancing business performance.

2.2.1 Resources & productivity

To enhance business performance, the business should use scarce resources efficiently.
Productivity is the output per unit of input. When productivity grows, organisations are
able to generate more returns so that they will be in a position to satisfy their
customers, suppliers, employees, bankers, shareholders and government.
Knowledge
Productivity is a major determinant of the living standards and explains as to how the
available resources are used in an economy. High productivity generates many benefits:
it enhances business and trade performance, improves competitiveness, decreases
average costs, brings greater profits and ensures economic growth.
The economy grows when productivity grows. Production performance could be
measured from the productivity ratio (real output/real input).

Diagramme - Benefits of increasing national productivity

Improves
living
standards

Benefits of
increased
national
productivity
Improves
business
profis

Contributes to
social and
environmental
programms

Efficient production generates greater income. It is measured by the following formula:

Formula Real income
Real income = Real output - Real input
Due to the increase in national productivity, the living standards of people go up as
better real income improves their ability to purchase more goods and services,
education, housing and enjoy leisure.
Human resource is an important component of any business, which should be managed
tactfully as it is a crucial resource for the success of the venture. Human resource
management is necessary as it facilitates training and development, provides expertise
in managing change, recruitment, selection and rewarding employees.

Management competence
To obtain a competitive edge over rivals, it is vital to have a competent management.
Moreover, corporate entrepreneurship is also essential in enhancing organisational
performance as entrepreneurial activities help the firm to come up with innovations,
products and methods.
For the management to be competent, new knowledge and skills have to be learnt and
the policies of the organisation should encourage innovations. Technical, human and
conceptual skills are essential to be competent.

Technical skills - Technique knowledge and proficiency

Human skills - The ways of managing people
Conceptual skills - The ways of formulating ideas to solve problems

Any organisation could acquire or develop resources and competencies over time.
However, those who already possess it would have a competitive advantage over
others. Thus, strategy should now be developed taking into account those existing
resources and competencies. Organisations should ideally look for environments in
which they could stretch their resources and competencies. This could also refer to an
inside out view.

Example - Resources & productivity

Many companies stretch their competencies into diverse market applications.

3M has competencies in coatings helping them to move into diverse markets

such as car polish, tins, etc.

Carl Zeiss has competencies in lenses helping them to move into markets such as
cameras and eyewear.

Honda has competencies in high performing petrol engines helping them to

move into markets such as bikes, cars, motor boats, generators and airplanes.

Vital resources include natural resources, human resources and capital as they are
required for production of goods and services. Labour productivity is one way in which
productivity could be looked into. Labour productivity is the measure of output
produced per worker. The worth of a worker could be measured by taking into
consideration the amount of output produced by each worker. There is a direct
relationship between the productivity and the real wage of workers. Productive labour
leads to higher wages and higher standard of living. In mature economies, a high
standard of living mainly comes from the improvements in labour productivity.

Activity - Resources & productivity

1. Explain the importance of human resource planning.
Answer
Human resource planning is a rational and logical approach to the recruitment,
retention, utilisation, improvement and disposal of human resources. It attempts to
ensure the right quantity of people with the correct skills and attitudes are present to
help implement the firms future business plans.
2. Explain the meaning of a resource audit and list out the resources that an
organisation uses for its operations.
Answer
A resource audit reveals the gaps in resources and limiting factors of the organisation.
Inputs materials, cost, availability, wastage, suppliers
Management structure, skills and competencies, reliability, growth prospects
Human resources skills, creativity and innovation, compliance, size
Finance sources of finance, levels of debt and equity, liquidity, cash flows
Organisation structure and culture
Fixed assets useful life, depreciation rate, cost, revaluation, condition
Intangible assets copyrights, brand image, goodwill
3. The competitiveness of any organisation depends on unique resources and core
competences. What are the tests for identifying a core competence?
Answer
The organisations core competence helps it to outperform its competitors. Tests for
identifying a core competence include the following questions:
Does it provide access to a variety of markets?
Does it contribute to the value enjoyed by the customer?
Is it difficult for the competitor to imitate?

4. Human resource is an important element for any organisation. Explain the meaning
of human resources and the methods used in the training and development.
Answer
Training focuses on acquiring knowledge and skills in order to achieve specific goals. It
helps employees perform their current jobs better. Development is about enhancing
potential so that employees could undertake future challenges.
Methods used to train and develop human resource include:

Workshops
Seminars
Special assignments and projects
Class room lectures and short-term university courses
Mentoring
Simulations
Apprentice programmes

2.2.2 Issues related to productivity

Workforce productivity could be defined as the number of products or services
generated by a worker within a given time. There are many factors that influence the
workforce productivity and ultimately the overall performance of the organisation. This
section focuses on strategies to overcome productivity issues.
Workforce productivity has to be monitored and developed accordingly for better
performance of the organisation.

Knowledge
Workforce productivity could be measured for any organisation, process, country or
industry. It refers to the amount of goods or services produced by a worker in a given
amount of time. Organisations face productivity issues that have to be tackled on time as
ignoring them could lead to a closure of the business.

Diagramme - Productivity issues

Personal
issues

Insufficient
equipment

Productivity
issues

Use of
internet

Absentiesm

Employee personal issues - Employees could have many issues such as legal issues,
which could affect workforce productivity as they find it difficult to concentrate on their
work. The workers facing such issues would not be in a position to give their level best
to the organisation. Workers who have cash problems might even try to steal the
companys assets to solve their issues.
The use of the internet and email during office hours - Personal usage of internet and
email could cause productivity issues. Hence, adequate policies should be implemented
on the usage of email and the internet and disciplinary action should be taken in the
case of misuse.
Absenteeism - When employees are absent, the organisation is unable to perform its
activities as scheduled, which would affect its productivity and profitability. Getting late
to work and taking breaks could also lead to drop in productivity.
Equipment - Inadequate tools and equipment would make it difficult for workers to
perform their work accurately. For example, there could be breakdowns and delays.

Example - Issues related to productivity

The health of employees could also have an impact on a firms productivity. Health
conditions should be taken into consideration as poor health leads to poor performance
and absenteeism. Productivity losses from health and family problems of employees had
caused U.S employers to spend $1,685 per employee per year or $225.8 billion annually.
Activity - Issues related to productivity
Is technology an important factor that affects productivity?
Answer
Technology has become an important element that enhances the productivity of
workers. More investments in new software, high tech computers and speedy internet
enhance workplace performance.

2.2.3 Overcoming productivity issues

Lower productivity affects the entire organisations performance and give lower profits.
If productivity issues are not addressed, the long-term survival of the organisation
would be questionable.
Knowledge
To remain successful, it is imperative to address productive issues and take adequate
actions to overcome them. Improving productivity is a vital goal in any business venture
and it is important to be aware of the factors, which influence individual and team
performance.
Foundations of productivity (talented and innovative employees and effective leaders
and managers), direction and guidance factors (corporate strategy, defined team goals,
clear priorities and effective reward systems), support factors (support for innovation,
support for sharing knowledge and skills, team member support and support for
identifying barriers to productivity) and skills, communication and information factors
influence team and individual performance.
The following strategies are useful in overcoming productivity issues.

Preparation of flexible schedules - Flexible work schedules have to be prepared

to avoid monotonous work.
Minimising of work place stress A friendly atmosphere has to be created to
work in harmony; proper training has to be provided with good site
management.
Proper monitoring of the work - This involves adequate assistance and guidance.

Creating a suitable working environment The physical work environment must

be suitable for the workers to perform their tasks.

Example - Overcoming productivity issues

Tesco faced problems in range, quality and services. In order to overcome them, Tesco
focused on improving productivity as a strategy. Further, they began to improve store
productivity so that unit costs could be reduced and thus profits improved.

Activity- Overcoming productivity issues

Identify steps that could improve productivity by changing the habits of individuals.

Prioritisation of work would assist in focusing on the most urgent tasks first.
Preparing of a file organisation system and having a back up of all the work.
Minimising the frequency of checking emails.

2.3 Growth of companies

A company is said to have grown if it yields positive cash flows and performs at a higher
rate than the rest in the economy. New businesses can start from scratch and developed
with experience, hard work, proper management of resources and commitment. This
section focuses on the methods of growth of companies.
2.3.1 Methods of growth
There are various methods of growth. Organisations can decide to go for a merger or
acquisition to get more benefits and minimise their disadvantages. For synergy
purposes, they acquire or merge with another.
Knowledge
A company grows when it generates significant revenues and positive cash flows at a
faster rate than the overall economy. Growth companies would have viable
reinvestment opportunities for their retained earnings.
Methods of growth include:

Building new businesses from scratch and developing them

Acquisition of companies - This involves the acquisition of existing businesses
from their current owners.
Merger of two or more separate businesses

Spreading costs and risks by joint ventures and other forms

Organic Growth
Organic growth is also known as internal development. It is a primary method of growth
for many organisations and is achieved through the development of internal resources.
Reasons for pursuing organic growth include:
Learning
The best understanding of the product and the market could be gained by engaging in
the process of developing a new product.
Innovation
This might be the only sensible way to pursue technological innovations and exploit
them.
Non-availability of a suitable target for acquisition
Organic growth could be planned meticulously.
Convenient for managers as organic growth could be financed from the
companys current cash flows, without raising extra money.
Same style of management and corporate culture could be maintained.

However, there are problems with organic growth as it takes a long time to descend a
learning curve. In addition, barriers to entry would be harder to overcome. For example,
a strong brand image has to be available. Further, an organisation has to acquire the
resources independently and organic growth may be too slow for the dynamics of the
market.
Organic growth is more appropriate for market penetration, product or market
development.
Acquisition
Acquisition could be considered as a corporate action where the company buys in the
ownership stake in the target company. Acquisitions are paid in cash, acquiring the
companys stock or by a combination.
Acquisitions could be friendly or hostile. In the case of friendly acquisitions, agreements
for the acquisition are explained to the target company and in hostile acquisitions, it is
not necessary to have the same agreement and the acquiring firm tries to obtain a large
stake for obtaining a majority stake.
Mergers involve the combination of two or more companies with the intention of
forming a new company. Both mergers and acquisitions are important aspects of
corporate strategy, corporate finance and management.

The benefits of mergers and acquisitions are as follows:

Marketing advantages, e.g. the existing company could buy in a new product
range from the acquiring a company.
Production advantages, e.g. the ability to buy in technology and skills and
achieve high production capacities.
Better finance and management, e.g. the experience of quality management team
in the acquired company and cash could be obtained if the acquired company is
liquid.
Ability to spread the risk through merger or acquisition
Barriers to entry could be overcome.

Problems with acquisition and mergers include:

It would be expensive if it is resisted by the target company.
Sometimes the customers of the target company might resent a sudden take over
and switch to other suppliers.
Incompatibility in new products, customers, suppliers, markets and different
operating systems would give additional work pressure to the management
teams of the acquiring company.
It could be driven by the personal goals of the acquiring companys management.

Joint venture
Joint venture involves a business arrangement where two or more people pool their
resources with the intention of achieving manufacturing, marketing and financing
objectives. Each has a share in equity and management of the business.
Even though joint venture provides a great opportunity to share skills, knowledge and
reduce risks, it has distinctive challenges.

Advantages of joint venture

Sharing of costs
Capital would be shared among firms. Hence, new technologies could be
researched.
Risks are shared.
Marketing and other operations can be closely controlled and monitored.
If there is an overseas joint venture, local knowledge can be gathered quickly.
Synergies could be obtained.
For example, the other companys better marketing and distribution facilities
could enhance the acquiring companys production expertise.

Learning could be enhanced.

Knowledge and skills could be shared and learnt.
Ways of improving performance by alliances could be suggested.

Some of the disadvantages of joint ventures include conflict of interest between

different parties, disagreements when making decisions on profit sharing, amounts to
be invested and managing the venture and depending on the circumstance, the partners
may wish to withdraw from the arrangement.

Example - Methods of growth

In 1999, JDS Fitel Inc. merged with Uniphase corp. to form a new company, JDS
Uniphase. Similarly, in 2004, Manulife Financial Corporation acquired John Hancock
Financial Services Inc.
An agreement was signed between Tower Jazz and Panasonic Corporation to form a
joint venture to manufacture Panasonic products.

Activity - Methods of growth

Explain the advantages of inorganic growth.
Answer
Inorganic growth is much faster, where knowledge and risks can be shared. As the
business is already set up, the risk lessens. Further, the firm may not have the
technological knowhow to achieve organic growth and thus takes advantage of
inorganic growth. Inorganic growth reduces competition.
2.3.2 Multinational enterprise
A multinational is an enterprise that produces goods and provides services in many
countries. Multinational enterprises play an important role in globalisation.
Globalisation is the trend towards standardised products, services, tastes and
organisational policies worldwide.
Knowledge
Multinational enterprises perform operations in many countries. They operate a
centralised head office to manage their global activities. Majority of multinationals are
based in the US, Japan and Western European countries.
Multinational enterprises help to boost up the economies of developing countries by
providing employment, international knowledge, skills and offering a variety of goods

and services. Developing countries are more attracted to multinational enterprises as

this helps bringing foreign direct investments into the country.
The following factors encourage globalisation:

Financial factors, e.g. the debt in third world countries could be taken into
consideration. Lenders require the initiation of economic reforms as a condition
of the debt.
Alliances between countries/continents that promote trade and tourism
Legal factors - Trademarks and patents to uplift the development of technology
Trading international commodities in stock markets

Exploitation of natural resources, labour and damaging the traditional cultures are
some of the criticisms against multinational companies.
There are advantages as well as disadvantages regarding multinational companies. The
operations of multinational companies in the host country would increase income,
employment and investment levels. Through multinationals, the country gets the
opportunity to adopt the latest technology, management expertise and increases
domestic traders and intermediaries.
Further, it provides support in improving industries, foreign exchange and helps the
country to be more competitive. Growth of multinationals in the host country also leads
to an economic development and improvements in the balance of payment.
The possibility of transferring obsolete technology to the host country could be a threat
to the economic and political sovereignty. It could also be a monopolist in the domestic
market which uses natural resources of the host country excessively. There would also
be a cash outflow to foreign countries in terms of profits, dividends and royalties.

Example - Multinational Companies

Coca Cola is a US based company that operates in the beverages industry. Coca Cola is a
manufacturer, retailer and marketer of nonalcoholic beverages and syrups. It operates
worldwide with headquarters in Atlanta, Georgia, U.S.A. Coca Cola operates in 200
countries, offers 500 brands, and serves approximately 1.7 billion servings daily.
However, there are controversies and lawsuits in relation to unethical practices and
human rights violations. Coca Cola also has environmental issues. In 2003, there was an
issue with pesticides in ground water and an Indian NGO, Centre for Science and
Environment stated that there were cancer-causing chemicals in Coca Cola and other
soft drinks of the company. They were also criticised for the excessive usage of water,
that had caused water shortages for some of the regional farmers that in turn led to the
closure of plants in that region.
Activity - Multinational enterprise
What are the main features of global organisations? State two examples.
Answer

Global organisations offer one product to the entire world.

Global organisations practice global recruitment policies.
Global organisations may be listed in several stock markets.
Global organisations have one corporate culture.

Examples of global organisations include HSBC and Shell.

2.3.3 Foreign direct investments

This part of the module provides an overview of foreign direct investments. Many
countries have liberalised their policies to attract multinationals to invest. To attract
more foreign direct investments, some countries also lower entry barriers.
Knowledge
Foreign direct investment is a capital investment in a country by a foreign country.
Foreign direct investment could be in two ways: either by purchasing a company in the
target country or by expanding the business in the target country.
Foreign direct investment leads to the economic development of a country where the
investment is made. It would be beneficial for developing economies, as it is an external
source of financing. Foreign direct investment could be used as a market entry strategy
for investors. In recent years, businesses tried to overcome protectionist measures
thereby encouraging foreign direct investment.

Foreign direct investment also facilitates the following.

Transfers of technology
Increasing competition in the domestic market
Human capital development

Inward foreign direct investment also leads to employment and job creation.
Protectionist measures are incorporated to restrict competition and include:
Quotas on the number of items to be imported
Import bans
Restriction on foreign ownership of certain industries
Tariffs
Transfer of technology is in the form of different inputs that cannot be obtained by
financial investments and trading goods and services.
Human capital development - Foreign direct investments provide employee training to
operate the new business.

Example- Foreign direct investment

A Japanese company is building a factory and a supply chain for entering the European
market. This refers to Japanese foreign direct investment in Europe. In such a situation,
the Japanese company makes the overseas investment by setting up a subsidiary in
Europe.

Activity- Foreign direct investments

Identify the drawbacks of foreign direct investment.
Answer
Multinational companies may not share the latest technology they possess with the host
country. Thus, the host country may not enjoy the maximum benefits of the technology
introduced.
Multinational companies are capable of political interference. Due to their power within
an economy, multinationals could attempt to get certain laws and policies executed in
their favour.
Multinational companies are often a threat for small industries in the host country. They
possess large sums of capital, economies of scale and pricing power. As a result, small
industries in the host economy find it difficult to survive in the market.

Global Trends

Demographics shifts

Demographic shifts transform the global workforce.

Global employers face the challenge that, despite a growing global population,
they will soon have to recruit from a shrinking workforce due to an aging
population.

Despite a growing global population, the availability of skilled workers is actually

shrinking, and no longer just in advanced, aging countries such as Japan and
Italy. Now, some emerging markets, such as China and Russia, are also feeling a
demographic pinch.

Population growth, increased urbanization, a widening divide between countries

with youthful and quickly aging populations and a rapidly growing middle class
are reshaping not only the business world, but also society as a whole.

Global power structure

As the world recovers from the worst recession in decades, the rise of
relationships between the public and private sectors has shifted the balance of
global power faster than most could have imagined just a few years ago.

Emerging markets via disruptive innovation, outsourcing, m-commerce and ecommerce

Innovations in technology continue to have massive effects on business and

society. We're now seeing emerging markets become hotbeds of innovation,
especially in efforts to reach the growing middle class and low-income
consumers around the globe

Mini Test
MCQs
1. Social responsibility is judged by the extent to which the company makes its:
a.
b.
c.
d.

Contribution towards GDP and employment

Its legal duties
Its ethical & philanthropic duties
All of the above

Answer
Correct answer - d
An organisations approach towards social responsibility is judged by the extent to
which it makes its economic, legal, ethical and philanthropic duties.

2. Which of the following statement is not true?

a. Consumer behaviour, cultural, political, economic and environmental factors
affect business behaviour
b. Real income is the difference between real output and real input
c. Physical location does not affect workforce productivity
d. Technical, human and conceptual skills are essential for managerial
competence
Answer
Correct answer c
Physical location affects workforce productivity. The workplace atmosphere should be
favourable as it helps to generate higher productivity and hence statement c is
incorrect.

3. Foreign direct investment is:

a. A capital investment by a company in one country into another company in a
foreign country
b. Made to obtain tax exemptions
c. Made to obtain the benefit of cheaper wages
d. Made to acquire raw materials at a cheaper rate
Correct answer - a
Only answer a gives the definition of foreign direct investment while answers b, c, and
d give the reasons as to why foreign direct investments are made.

Short questions
1. Explain the importance of environmental scanning.
Answer
Environmental scanning refers to the macro environment and it deals with political,
economical, social and technological factors that affect business performance, industry
and the market. Environmental scanning becomes imperative due to the following:

It helps to identify opportunities and threats.

It helps to gain competitive advantage.
It helps to identify external forces of change to develop responses to such
change.

It helps to improve short-term and long-term planning.

2. List down the factors to be taken into consideration in the political,

economical, social and technological environment.

Answer

The political and legal environments include common law and government
regulations. Under legal factors, the legal framework becomes important as it
states the basic ways of conducting business, negligence proceedings,
employment law, health and safety regulations, environmental and tax laws.

Economic factors include inflation, exchange rates, interest rates, tax levels and
economic trends.

Social environmental factors include growth, age, geography, ethnicity, social

structure, employment and wealth.
Technological factors consist of technological aspects of research and
development activity and rate of change of technology.

Scenario based question

Furnish Inc. is a well-established furniture manufacturer in the United States. It
manufactures and sells furniture for the last twenty-five years. It caters to both
industrial as well as domestic households, a range of quality office and domestic
furniture types such as genuine leather sofas, coffee/lamp tables, TV stands, wooden
and metal dinning suits, bedroom sets, wardrobes, office cupboards and racks, office/
computer tables and chairs. Furnish Inc. possesses a highly qualified team of designers,
who continuously engage in creative and innovative product designs. Further, the
company regularly invests in training and development of its workforce. They have
created a good image in the hearts of its customers. Furnish Inc. has recently won a gold
award for the quality and design technology of its furniture.
However, the recent financial highlights of Furnish Inc. do not appear to be attractive to
its board of directors, as sales have dropped over the last four years by 10%, mainly due
to the economic recession. The directors of Furnish Inc. are of the view that entering the
Asian market would solve the issue. There is a growing market for furniture in the Asian
region and the competition seems to be intense.

Required:
Assume that you are an external consultant to Furnish Inc. You are required to highlight
to the board, the key external factors that would affect Furnish Incs decision to explore
the Asian market.

Answer
An external environmental analysis would assist Furnish Inc. in understanding major
external factors that would affect its strategic direction. The company could use the
SLEPT framework that focuses on social, legal, economic, political and technological
factors that would affect its operations.
Social
Furnish Inc. has to look into the population trends and its composition to identify the
market requirements. Further, the occupation and lifestyle of people could affect the
demand for furniture.
Legal
Employment laws, governance and safety standards are vital to be taken into
consideration by Furnish Inc. before entering the Asian market.
Economic
Economic cycles, inflation, unemployment, interest and exchange rates, trade barriers
are key factors to be considered by Furnish Inc.
Political
Political stability, political ideology, economic and government policy would affect the
entire economy. Further, government policies should provide a framework to support
businesses.
Technological
Emerging technologies, technology diffusion, and technology transfers would have an
impact on the overall growth in the economy. Technology could result in cost efficiency,
improved productivity and new product development.

3 Factors Affecting the New Ventures

Under this section, objectives of firms, government policies, strategies and corporate
alliances would be discussed. The module will focus on the complex nature of policy
decisions. Changes in policy decisions directly affect operations of business
organisations. They are made to eliminate negative impacts while enhancing positive
impacts. Policy changes can affect the objectives of firms and their strategies.

3.1 Implementation of policies

Policies are essential as they help in decision making. This section provides an
explanation on government policies and the reasons for incorporating such policies.
Policy making has to be considered as an iterative process as it helps to incorporate the
lessons and experience obtained.
3.1.1 Policies
Policy is a principle or a rule that guides important decisions to achieve a desired
outcome. To implement policies, it has to be in the best interest of the country and its
people. Policies should meet the needs and wants of a society. Policies are changed or
revised when there are changes in the government. There has to be communication and
coordination between stakeholders to discuss about challenges and other issues so that
action can be taken.
Knowledge
Policy can be considered as a principle or a protocol. Policies and procedures are very
much essential as they help to direct and guide the workforce to achieve organisational
goals and objectives. The term policies could be in any form. It could be government,
insurance or organisational policies. Government policy would include all the principles
to guide the behaviour of the government while an insurance policy states all the
contractual terms and conditions. Organisational policies state basic principles and
guidelines to guide the actions and behaviours of people within the organisation in
achieving its long-term goals and objectives.
Policy can also be defined as a course of action that provides guidelines for achieving
business strategies and objectives. Policies are incorporated to avoid negative effects
observed in the organisation to obtain positive effects. Business policies state what the
organisations expected goals are and what the business stands for.

Policies are general in nature, identify rules of the venture, explain why it exists, when
they apply, to whom they are applied and the consequences.
Benefits of having documented policies:
They enable the organisation to carry out business operations smoothly;
They provide a better understanding of roles and responsibilities.
They help in reducing the overall risks of the organisation.
They help employees to behave ethically as they set out clearly the guidelines
and directions.
As the environment we live in is rapidly changing, we need to clarify when a policy
requires a change. To guide the operational decisions, policies should be changed
accordingly.
The following should be taken into consideration as policies should respond to new
realities, risks and opportunities:
Where people live
How income is earned
Use of natural resources
Demographic and social trends
Changes in technology
Changes in the economy
Persons initiating a policy should know the right time to review, develop and formulate
the policy. For a policy to be successfully implemented, it requires leadership skills and
expertise. The policy development process can fail if complex social, economical and
political dimensions are not understood.
Example - Policies
Organisations use purchasing policies to describe the principles that should be followed
through the purchasing process to avoid negative effects. Purchasing activities must be
carried out above a certain value to minimise wastage and standardise the purchasing
process.
The health and safety policy of McDonalds clearly specifies that the business should
commit itself towards creating a healthy and safe environment to work. McDonalds
attempts to ensure all employees have the same commitment to build a healthy and safe
environment to work. The employees are taught about accountability for safety. The
managers of McDonalds are accountable to create a safe environment within the
restaurants. They are required to undergo McDonalds safety training and be familiar
with the Health and Safety Act.

Activity- Policies
Identify the disadvantages of organisational policies.
Answer
Policies require a lot of time and effort to design and execute. Moreover, the employees
may perceive that the organisation is bureaucratic. Designing and implementing of
policies are a costly process.

3.1.2 Government policies

Government policies are very much essential in promoting entrepreneurship as they
lead to economic growth and reduce poverty. It is the responsibility of the government
to provide an entrepreneurial friendly environment.

Knowledge
Government policy can be defined as a course of action taken to change a particular
situation. The government uses policies to tackle many issues. When the government
creates policies, it could have an impact on certain individuals, businesses and
industries.
Every government has a tax policy to raise revenue. Such policy could affect businesses
as it affects costs. Environmental taxes and administration of VAT will bring an
additional cost to business entities. Further, monetary and spending policies of the
government affect businesses as well as consumers.
Political policies also could bring changes by varying certain laws. It requires businesses
to respond to such changes. Legal changes include creation of a minimum wage rate to
offer more facilities to disabled employees in the organisation and providing more
protection for consumers.

Importance of having government policies:

Policies to promote entrepreneurship lead to economic growth and reduce

poverty.
They are a better way to promote small businesses.
They provide clear guidelines.

Diagramme - Ways of encouraging entrepreneurship and small businesses

Changes
in tax
policy

Changes
in
regulatory
policy

Promoting
Entrepreneurship
and small
businesses

Access to
capital

Legal
protection

Taxation policy
Taxation policies are used to raise government revenue. Taxation raises business costs
and discourages entrepreneurs and small business ventures. Therefore, it is essential to
have a balance between the objective of raising revenue and promoting
entrepreneurship.
Access to capital
Stating a new business venture requires huge amount of capital, and hence government
should provide support for finding money for start-ups.
Legal protection
It is imperative for the law to protect intellectual property to help entrepreneurs to
thrive. Innovations should be protected through copyrights, patents and trademarks.
Regulatory policy
The regulatory process should be simple to encourage and expand small businesses.

Example - Government policies

If the government regulatory policy could reduce the cost of compliance, it could help
entrepreneurs to grow. Government could take action to provide one-stop service
centers so that entrepreneurs can get necessary assistance and guidance. Further, policy
makers could offer financial incentives for creating new business ventures.

Activity- Government policies

Identify four types of government policy.
Answer
1. Distributive policies do not focus on a large group of people but consider a specific
group. They are relatively cost effective.
2. Redistributive policies are capable of creating a massive change and are expensive.
3. Regulative policies are designed for a particular sector but affect a wide range of the
population.
4. Constituent policies are passed by legislative bodies and form part of legislation. They
are a cost to the entire nation.
The Role of Government

Employee protection

Employment protection legislation (EPL) includes all types of employment

protection measures, whether grounded primarily in legislation, court rulings,
collectively bargained conditions of employment or customary practice.

Governments may enact various legislation for the protection of employees such
as, Employee Discrimination law, Employee Rights law, Health and safety law etc.

Customer protection

The government is responsible for creating marketplaces that are fair, efficient
and competitive for producers, traders and consumers.

It is also responsible for the safety of food products. This includes food labelling
and advertising.

The provincial government is responsible for matters, such as as the conditions

of sale, business practices, public safety and licensing.

Governments can make strict rules and regulations that rectify the unfair trade
practices and protect consumers. Governments can inform the customers about
their rights.

Environment protection

Local governments currently involve with a range of environmental priorities,

including land use planning, infrastructure provision, natural resource
management, cultural heritage preservation, and pollution prevention.

Environmental law is a collective term describing international treaties

(conventions), statutes, regulations, and common law or national legislation
(where applicable) that operates to regulate the interaction of humanity and the
natural environment, toward the purpose of reducing the impacts of human
activity.

Taxation

The purpose of taxation is to provide for government spending without inflation.

Government is responsible for tax collection and tax law enforcement

Investor protection

Investor Protection Acts are intended to protect investors against the

misappropriation of their funds and of most types of securities in the event of the
failure of their broker.

Contract enforcement

The Unfair Contract Terms Act 1977 (c 50) is an Act of Parliament of the United
Kingdom which regulates contracts by restricting the operation and legality of
some contract terms. It extends to nearly all forms of contract and one of its most
important functions is limiting the applicability of disclaimers of liability.

Impact of Government policies on businesses

Governments establish many rules and regulations that guide businesses. Businesses
will normally change the way they operate when government changes these rules and
regulations. Government economic policy and market regulations have an influence on
the competitiveness and profitability of businesses

Market Catalyst

The government can implement a policy that changes the social behavior in the business
environment.

Political Stability

Government policy will always depend on the political culture of the moment. Policy
crafted in a politically stable country will be different that formed in an unstable
country. A stable political system can make business-friendly decisions that promote
local businesses and attract foreign investors. Unstable systems present challenges that
jeopardize the ability of government to maintain law and order. This has a negative
affect on the business environment.

Government Spending

Governments get money to spend from taxation. Increased spending requires increases
in taxes or borrowing. Any tax increase will discourage investment, especially among
entrepreneurs, who take the risks of starting and managing businesses. Increased
spending also eats into the limited pool of savings, leaving less money for private
investment. Reduction in private investments shrinks production of goods and services.
That, in turn, may lead to the elimination of jobs.

Interest Rates

Government policy can influence interest rates, a rise in which increases the cost of
borrowing in the business community. Higher rates also lead to decreased consumer
spending. Lower interest rates attract investment as businesses increase production.
The government can influence interest rates in the short run by printing more money,
which might eventually lead to inflation. Businesses do not thrive when there is a high
level of inflation.

Regulations

Trade regulations, the federal minimum wage, and the requirements for permits or
licenses have effects on business. For example, periodic health inspections must be
carried out in all restaurants. Regulations and laws on HR aspects may also prove to be
costly for businesses. Businesses might spend a lot of money and time to comply with
regulations that ultimately prove to be ineffective and unnecessary. Fair and effective
regulations, however, promote business growth.

3.2 Objectives of organisations

Objective can be defined as a precise statement of the goal set by a firm. There could be
various objectives of firms that may be affected by government actions. This section
explains the impact on such objectives when the government changes its policies.

3.2.1 Objectives of firms and the government impact

Many organisations set quantified objectives to achieve their corporate mission. When
there are many key objectives, some may be achieved at the expense of others.
Objectives can also be developed for each Strategic Business Unit (SBU). An SBU is a
part of a business that has its own distinct external market for goods and services
different from another SBU.
Knowledge
Firms could have many objectives and some objectives could be more important than
others. Objectives are quantified statements which describe what the firm intends to
achieve over a period.
Uses of objectives

They help the firm to perform its activities towards the achievement of its
mission.
They can be used as standards for measuring the firms performance.

There are primary and secondary corporate objectives that should be combined for the
achievement of overall corporate objectives.
For example, if the firms primary objective is to increase profits, then it will have to
come up with strategies that support its primary objectives. Once the strategies are
developed, objectives have to be set for each individual strategy. Secondary objectives
could be concerned with increase in sales, technological innovations, customer service,
product quality and better resource management.

Diagramme - Features of objectives

Specific

Time
bounded

Measurable
Objectives
are:

Resultsoriented

Attainable

Corporate objectives look at the firm as a whole and include:

Profitability
Earnings per share
Growth
Customer satisfaction
Cash flow
Market share
Quality

Profit as an objective
Accountants and economists may interpret profits in different ways. For economists,
cost includes normal profit. Normal profit is the opportunity cost of entrepreneurship.
Opportunity cost is the amount of profit an entrepreneur could earn elsewhere.
Accounting profit is the difference between sales revenue and explicit costs of the
business. Explicit costs are clearly stated and recorded. However, in the case of
economic profit, it considers the difference between sales revenue and both explicit and
implicit costs. Implicit costs are benefits foregone for not utilising the factors of
production in their next most profitable way.

Apart from maximising profits, any firm could have alternative objectives such as
enhancing the growth of firms by increasing sales and market share, to maximise
welfare and achieve its mission.
Profit maximisation
Profit maximisation is one of the objectives of many firms and it focuses mainly on
profits. When concentrating only on profits, there is a tendency for the firm to utilise its
resources without taking into consideration the risks involved.
Profit maximisation is a short-term concept. Focusing only on profits is not good, as you
will have to forego investment opportunities. Sometimes this would affect the goodwill
of the company as well. In order to maximise profits, the firm has to increase the usage
of the input up to the point where the marginal revenue equals the marginal cost.

When Marginal revenue > Marginal costs (at a given output level), higher
quantity can be produced as marginal profit is positive.
When Marginal revenue < Marginal costs (at a given output level), lesser quantity
is produced as the marginal profit is negative.
When Marginal revenue = Marginal costs, marginal profit is zero and this is the
quantity that maximises the firms profits.

Revenue maximisation
Organisations having the objective to maximise revenue tend to focus only on revenue,
ignoring the costs involved in making the product and marketing it. Organisations
would try to produce more until marginal revenue is equal to zero.
However, growth maximisation social concerns and improving productivity could be
other objectives that may be taken into consideration by organisations.
Government from time to time brings changes to policies that could have an impact on
the objectives of organisations.

Example - Objectives of firms and the government impact

Suppose the government increases the tax rate from 28% to 35%. This would increase
the business costs and affect the objective of maximising profits. Even though there is a
possibility of passing the tax to consumers, it could affect the bottom line.
Furthermore, an increase in the interest rates would affect businesses as they would be
reluctant to borrow and consumers will tend to save more by reducing expenditure.

Activity - Objectives of firms and the government impact

Explain the link between organisational vision, mission and strategic objectives.
Answer
The strategic vision reflects managements aspirations for the future and provides a
panoramic view of where it is heading. It spells out the long-term purpose of the
organisation helping it plan its course of action.
The mission spells out the organisations present business scope in terms of products
and markets served. It also lists out the purpose of the organisation.
The mission may be too vague to be acted on immediately. It needs to be translated into
strategic milestones for strategy to be developed to achieve it.

3.3 Strategies of organisations

This section explains about the levels of strategy, strategy of pricing, advertising,
product development and its strategic importance.

3.3.1 Levels of strategy

Strategy can be divided mainly into three sections, namely corporate, business and
functional. This section focuses on these three levels.
Knowledge
Diagramme - Levels of strategy

Corporate
strategy

Business strategy

Functional strategy

Corporate strategy is more concerned with the long-term direction and deals with the
organisations overall purpose and scope. Further, it considers how value will be added
by different parts and includes:

Whether or not a new strategic business unit should be created or eliminated

Funding decisions for strategic business units and resource allocation
Mergers and acquisition decisions
Decisions to implement new technologies
Decisions to achieve cross business fits (synergies)
Diversification decisions

Defining aspects of corporate strategy are:

Scope of activities
Scope of activities includes the impact of strategy and strategic management
impact on the entire organisation. Business operations should support the
strategic plan.

Environment
Under the aspect of environment, the firm should counter threats and exploit
opportunities.

Resources
This includes decisions about obtaining and allocating corporate resources.

Values
Value systems of people with power would influence the strategy of the firm.

Timescale
Corporate strategy will have a long-term impact.

Complexity
Complexity involves uncertainty about the future.

Business strategy
Business strategies are made at the strategic business unit level, which is a part of a
business and which has its own distinct external market for goods and services different
from other strategic business units. Managers in charge would be responsible for
winning customers and beating rivals in their chosen markets. Decisions could include
new product development, distribution, pricing, staffing, etc.

Strategy made at this level would normally include generic strategies of cost leadership
or differentiation or focus. These could be followed to create a competitive advantage.
A competitive advantage gives enables a firm to generate long-term sustainable
economic profit.
Generic strategy
Porter argues that a firm could use a generic strategy to position itself against the five
forces and in the process earns economic profits. The word generic is used to describe
the strategies any firm in any industry could follow.

According to Porter, the firm should choose amongst three potentially successful
generic strategies without an attempt to mix them. Doing so causes the firm to become
Stuck in the middle which is a recipe for below average performance. Each strategy
requires different organisational arrangements, resources, leadership styles, systems
and processes. Rarely is a firm suited to implement all strategies together. The
strategies are:
Cost leadership
A firm willing to be a cost leader attempts to be the lowest cost producer in the
industry. Such companies should aim at volume production and economies of scale
offering a no frill product, operating in related industries and locating close to sources
of supply.
Differentiation
This involves creating a product or service considered unique in the minds of buyers for
which they are willing to pay a premium. This be on the lines of design, quality,
packaging, after sales, customisation, attributes and features.
Focus
This includes a companys choice to cater to a broad range of segments or a few.

Model Porters Generic Strategies

Competitive advantage

Lower cost

Broad

Differentiation

Overall cost leadership

Differentiation

Cost focus

Differentiation focus

Competitive scope
Narrow

Functional strategy
It is at the functional level that strategy is implemented. The functional strategy looks at
how the individual business functions such as human resources, marketing and finance
contribute towards the business strategy.
Example - Levels of strategy
Under the corporate level strategy, organisations could decide as to how business units
could be managed and governed either through centralisation or decentralisation.
Cost leadership, differentiation and focus could be applied at the strategic business unit
level. A firm could decide to differentiate its products by adding unique qualities.
Product differentiation can be done by packing the goods in a creative manner.
The functional strategy of a company helps to review operational income and determine
the amount that should be re-invested in the company by providing guidelines. The
functional strategy also helps the finance department to make decisions on the capital
structure.

Competitive advantage
Lower cost

Differentiation

Broad
Competitive
scope
Narrow

Example- Levels of strategy Conted.

Competitive advantage

Lower cost

Broad
Competitive
scope
Narrow

Differentiation

TATA
Maruti
Kia/Hyundai

BMW
Audi
Mercedes

Ambassador
Proton

Ferrari
Aston Martin
Morgan
Rolls Ryle

The diagramme depicts how companies in the automobile industry make use of
generic strategies in the market.
TATA, Maruti and Kia/Hyundai follow an overall cost leadership within a broad
competitive scope while Ambassador and Proton follow an overall cost leadership
within a narrow competitive scope.
BMW, Audi and Mercedes follow a differentiation strategy within a broad competitive
scope while Ferrari, Aston Martin, Morgan and Rolls Ryle follow a differentiation
strategy within a narrow competitive scope.

Activity - Levels of strategy

1. What are strategic groups?
Answer
A strategic group consists of organisations that are very close competitors. A strategic
group attracts the same target customers and competes with similar strategies.
Strategic groups use several variables. They include extent of branding, product range,
number of segments served, geographical coverage, number of distribution channels
used, size of business and quality.
2. What are the pros and cons of a focus strategy?
Answer
With the focus strategy, an enterprise would attempt to focus on one or more particular
segments and it has its own advantages and disadvantages.
Advantages

A niche market seems to be more secured and helps the firm to protect itself
from intense competition.
The firm does not spread itself too thinly.

Disadvantages

The firm would have to forego economies of scale, which would have been
achieved if a wider market were served.
There is a possibility of competitors moving into the segment with better
resources.
The needs of the segment could be less distinct from the major market.

3. Identify the internal strengths of an organisation that successfully implements the

strategy of differentiation.
Answer

Corporate reputation for innovations and quality

A product development team with skills and creativity
A sales team with the capability of communicating the perceived strength of the
products
Access to research and development

3.3.2 Strategies
Strategy is a course of action including specification of resources in order to achieve a
desired outcome. Businesses should consider economic fluctuations and political factors
as they can affect their strategies and policies.
Knowledge
Strategy is a course of action including the specification of resources required to meet a
specific objective.
Mintzberg sees strategy as 5Ps.

Diagramme- Strategy as 5Ps

Plan

Perspective

Ploy
Strategy
as a

Pattern

Position

Strategy as a plan
This includes a rationale, well-conceived course of action.
Strategy as a ploy
Ploy includes actions initiated to defeat or bring down competitors in the market place.

Strategy as a position
Strategy is used to position or help the firm achieve a fit with its environment.
Strategy as a pattern
This is the idea behind emergent strategy where strategy could be seen as incrementally
developing from another.
Strategy as a perspective
A perspective is a viewpoint of how a person sees something. This could vary from
person to person. Strategy is influenced by perspective. This implies that strategy is
unique.

Diagramme- Elements of strategy

Provides resources

Competitive
strategy
Provides
cashflows

Investment and
resource strategy

Financial strategy

Provides finance

Competitive strategy

This is concerned with how a firm attracts customers, what it produces and sells, what
markets it operates in and how it defeats rivals.

Financial strategy

Financial strategy considers the finances to raise, durations, amounts, hedging risks,
dividend policy, capital structures, etc.

Investment and resource strategy

This considers investment in assets, working capital, brands, human resources,

acquisitions, etc.

Strategic lenses
Jhonson & Scholes argue that something as complex as strategy should be viewed from
different perspectives. If one were to look at strategy development as a process through
different lenses, alternative definitions of strategy can emerge.

Design lens

This views strategy as a deliberate positioning of the organisation through rationale,

analytical, structured and directive process. Design lens views strategy to be something
planned in advance of its execution.
Experience lens
This views strategy as the outcomes of the individuals and groups and their collective
experiences and taken for granted assumptions. This approach suggests that strategies
develop in an adaptive fashion building on the existing strategy and changing gradually.
Ideas lens
This helps explain how some organisations have innovative strategies. It suggests that
strategy arises out of diversity, which exists in and around the organisations
environment. Greater the diversity, the more creative the strategy would be.
Rational Planning model
The rational planning model views strategy through the design lens. It suggests that a
strategic course of action could be planned well in advance of its implementation. Such
rationale strategy is also referred to as intended/deliberate strategy.
Benefits of rationally planned strategy

Planning ensures organisational continuity.

The organisation becomes more focused on its purpose and objectives.
It reduces conflicts and the individual parts become goal congruent.
It creates an efficient allocation of resources.
The constant review and control process ensures that strategy is on track.
As the organisation grows and its stakeholder base increases, some form of
formal strategic development is needed to communicate to them about what the
organisation is doing. This ensures their support.
Contingency plans can be developed for unexpected situations.

Since the organisation monitors its resources and the environment, it is kept
aware of the strategic issues being developing.

Drawbacks of the approach

It could be too costly and complicated.

It may stop the development of radical and innovative strategies because of the
need to maintain consensus with the rest of the decision makers.
Too much analysis could sometimes be dangerous.
The approach is more appropriate for businesses operating in more predictable
environment.
Planning tends to add unwarranted comfort.
Plans sometimes act as straight jackets, i.e. flexibility is lost as the organisation
becomes committed to the plan and loses out an opportunity in the process.

Critical Success Factors (CSFs) and strategy

CSFs are the important attributes or features of a product or service which an
organisation needs to get right or excel in and outperform competitors in order to
create a competitive advantage. They are simply areas, which are crucial for success.
Organisations should have in place resources and competencies to ensure that CSFs are
achieved. Competencies relate to how an organisation uses its resources and skills in
performing processes by linking activities.
Any chosen organisational strategy will have certain CSFs, which should be satisfied.
Johnson and Scholes explained the approach as follows.

Diagramme - Critical Success Factors (CSFs) and strategy

Competitive strategy

CSF 1

CSF 2

CSF 3

CSF 4

Business processes and activities to achieve the CSFs with

resources in place

KPIs

KPIs

KPIs

Step1- Identify the CSFs for a particular strategy

Step2- Identify the processes and competencies alongside resources to implement the
CSFs
Step 3- Ensure the list of competencies is sufficient to gain competitive advantage
Step 4- Identify performance standards that is Key Performance Indicators (KPIs) which
monitor how well the processes are being carried out
Step 5- Ensure competitors will not be able to imitate the process
Step 6- Monitor competitors and analyse their impact on your CSFs

Information required in developing a marketing strategy

Industry trends
rival information
resource requirement
financial markets,
government regulations
demographic information,
corporate financial performance indicators
internal operations related data, etc.

Corporate strategy of pricing

The quality of the product also becomes important when making decisions on the
pricing strategy. Pricing process involves the following steps.

Select the pricing objective that is the overall pricing goal for the firm.
Determine the demand, for which the price elasticity of demand is vital.
Estimate costs. This includes the fixed and variable costs. However, the cost of
manufacturing the product will decline when workers gain experience.
Analyse competitors costs, prices and offers.
Select a pricing method.
Select the final price.

Approaches to pricing

Psychological pricing

Many customers use prices to measure the quality of products. As such, marketers
attempt to use prices to have a psychological effect on customers. However, if
information with respect to quality is available, the price will be an insignificant factor.
Value pricing
This approach is adopted when the external factors force the firm to produce value
added products to maintain sales.

Promotional pricing

This is where pricing is done to promote the product, e.g. the firm may offer discounts
or follow the buy one and get one free concept.

Diagram - Pricing strategies matrix

Quality

Low

High

Low
Economy

Penetration

Price
High

Skimming

Premium

There are many ways of pricing a product.

Premium pricing This could be used when the firm has a unique brand. This
strategy is adopted when the firm has a competitive advantage over its rivals.

Penetration pricing - The price is set low to gain market share. Once it is
achieved, the price would be increased.

Price skimming In skimming, the firm charges a higher price for having a
competitive advantage. However, due to high prices, there would be new
entrants to the market and the price would eventually come down due to
increase in supply.

Economy pricing A very low price is charged. Marketing activities are

performed at a minimum level.

The pricing strategy should set the right price for the organisation. Setting high prices
would also make customers not to buy the product if they feel that the company is
trying to exploit them. Therefore, the firm has to set the correct price by analysing the
markets and testing different pricing options.
Strategic pricing is important as it helps the growth as well as the profitability of a
company. Strategic pricing considers as to how pricing could drive profits and heavily
invests in advertising, brand building, research and development.
Strategy of advertising
An advertising strategy becomes important when promoting a firms products. The firm
has to decide on the appropriate marketing communication strategy to be followed by
the firm.
When developing an advertising strategy following should be considered.

Segmentation

Market segmentation is important as there are differences among buyers such as

purchasing power, geographical locations and buying behaviours. Therefore, different
segments require different product and marketing mixes. Market research helps to
gather information through questionnaires, analysing sales and buying patterns.

Targeting

This is where the firm communicates with the right segment. The methods of
communicating have to be in line with the firms marketing objectives. The methods of
marketing communication include:

Advertising ( magazines, newspapers, radio)

Sales promotions ( offering coupons and discounts)

Public relations( press releases and launches)

Direct marketing (email, telemarketing)

Positioning
The firm attempts to create a good image by positioning itself in the market. For this
purpose, branding could be used. Competition in the market place has to be considered
and must highlight on the uniqueness of the firm from other competitors.

 Delivering a message
The firm has to develop a message to attract the target audience. Moreover, the
advertising objectives have to be linked to the firms marketing plan.
Advertising strategies could be weak, middle-strength or strong. When developing weak
strategies, product attribution is taken into consideration. Middle strength strategy
involves adding of a unique element to the average product.
Advertising gives the following benefits to a company.

It helps the public to realise that the company is in business and the types of
products and services offered.
Advertising brings new customers and helps to retain existing ones.
Special sales and promotional activities could be informed to customers.
It creates confidence in customers about the company.
It improves product sales.
It could change the attitudes and buying habits of customers.
It has the ability to communicate directly to the customer.
It facilitates economic progress.

Strategy of product development

Under a product development strategy, the firm develops new products or modifies
existing ones to deliver them to current or new markets.
The following reasons explain the importance for firms to develop new products.

Inability of existing products to satisfy changing needs and tastes of customers

New technologies
Shortened product life cycle
Foreign and domestic competition

When profits and revenue are declining, the firm could develop a product diversification
strategy where a new product is offered to a new market.
Product development is crucial for any organisation. Organisations have to perform this
task right as it could hinder their performance if not performed correctly. Improper
investments and improvements to products would always keep the company behind the
competitors.

Many new products fail due to the following:

Negative market research findings

Market size being overestimated
Incorrect target market focus
Improper pricing strategy
Product being incorrectly positioned

Example- Strategies
Apple Inc. saw their stock prices going up by more than 80% in 2012. In that year, the
companys most successful product was the iPad thanks to the following product
strategies.

Pricing the products according to customer segments

Apple reduced the price of the 3G version iPhone to $99 at its launch and the
price of the iPad was $100 that in turn enabled the company to establish a
market for additional customer segment.

Concentrating on the future

Apple Inc. launches innovative products that has helped beat rivals in the market
place.

Listening to customers
This strategy helps the company obtain customer opinion about the companys
product and improvements to be made as per customer demand. The new iPad
addresses customer concerns that had been expressed since the initial launch in
2010.

Activity Strategies
1. Explain the meaning of emergent strategy.
Answer
According to Mintzberg, only a few of the strategies followed by firms in the real world
are concisely planned as the rational planning model suggests. According to him, the
actual strategy followed is a combination of the planned intended strategy and
emergent strategy.
Emergent strategies are patterns or consistencies realised despite or in the absence of
intentions. They happen along the way and are more adaptive to environmental
conditions.

2. What are the factors to consider when funding strategic business units?
Answer

The degree of business risk of the strategic business unit is vital. If the risk is
high, high levels of debt should be avoided as volatile cash flows could make it
difficult to service debt interest.
Cost of financing
The current level of gearing
Payback period: For example, if a particular strategic business unit is expected to
generate cash flows only in ten years time, the most appropriate funding should
be equity or ten year zero coupon bonds.
Trends in the industry
Expected movements in the yield curve

3. What are the strategies that an organisation could follow to meet the challenges
in the market?
Answer

Pricing strategies
Manufacturing cost reduction strategy
Product expansion strategy
Product innovation strategy
Distribution innovation strategy
Improve service strategy
Intensive advertising strategy

3.4 Alliances
Alliances involve the combination of resources and forces to achieve a common goal
within a specified or indefinite period. Strategic alliances help to achieve strategic goals
by bringing together the different strength of the firm. It also provides better access to
technology and information. On the other hand, it helps to expand the operations
without increasing its size.
3.4.1 Corporate alliances
In a dynamic and uncertain environment, there is a greater importance for cooperation
and collaboration among firms to work together to achieve their strategic goals.
Strategic alliances are formed between two or more companies for synergy purposes.
Knowledge
In an alliance, two or more firms work together for mutual benefit. No separate entity
may be created and the firms come from a common industry.
Strategic alliances
Help to achieve strategic goals by bringing together the strength
Give better access to technology and information
Help to expand the operations without increasing its size
Diagramme - Alliance formation process

1.

2.

3.

4.

5.

Strategy development

Partner assessment

Contract negotiation

Alliance operation

Alliance termination

Strategy development

Strategy development focuses on feasibility, goals, objectives and the rationale behind
the alliance. Strategies are developed for challenges, issues and other resources.
However, alliance objectives have to be in line with corporate strategy.

Partner assessment

Partners are assessed in terms of their strengths and weaknesses. Strategies should be
able to accommodate partners management styles. The right partner has to be selected
for the right task. Resource gaps should also be identified.

Contract negotiation

All parties must have attainable objectives and involve in the formation of negotiating
teams where each partners contribution, rewards and penalties for bad performance
are clearly stated.

Alliance operation

Senior management commitment and dedication are considered. Budget and the actual
performance are compared and rewards for satisfied alliance performance are offered.

Alliance termination

An alliance is terminated when the desired target is achieved or when partners are of
the view that the business goals cannot be achieved.

Role of corporate alliances

Facilitating the acquisition of managerial resources

Scarce resources are an issue faced by many organisations. Through mergers,

acquisitions and alliances, firms attempt to overcome such issues. Inter-organisational
activities are encouraged through alliances. In addition, alliances help to exchange
knowledge, skills and learning among organisations. Alliances could be a strategic
method of acquiring scarce managerial resources.

Helping to skillfully apply managerial resources

Alliances complement managerial resources. If the managerial resources for an

operational activity are restricted, still such an activity could be carried out by
complementing them with resources obtained from firms through the alliance. When
managerial resources are skillfully applied through adequate cooperation among firms,
it would give a competitive edge over its rivals.

Helping to deploy managerial resources

Managers must attempt to acquire scarce managerial resources and apply them
skillfully. In addition, these resources have to be in line with the managerial
environment.

Example - Corporate alliances

The alliance between Kodak, Fuji and Nikon to develop a new type of photo system is a
good example of an alliance. The alliance was formed to obtain mutual benefits. In
addition, there was an alliance between Starbucks and Kraft to distribute Starbucks
coffee through Kraft only.
Activity - Corporate alliances
Identify the disadvantages of global strategic alliances.
Answer

It could be difficult to meet the objectives as planned over time.

Efficient communication could be low.
There could be poor allocation of resources.
Equity stake could be low and or poor involvement of management.

3.4.2 Types of strategic alliances

Alliances are formed to combine strengths and eliminate weaknesses. Strategic
alliance may be provided with the necessary resources such as products, knowledge,
expertise, equipment, manufacturing capabilities, etc. In addition, each member has its
own operational responsibility, financial risks and rewards.
Knowledge
Types of strategic alliances include:

Joint venture

This is a collaboration between two or more parties creating a separate entity where
the parties may jointly own equity. This could even be from different industries.

Equity strategic alliances

This is where two or more firms own different percentages of the company formed.

Non-equity strategic alliances

In order to share unique resources and capabilities, contractual relationship is

developed.

Global strategic alliances

This is where partnerships are formed across national boundaries.

Example - Types of strategic alliances

Joint venture - BMW Brilliance Automotive Limited was formed through a collaboration
between BMW Holdings and Shenyang Jinbei Automotive Industry Holdings Limited in
China where each held 50% stake.

Activity - Types of strategic alliances

Explain the difference between joint ventures and franchising.
Answer
A joint venture is a collaboration between two or more parties creating a separate entity
where the parties may jointly own equity. They could be from different industries.
In franchising, a firm acquires rights to use another firms business system. In the
agreement, there would be a lot of central support given by the franchiser including
staff training, procedures, instructions and promotional materials.

Mini test
MCQs
1. Mintzberg sees strategy as:
a. Plan, ploy, position, pattern and perspective
b. Plan, ploy, procedure, pattern and perspective
c. Ploy, pro-active measure, position, pattern and perspective
d. Plan, position, policy, pattern and perspective
Answer
Correct answer - a
Mintzberg sees strategy as the five Ps - plan, ploy, position, pattern and as a perspective.

2. Which of the following statement is not true?

a.
b.
c.
d.

Rational planning model views strategy through the design lens

Emergent strategies are concisely planned
Corporate strategy is concerned with the long-term direction
Elements of strategy include competitive, financial and investment and resource
strategy

Answer
Correct answer - b
Emergent strategies are patterns or consistencies realised despite or in the absence of
intentions.
3. The correct sequence of steps involved in pricing a new product includes
a. Setting the objective, determining the demand, analysing environmental factors,
calculating cost, determining the pricing method and final price
b. Determining the demand, setting the objective, analysing environmental factors,
calculating cost, determining the pricing method and final price
c. Setting the objective, determining the demand, calculating cost, analysing
environmental factors, determining the pricing method and final price

d. Determining the pricing method and final price, analysing environmental factors,
determining the demand, calculating cost, determining the pricing method and final
price
Answer
Correct answer - c
When pricing a new product, the correct sequence of steps involved is setting the
objective, determining the demand, calculating cost, analysing environmental factors,
determining the pricing method and final price.

Short questions
1. What factors should be taken into consideration in developing a human resource
policy for a new business venture?

Answer
A human resource policy provides guidelines for the behaviour of employees within the
organisation. When developing a human resource policy, the following have to be
considered.

Planning the workforce strategically

Provide expectations for the workforce
Recruit right quantity of people at the right time
Track, manage and evaluate employee performance to align employee and
business goals
Establish payroll procedures
Disciplinary procedures

2. What is the importance of objectives?

Answer
Objectives are essential for any business as they spell out the aims it wants to achieve.
They motivate employees and help them understand business goals. Objectives could be
used as standards for measuring the performance of the organisation. In addition, it
provides clearly defined targets so that every aspect of work could be guided.

Scenario based question

Oil Max is a company situated in a country in the European Union and enjoys a
monopoly for the supply of oil in the country until the recent past. Oil Max was always
committed to supply oil at a reasonable price for national consumption. The
government intervened in fixing the price of oil.
With the intention to make the oil industry more competitive, the government
privatised Oil Max and listed it on the stock exchange. Individuals held 70% of its shares
and the rest were in the hands of industrial shareholders. After the privatisation,
government had no intervention in the companys affairs. Before the privatisation, Oil
Max was criticised for inefficiencies in cost and resource handling by the media.

Required:
You are required to advise as to how the objectives of Oil Max should be revised to
support privatisation.

Answer
Before the privatisation, Oil max was continuously committed to supply oil at
reasonable prices to the country. However, the company should now focus on the needs
of its shareholders and attempt to maximise shareholder value. During its monopoly
years, the government intervened regarding the oil price, which is not the case
anymore. Therefore, Oil Max has no commitment to supply oil at reasonable prices but
to do its business profitably.
In order to maximise shareholder wealth, Oil Max should manage its cost and resources
efficiently. If it does not focus on the inefficiencies that occurred, sooner it would have
an impact on the performance of the company which would consequently affect
shareholder wealth. Thus, it should set objectives with respect to costs and efficiency.
The directors of Oil Max should also focus on risk and growth prospects to attract new
investors. They should determine the resource requirements and the objectives as
appropriate.
Although Oil Max was committed to provide oil at a reasonable price before
privatisation, it should now provide oil depending on the prices customers would be
willing to pay. Hence, it should have a variety of product categories to cater to the
market.

4 Corporate Performance, Measurement & Economic Analysis

Economic analysis is important as it helps to determine the trends in the economy so
that entrepreneurs could identify how they could affect their business performance.
Furthermore, this section of the module focuses on the analysis of company
performance using economic, accounting ratios and an assessment of effects on various
government micro and macroeconomic policies.

4.1 Analysis on the economy

This section focuses on the importance of conducting economic analysis to indicate any
prevailing trends in the economy.
4.1.1 Economic analysis
Economic analysis is a systematic approach to determine the trends in the economy. It
becomes imperative to have a good understanding of the economy as it can have an
impact on the companys performance.
Knowledge
Economic analysis is a systematic approach that determines the costs and benefits of an
event, project or an entity. Furthermore, it becomes vital to know how the
entrepreneurial venture contributes to the economy in the form of income and
employment. In addition, to succeed in the industry, it is imperative to consider the
effect of inflation, recession, interest, and exchange rates on the a entrepreneurial
venture to take proactive actions.

Diagramme - The process of conducting an economic analysis

1.
2.
3.

Identifying economic indicators

Data collection

Forecasting
Interpreting results

4.
5.
6.

Monitoring

Application

Identifying economic indicators

Indicators include GDP growth, unemployment rate, consumer spending, government
spending and manufacturing activity. Economic drivers include tax policy, government
regulations, business investments, consumer response and interest rates.
Data collection
Data should be collected to carry out the economic analysis and for this purpose,
organisations could use the media and consultation.
Forecasting
Economic data collected should be analysed to identify trends and then it has to be
extrapolated.
Interpreting results
Once the forecasting is complete, the results should be interpreted.
Monitoring
Monitoring involves considering new inputs and adjusting the forecast accordingly.

 Application
Application involves applying the results of the analysis to the organisations
investment decision. For example, where do we get the best mix of economic growth?,
what investment would perform better in the current and future economic conditions?.
The importance of conducting an economic analysis:

To identify trends
To identify long-term opportunities
Helps organisations to take pro active measures
To identify fluctuations in economic drivers

Example - Economic analysis

If the economy were going to experience a recession in the near future, it would bring
unemployment, decline in real income, slump in manufacturing and industrial
production and decrease in consumer spending. If the organisation is well aware about
the situation, it could consider of cutting unnecessary expenditure in advance.

Activity - Economic analysis

Identify the key factors and indicators when assessing an economy.
Answer
Conditions of the economy are a key factor that could be used to assess the economy.
Key indicators could include gross domestic product/gross national product, economic
cycles, inflation, unemployment, interest rates, exchange rates, money supply and
budget deficit.
Characteristics of the population are another factor to assess the economy. Its key
indicators could be demographics, gender, age, occupations, race, religion, lifestyles and
population distribution.
Business climate is a key factor and its indicators are employment laws, governance,
safety standards, consumer rights and employee training.
Physical conditions are another key factor to assess the economy and its key indicators
include use of land, value of land, infrastructure conditions, quality of buildings and
green issues.

4.2 Company performance

The way an organisation is performing determines its performance. Hence, it is
imperative to have a track on the performance of the company. This section provides
information on the factors affecting corporate performance and the ways of analysing a
companys performance.

4.2.1 Factors influencing corporate performance

The success or failure of a company depends on its performance. To ensure that the
company is performing well, it is imperative to carry out an analysis of its
performance. An organisation could identify many factors influencing corporate
performance. This section elaborates on identifying such factors.

Knowledge
Corporate performance refers to the operational activities of an organisation over a
time period. For any business venture, corporate performance management becomes
essential as it involves business acumen to monitor and manage the performance of
the venture based on key performance indicators (KPIs). KPIs include revenue, return
on investment, overhead and other operational costs.
Organisations have the opportunity to use Corporate Performance Management (CPM)
software to monitor performance as well as to gather corporate information.
CPM software provides:

Forecasting
Budgeting function
Planning
Graphical scorecards
Dashboards

Diagramme - Factors influencing corporate performance

Assets
and
liabilities
Intangibles
Corporate
performance

External
factors

Financial
management

Human
resources

Financial management

The way the finance is managed is important, as it brings value to the business. In order
to carry out operations smoothly, a firm should have adequate profits and cash flows. In
addition, it is important to control costs to avoid unnecessary expenditure.

Human resources

People are an important factor that contributes towards the performance of the
company. In order to perform well, it requires a skilled, knowledgeable and well-trained
set of staff. Therefore, human resource planning is vital for better performance as it is a
rational and logical approach to recruitment, retention, utilisation, improvement and
disposal of human resources.

To enhance corporate performance, the right quantity of people with the correct skills
and attitudes are required.

External factors

Interest rates in the economy and the demand prevailing in the market would also
influence the performance of a company. In addition, attention should be paid to
competitor actions, government rules and regulations.

Intangibles

Goodwill and the relationship built with stakeholders could have an impact on
performance, hence stakeholders should be managed for better performance.

Assets and liabilities

The assets of a company would indicate how well the company is using it assets towards
the achievement of organisational goals. All the assets of the company should contribute
to the production and sales activities. In addition, the company should have the ability
to settle liabilities.

Example - Factors influencing company performance

Tesco uses a high commitment human resource management model to provide training
and development to all its employees. Through their logo, Tesco has attempted to
develop their own culture. Tesco tries to motivate employees continuously by offering
them paid holidays and allow creative workers to share their ideas and culture with
each other. In addition, Tesco offers bonuses and vouchers to motivate their staff so that
they would carry out organisational activities to their level best.

Activity - Factors influencing corporate performance

Explain the meaning of performance management.
Answer
Performance management involves linking employee goals and objectives to a business
Critical Success Factors (CSFs) and strategic objectives. Individuals are given set targets
in those CSFs so that improved performance helps the organisation to achieve its
strategic objectives. The process could involve establishing targets, appraising
performance and developing personal development plans.

4.2.2 Analysing company performance through Gap analysis

The main purpose of analysing performance is to determine whether the company is
performing up to the expected standard and if not, how it could achieve the required
standard. For this purpose, organisations could use the gap analysis.
Gap analysis involves a comparison between an organisations ultimate objective for
example turnover, profits, Return On Capital Employed (ROCE) and sales volume and
the expected performance of projects both planned and being implemented. Once the
gap is identified, a strategy could be formulated.
Knowledge
Gap analysis is a process that helps organisations to compare actual with expected
performance.
Gap analysis compares two things.

The organisations targets for achievement over the planning period

What would the organisation expect to achieve if it continues in the current way
with same products and selling to the same markets with no changes in
operations.

Through the gap analysis, a firm could find out whether it is meeting its expectations
and using resources effectively. Gap analysis helps to answer the following questions.

Where are we now?

Where do we want to be?

Diagramme - Gap bridging strategies

Gap
bridging
startegies

Efficiency
strategies

Intensive
strategies

Diversification
strategies

Once the gap is identified, gap-bridging strategies have to be developed and classified as
follows:

Efficiency strategies: making better use of resources or better throughput;

Intensive strategies: exploiting the firms existing products and markets through
market penetration, product development and market development.

Through market penetration, the company would look to maintain or to increase its
share in the market, secure the dominance of growth markets, restructure a mature
market and increase usage by existing customers.
Product development occurs when the company launches new products in the existing
market. This strategy is riskier than market penetration and market development as it
requires huge investments in the new product development process.
Under market development, the company seeks new markets for its current products.
For example, offering different package sizes for food items so that consumers could
buy both in bulk and small quantities as per their requirements.

Diversification

This occurs when the firm decides to make new products for new markets. Further, the
company should have a clear idea as to what it intends to achieve from diversification.
Pros of gap analysis

It gives a comprehensive overview of the organisation so that it helps the

executives to see whether the resources are adequate to meet the desired goals
and objectives.

It helps to rank goals and objectives as per the order of preference so that most
important objectives could be prioritised.

Cons of gap analysis

It is time consuming as it takes a lot of time in exploring and evaluating results.

It is expensive to conduct a gap analysis as it involves the use of consultants to

carry out the assessment. On the other hand, it could even affect the staff morale
if employee skills are closely monitored.

Example Gap Analysis

Budget output: 150,000 as at 31.12.2014
As at 15.12.2013, output is 37,500
Forecast based on current performance: 75, 000 (31.12.14)
Programs planned but not implemented would bring 25,000 units

Ultimate objective
E.g. Sales volume (000)
Ultimate objective
150
GAP

125

Future projects

100

25
75

Current operations

50
Forecast

25

15.12.2013

T1

Time

To minimise the gap of 50,000units, the company should consider gap bridging
strategies.

Activity - Analysing company performance through gap analysis

1. Identify the factors to consider when conducting a gap analysis for a software
application.
Answer
Gap analysis is a key to ensure the quality of a software. There are many important
factors namely a realistic plan, technical and business environments and users to focus
on when conducting a gap analysis for a software application. Furthermore, adequate
planning and concern of both external and internal elements would result in a
successful gap analysis for a software application.
2. Intensive strategies are taken into consideration when bridging the gap. If an
organisation attempts to focus on market development, what are the possible
approaches available for such organisation?
Answer
Market development occurs when the organisation seeks new markets for its present
products. In pursuing market development, it can consider the following approaches.
Looking into new geographical areas and export markets
Introduce different package sizes so that customers could either purchase in bulk or
small quantities
Obtain access to new distribution channels
Use of different pricing policies to attract a variety of customers with a view to create
new market segments

4.2.3 Analysing company performance through balanced scorecard

The balanced scorecard is a set of measures that gives top managers a fast but a
comprehensive view of the business. It becomes significantly important as some of the
traditional financial accounting measures could give misleading signals. The balanced
scorecard enables managers to look at the business from four perspectives namely
financial, customer, innovative, learning and internal business.
Knowledge
The balanced scorecard could be considered as a performance metrics that is widely
used in strategic management for the purpose of identifying and improving internal
functions and their resultant outcome. The balanced scorecard looks at four different

perspectives by which the activities of the organisation could be evaluated. They

include:

Financial perspective
Customer perspective
Internal business
Innovative and learning

Diagramme - Balanced Scorecard

Financial
perspective

Innovative
and learning
perspective

Balanced
scorecard

Customer
perspective

Internal
business
perspective

The financial perspective considers as to how the company appears to its shareholders.
It would indicate whether the companys strategies, implementation and execution are
contributing to bottom line management and pays attention to shareholder value,
return on investment, etc.
The customer perspective views that the company has to identify customer satisfaction
as the main corporate goal and wants to find out as to how customers perceive the
company. Furthermore, attention is given to customer concerns such as time, quality,
performance and service.
Internal business perspective considers the business processes that have the greatest
impact on customer satisfaction. To achieve this performance measure, it must be
linked to employee behaviour. An information system must be in place to measure
performance.

Under innovative and learning perspective, the company asks the question as to
whether it could continue to improve and create value. While the customer and internal
process perspectives identify parameters for competitive success, the company needs to
learn and come up with innovations.
Pros of the balanced scorecard

It helps to look at the business from four perspectives, namely customer,

financial, internal business and innovation and learning thereby giving the
company a balanced view of its performance.
The future could be evaluated as it enables stakeholders to determine the
strength of short, medium and long term objectives.
It ensures that strategic actions carried out would reach the desired goals.
It improves strategic planning and strategic alignment.
It provides better management information.

Cons of balanced scorecard

It is time consuming to put the balanced scorecard into practice.

It includes only limited information about financial performance. To get better
information, it should adopt thorough accounting methods.

Example - Balanced scorecard in the apparel industry

Financial- operating income, return

on investment, economic value
added, return on capital employed

Customer- customer satisfaction and

retention, market share of target
segments

Vision and strategy

Internal business- procument,
production and order fulfillment
processes include measures of
quality and cost throughout

Innovative and learning- employee

satisfaction, retention and training

When employees are adequately trained on the job, they would be satisafied with their
performance and that would enable them to perform their job process effectively. That
would help the organisation to generate a high quality product so that the customers
would be satisfied and that would result in increasing operating income and profits.

Activity- Analysing company performance through balanced scorecard

Shareholder value is one of the main considerations of the financial perspective.
Identify the value drivers that affect shareholder value.
Answer

Sales growth rate

Operating profit margin
Income tax rate
Investment in working capital rate
Fixed asset investment rate
Cost of capital
Planning period

4.2.4 Financial performance

The financial performance of a company should be evaluated as it helps to know about
its financial condition and performance. This section reveals the use of ratios in
analysing financial performance. Financial performance also shows how the business
has grown. In order to evaluate the financial condition and performance of the
company, certain yardsticks are required. Ratio or an index could be used to get a good
understanding of the financial condition and performance.
Knowledge
The financial performance of the organisation shows its financial health and shows
whether it has been able to use its assets efficiently to generate revenue. Financial
performance could be compared with similar organisations, industries or sectors.
Financial condition and the performance could be evaluated using ratios and indices.
There are five types of financial ratios: liquidity, debt, profitability, coverage and market
value ratios.

Liquidity ratios

Liquidity ratios measure the firms ability to meet short-term obligations. Short-term
obligations are compared with short-term resources. In addition, cash solvency could be
judged from liquidity ratios.

Debt ratios

Debt equity ratio is the measure of the relative claims of creditors and owners against
the firms assets. It could be calculated in various ways.

Profitability ratios

These indicate the firms efficiency of operation. There are two types of profitability
ratios.
1. Profitability in relation to sales
2. Profitability in relation to investment

Coverage ratios

Coverage ratios are designed to relate the financial charges of a firm to its ability to
service them. Bond rating institutions extensively use these ratios.

Market value ratios

These widely used ratios relate the market value of a companys stock to profitability,
dividends and book equity.
Pros of using financial ratios

They provide significant information about financial performance and are simple
methods to be followed.

Comparisons are possible between companies and industry standards so that

operational improvements could be made for better performance.

Cons of using financial ratios

They provide only financial information.

Even if the financial performance is favourable, there could be other internal
weaknesses that could hinder the companys performance.
Comparisons cannot be made if identical companies are not available in the
industry.
Historical information may not be appropriate in making decisions for the future.

Importance of measuring performance

If the business intends to grow, it is essential to set targets and measure its performance
continually. Strategic business reviews could also be carried out as they help to clarify
the uncertainties about the business performance and to know better about market and
business opportunities. Measuring performance helps to identify the areas performing
weakly and allows bringing changes to improve performance. In addition, it helps in
improving business performance proactively and efficiently.
Moreover, it is vital to know about key performance indicators. They are also known as
performance standards that monitor how well the processes are being carried out.
Reasons for measuring performance

It helps to improve performance.

A close track of performance enables a company to identify problem areas and remedial
action could be taken.

It facilitates planning and forecasting.

By continually measuring performance, the progress of the business could be checked

and the manager could know whether the firms budgets and forecasts should be
revised or not.

It helps to maintain competitiveness among rivals.

Weak areas could be monitored and improved thereby enabling the company to
compete in the industry.

Example - Use of financial ratios

Motorola Inc is a multinational company operating in the telecommunications industry.
It was established in 1928. Due to the intense competition in the industry, analysing the
financial performance of the company was vital as it helped them to know about their
current position. The analysis was based on the financial information from 2006 to
2009 and the results had shown that there had been a decline in current assets and total
assets. Some of ratios computed were as follows.
Current ratio = 2.0
Quick ratio = 1.5
Debt equity ratio = 32.5
Return on assets = 3.15%
Return on equity = 3.5%
Total assets turnover = 0.9

Activity- Financial performance

Explain the meaning of value based management.
Answer
Any business is a value creating entity. Greater the value created, the more it keeps its
stakeholders happy. The firms strategy aims at attempting to create value. Performance
measures need to focus on the degree of value creation in businesses.

4.3 Micro & macroeconomic policies

This section highlights the importance of micro and macroeconomic policies.
Macroeconomics focuses on the economic behaviour and the policies that have an
impact on the consumption and investment, currency and trade balance, the
determinants of changes in wages and prices, interest rates, government budget and the
national debt. It deals with economic issues and problems. Microeconomics
concentrates on specific economic units and a detailed consideration is given to
behaviour of individual units.

4.3.1 Micro economic policies

Micro economic policies are tools adopted by the government to improve and control
economic growth. It focuses on the behaviour of individual firms, consumers, individual
decision-making units or product markets in making decisions about the allocation of
limited resources. Microeconomics is applied to markets which involves the trade of
goods or services. Microeconomic policies are important as they help to analyse
individual behaviour, facilitate the allocation of resources and help price
mechanisation.

Knowledge
Microeconomics focuses on the behaviour of individual households and firms in
decision making on scarce resources. Further, it considers as to how such behaviours
could have an impact on the demand and supply for goods and services.
Microeconomics is essential to analyse market mechanisms and market failures.
Microeconomics deals with an individual, industry, firm or household and concentrates
upon output of specific product, the number of workers employed by a company and
income of a household.

Microeconomics is important due to the following reasons.

It helps to analyse individual behaviour.

It examines the behaviour of consumers or producers in a given situation.

It facilitates the allocation of resources.

Resources are scarce and due to their scarcity, a choice has to be made. Microeconomics
helps to allocate the limited resources in the best way.

It helps in price mechanization.

Analysis determines the prices of goods and services through demand supply.

Other advantages include the facilitation of a free enterprise economy where each
individual has the freedom to make his or her own economic decision, helps the
government in determining the tax rate to be charged on the buyer and the seller and
further helps to examine social needs under different market conditions.

Example - Microeconomics
Microeconomics helps to analyse current issues, which occur unexpectedly. For
instance, governments had to revise and rethink their energy policies due to the oil
crisis in 1970 and 2005. In such situations, microeconomics could show how subsidies
and taxes could have an impact on the price of other oil substitutes.

Activity- Microeconomic policies

Explain the terms utility, total utility and marginal utility.
Answer
Utility refers to the satisfaction that an individual or a household would receive by
consuming commodities.
Total utility refers to the total satisfaction obtained by consuming a particular
commodity.
Marginal utility refers to the change in satisfaction due to consuming an additional unit
of a particular commodity.

Impact of trends in economic indicators

ADAS model
The ADAS or aggregate demandaggregate supply model is a macroeconomic model that explains
price level and output through the relationship of aggregate demand and aggregate supply.

The aggregate demand curve of an economy is simply the GDP of that economy. GDP
consists of consumption, investment, net exports, and government spending.

A short run aggregate supply (SRAS) curve essentially displays the supply of all businesses
in an economy. The SRAS curve has a direct relationship between economic output and price
level, creating a positive slope on the graph.

Economic indicators help a business understand where the economy is heading. For business owners
and investors, being able to understand the economys health and direction can help guide business
and investment decisions.

Market Indexes

In order for an economic indicator to have predictive value for investors, it must be current, it
must be forward-looking and it must discount current values according to future expectations

Given the global nature of business, it is important to take into consideration both national and
global economic indicators. The top four are: short-term interest rates, long-term interest
rates, bilateral exchange rates, and foreign stock market indices.

The importance of a national economic indicator ultimately depends on a number of factors:

Time of publication
Scope of new information
Accuracy of statistics
Importance for economic policy decisions

Many economic indicators affect businesses. These areas may not be of the utmost importance for
every business, but consider the following list of common economic indicators:
Overall economic growth or industry growth
Interest rates
Government spending
Changes in employment policies and minimum wage
Housing costs
Exchange rates, which impact demand from overseas customers
Availability of capital
Consumer confidence
Average hourly earnings
Personal consumption expenditures

Economic indicators are classified into three categories leading, lagging or coincident. Leading
indicators change before the economy changes, and are one of the most important to investors in
gauging how the economy will perform in the future. Meanwhile, lagging indicators do not change
direction for a few quarters after the economy starts to decline or improve, and coincident indicators
move in tandem with the economy.

The most comprehensive measurement of economic performance and thereby economic

growth is the GDP. In simple terms, GDP can be taken as the sum of consumption,
investment, government purchases and net exports.

The labour market data need to be considered between the data from the production side and
the consumer side. The labour market situation affects demand for goods and services in
turn. In addition, labour market data can provide information on rising inflation pressure and
unemployment levels.

Inflation can be measured using a number of methods. Apart from the GDP price deflator,
which represents the broadest measure of price trends, these primarily include producer and
consumer prices. Nevertheless, for policy-making and market trends it is important not only to
be informed about the current inflation rate but also to assess the inflationary pressure that
may be building.

Even outside trends tend to impact economic indicators.

Aging population
Globalization
Technology
Increasing price of oil
Shrinking middle class
Increasing natural disasters

Economic indicators provide a broad look at the economy.

While some reports may have an indirect impact on consumers and investors, others may
have the potential to shift the direction of both the economy and the markets.

There is an abundance of information available, and knowing what these indicators mean can
help one better understand the health of the economy, as well as investor reaction to
economic news.

4.3.2 Macroeconomic policies

Macroeconomic policies are the study of the entire economy or national economic
parameters such as Gross Domestic Product (GDP), unemployment, inflation and so on.
It considers as to how the above parameters individually and collectively affect
economic growth.
Macroeconomic policies include fiscal and monetary policies. Under fiscal policies,
government spends money or reduces taxes to improve economic growth. Monetary
policy involves increasing or decreasing interest rates to control inflation or economic
growth.
Knowledge
Macroeconomics focuses on economic behaviour and policies that have an impact on
consumption and investment, currency and trade balance, the determinants of changes
in wages and prices, interest rates, government budget and the national debt. It deals
with economic issues and problems.
Macroeconomics studies the aggregate economy and observes changes in national
income, unemployment, gross domestic product, inflation, growth rate and price levels.
Macroeconomic issues
Inflation, unemployment and growth are some of the important issues addressed by
macroeconomics.
Inflation refers to the increase in the general price level of a country. The inflation rate
measures how quickly prices are rising. Rapid increase in overall price level results in
high inflation and it may be due to:

changes in aggregate demand

government increases in the money supply
supply shocks

Inflation brings problems to the economy as it reduces the purchasing power of people
and brings greater uncertainty.
The unemployment rate measures the fraction of the labour force that is out of work.
High unemployment may be due to high recessions. Unemployment occurs when factors
of production are not effectively involved in production of goods or services.
Formula - Unemployment rate

Unemployment rate = Number of unemployed x 100

Labour force
Unemployment is an issue as it results in lower output. Unemployed people would
receive lower income, and therefore, they would have lower living standards.
Growth rate is the rate at which GDP increases. However, GDP growth is affected by the
changes in available amount of resources in the economy and the changes in the
efficiency of factors of production. Stagnant growth would be a problem to any economy
as the supply of aggregate production declines. As per the expectations and population
of the society, the economy should generate adequate goods and services. The quantity
and the quality of factors of production (land, labour, capital and entrepreneurship)
could also lead to stagnant growth.
Importance of macroeconomics

For economic stabilisation

Economic stabilisation is essential for higher economic growth and in improving better
living standards. To achieve economic stabilisation, an economy may avoid excessive
inflation.

To achieve social goals

Income security, education and health care are some of the social goals that could be
achieved through macroeconomics.

To predict economic events

Macroeconomic analysis helps to predict the future course of economic events while
providing knowledge about how the economy works.

To facilitate a stable basis for economic development

In order to facilitate a stable economic development, institutional reforms are required

to solve problems and structural transformation is needed for macroeconomic
management.
Micro and macroeconomic events and the type of economy would affect the society.
When forecasting demand, businesses must evaluate how consumers incomes grow.
Similarly, pensioners and fixed income earners would be affected when the prices go up
as it has an impact on their cost of living.
Taxation policies would have an impact on costs and businesses could see whether such
tax can be passed onto consumers who might end up paying high prices.

The monetary policy committee decides on the rate of interest to be charged. High rate
of interest increases the cost of borrowing money and cause consumers to reduce
expenditure.
Example - Macroeconomics
One of the main objectives of macroeconomic policy is to achieve full employment.
When there is unemployment in the economy, such objective cannot be achieved. In
October 2013, the unemployment rate in UK was 7.4%.
Investigations state that 40% of young people have experienced mental illness and
panic attacks due to unemployment. The main causes for unemployment include
frictional unemployment (moving between jobs), structural unemployment (mismatch
of skills) and use of technology instead of labour.
German employees in 1923 were paid twice a day so that they were able to purchase
food and other goods before the next price increase. It was due to doubling of prices
every two days. People had to carry a lot of money to the shop. They exchanged goods
without accepting money. Pensions on fixed income became worthless. Printing of
menus was pointless for restaurants because by the time the food was ready, the prices
had already gone up. This sort of inflation confirmed that the old Mark was of no use.

Activity- Macroeconomic policies

Explain the relationship between money supply and price level.
Answer
The rise in money supply increases the quantum of money that circulates among the
public. It would result in an increase in the nominal income of the public. The ultimate
outcome of it is an increase in demand for goods and services. In a situation where
production does not proportionately change, it would generate an excess demand
leading to an increase in the price level.
4.3.3 Economic reforms
Economic reforms help the growth of an economy. When the country is faced with a
certain situation, distinctive measures such as devaluation of the currency, removing
subsidies, encouraging foreign investments have to be take into consideration. This
section provides and understanding of economic reforms. Economic reforms become
essential when the country is facing an economic crisis, changes in technology, greater
vulnerability and economic crisis.

Knowledge
Economic reform is a process that aims at improving and shifting the market economy.
To reform an economy, certain structural adjustments are required. Countries use
structural adjustments as distinctive measures and they include:

Liberalising industries
Privatisation of government entities
Promoting exports with a view to encourage growth
Encouraging foreign investments and technologies

The need of economic reforms have risen due to the inefficiencies in the public sector,
adverse increase in the balance of payment and fiscal deficit and increase in prices and
so on.
To any economy, economic reforms are vital as they help in the growth of an economy,
improve competitiveness, provide a favourable environment for business entities, and
reduce unemployment and poverty.
Microeconomic reforms focus on specific sectors and their ultimate goal is to increase
the productive capacity of an economy. By implementing such reforms, the government
intends to increase the aggregate supply.
Microeconomic reforms include policies aimed at achieving economic efficiency by
eliminating distortions in individual sectors and reforming economic policies such as
tax and competition policies.

Example - Economic reforms

Liberalisation in the services sector has enabled the sector to compete internationally
with lesser government regulations and restrictions. Due to the low cost, Indias IT
sector has become more competitive as many countries have outsourced their
administrative functions there. When the sector is liberalised, there is a possibility of
foreign investors coming in with advanced technologies, learning techniques and better
skills. Economic management is vital as trade liberalisation could bring certain risks to
countries.

Activity- Economic reforms

Identify the disadvantages of economic reforms.
Answer
In a market economy, the focus is on earning profits. It would distort the investment
priorities, as public needs would be given less attention.
Exploitation of workers would increase as the employers would continuously thrive to
make more profits.
Inequality of the society and the economy would grow. It would lead to the rich people
getting richer and the poor people get poorer.
Corruption would spread across the society, as the rich would exert their power.

Mini Test
MCQs
1. The balanced scorecard looks at:
a. Financial, customer, product and innovation and learning perspectives
b. Customer, supplier, internal business, innovative and learning perspectives
c. Financial, customer, internal business, innovative and learning perspectives
d. Financial, supplier internal business, innovative and learning perspectives

Answer
Correct answer - c
The balanced scorecard helps to look at the business from four perspectives, namely
financial, customer, internal business, innovative and learning.

2. Corporate performance cannot be evaluated from:

a. Accounting ratios
b. Porters diamond theory
c. Gap analysis
d. Balanced scorecard
Answer
Correct answer - b
Only b is incorrect as Porters diamond theory explains how a nation can create a
competitive advantage. He concludes that certain industries use their national
backgrounds to create an excellent competitive advantage.

3. Macroeconomic deals with:

a. Behaviour of individual firms
b. Behaviour of consumers
c. Behaviour of decision-making units
d. Entire economy

Answer
Correct answer - d
Macroeconomic is a study of the entire economy and takes into consideration the
national economic parameters of gross domestic product, unemployment, inflation, etc.

Short answer questions

1. What are the effects of inflation?

Answer
A high inflationary situation affects business organisations, consumers and the economy
and the purchasing power of money declines. The effects of inflation are as follows.

It distorts consumer behaviour

It undermines business confidence
It makes organisations less competitive
It discourages investments
Instability in prices bring uncertainty
Dissatisfaction of creditors increase as they receive lower value
Dissatisfaction of fixed income recipients

2. What are the advantages of conducting an economic analysis?

Answer
Economic analysis is the process of determining the optimum use of resources. It
enables to identify the strengths and weaknesses of a particular economy.
Advantages

It helps to plan the future activities

It helps in accurate decision making
It helps to identify opportunities and threats
It helps to assess the risk
It helps to assess business cost and benefits

Scenario based question

Top Deliver Inc. was established 15 years ago and engages in the delivery of gifts
ordered online by customers to various parties. The company has performed well
financially until the recent past. However, its profits are increasing at a decreasing rate
in the last couple of years. Further, Top delivery Inc. is facing some cash flow issues. The
CEO of Top deliver Inc. is continuously focusing on its financial performance and
worried over the financial decline.
Customers have increasingly made complaints regarding the delays in delivering the
gifts. Further, some of the gifts delivered are not in acceptable condition. The company
is still using the delivery vehicles, which were purchased 15 years ago, and thus they
require a lot of repairs and maintenance. It was recently identified that it is difficult to
access Top delivery Incs site for online ordering. Presently, the company purchases gift
items from various suppliers and has not looked at opportunities to have its own range
of products.
Required:
Analyse Top Delivery Incs performance and how it could improve it.

Answer
Top Delivery Inc. could use the balanced scorecard to measure its performance. It seems
that the company is concerned only about its short-term profitability. It is important to
note that performance is derived not only financially but also through other nonfinancial measures. Cash flow issues should be addressed on time as it could bring
liquidity issues.
From a customer perspective, the company should find out the reasons for the delays in
delivering the gifts. It should identify whether it has lost existing customers and found
new customers.
In terms of the internal business processes, the company has to identify the reasons for
the products not having the expected standard of quality. The company should revise
the list of suppliers to ensure that it is up to the expected standard required by
customers. Further, it has to take measures to ensure that its down time is minimal by
updating and upgrading its software system.
To avoid delays and quality issues in gifts delivered, Top Delivery Inc. should think of
re-investing in new vehicles, which would in turn reduce its maintenance cost over the
years to come.
It seems that the company has not focused on its growth and learning prospects. It is
high time for Top Delivery Inc. to design and develop its own range of gift items so that
it would allow the company to ensure quality of gifts at the same time.

6
MCQs
1. What is the correct strategy to manage the minimal effort group?
a. Education and communication
b. Direction
c. Intervention
d. Participation and involvement

[Syllabus area 1: Creating, designing and running an entrepreneurial venture]

Answer
Correct answer - b
Stakeholders of minimal effort group include casual workers, part time staff,
contract staff and minority shareholders and they are likely to listen to what is said.
Therefore, direction is required to manage them.

2. Which of the factors affect general business behaviour?

a. Consumer behaviour
b. Cultural & technological factors
c. Political & economic factors
d. All of the above
[Syllabus area 2: Business behaviour and global environment]

Answer
Correct answer - d
Factors affecting general business behaviour include consumer behaviour, cultural
technological, political and economic factors.

3. Diversification decision is considered under

a. Business strategy
b. Tactical strategy
c. Corporate strategy
d. Functional strategy
[Syllabus area 3: Firms objectives, strategies, policies and factors affecting the new
venture]

Answer

Correct answer - c
Corporate strategy is concerned with long-term direction and deals with an
organisations overall purpose, scope and how synergies are created. Therefore,
diversification decision is a corporate strategy.

Short questions
1. What are the challenges entrepreneurs face when starting a new venture?
[Syllabus area 1: Creating, designing and running an entrepreneurial venture]
Answer
When starting a new business venture, entrepreneurs face many challenges as
well as obstacles in reaching their desired vision and objectives.
The challenges are:
Strategic planning
Managing resources to build competencies
Managing people
Raising of finance
Time management
Leadership

2. What are the benefits of having a work place policy?

[Syllabus area 3: Firms objectives, strategies, policies and factors affecting the new
venture]

Answer
Workplace policies are guidelines of standard operating procedures applicable at the
workplace and provide transparency when dealing with issues.

Workplace policies become essential to an organisation for the following reasons.

They help the organisation focus on the vision, goals and objectives.

They help in consistent and fair decision making.

They provide proper direction on employee behaviour.

They assist in business planning.

They provide roles and responsibilities of each position.

They help to minimise operational risks

Scenario based question

David is an entrepreneur who intends to start-up a small biscuit manufacturing
enterprise. Before starting up the venture, David has found some information with
respect to the industry. Two major biscuit manufacturers dominate the entire market.
The biscuit market has matured and the two major competitors are of equal size.
Further, varieties of biscuits are offered at low and moderate prices and the switching
cost to the buyer is low.
The key players in the market have created brand identity in positioning their biscuits.
In addition, as wheat and sugar are basic commodities, a large number of suppliers are
seen in the market. David has recognised that there is great demand for the bread
industry and traditional homemade snacks. He is already aware that entering the biscuit
market requires a massive capital investment in machinery, advertising and
distribution.

Required:
As an external consultant to David, carry out a competitor analysis for the new venture.
Answer
Based on Porters five forces, the biscuit industry could be analysed with respect to
rivalry among firms, bargaining power of customers, bargaining power of supplier,
threat of substitutes and threat of new entrants.
Existing rivalry between firms is high as there are two dominant players, the biscuit
market is matured and the competitors are of equal size. It seems that the bargaining
power of customers is also high, as the switching cost to the buyer is low and due to the

availability of biscuits at low and moderate prices. Further, key biscuit manufacturers
have created brand identity, where customers have shown loyalty to such brands and
that has made customers more powerful.
Bargaining power of suppliers is low as the commodities supplied (wheat and sugar)
are basic in nature.
Threat coming from substitutes, such as bread industry and traditional homemade
snacks is moderate. These substitutes place a limit on the pricing strategy. Further, it
forces product improvement and quality.
Barriers to entry for the biscuit industry are high, as it requires massive amounts of
capital investments. Further, there could be legal barriers such as government license. A
new venture may not have access to distribution channels and economies of scale.

[Syllabus area 1: Creating, designing and running an entrepreneurial venture]

7 Frequent questions
MCQs
1. Methods of growth include:
a. Joint ventures
b. Acquisition
c. Mergers
d. All of the above
[Syllabus area 2: Business behaviour and global environment]

Answer
Correct answer - d
Methods of growth could be in the form of joint ventures, acquisition, mergers or
organic.

2. Policy is a:
a.
b.
c.
d.

Course of action to meet a objective

Principle or a rule giving guidelines for management of decision making
General expression of the overall purpose
Precise statement of the goal

[Syllabus area 3: Firms objectives, strategies, policies and factors affecting the new
venture]
Answer
Correct answer - b
Only b is correct while the others refer to strategy, mission and objective. Policy is a
general statement giving guidelines for better decision making.

3. Survival is one of the goals of

a. Customer perspective
b. Internal business perspective
c. Innovation & learning perspective
d. Financial perspective
[Syllabus area 4: Corporate performance, measurement and economic analysis]

Answer
Correct answer - d

Survival is taken into consideration under financial perspective and it is measured using
cash flows.

Short questions
1. What are the key personality traits of entrepreneurs?
[Syllabus area 1: Creating, designing and running an entrepreneurial venture]

Answer
Key personal traits and behavioural characteristics are essential in successfully running
and managing a business venture. Following are some of the essential traits an
entrepreneur should possess.

Motivation to achievement
Entrepreneurs with great motivation for achievement tend to set challenging targets
and work hard towards achieving them. This is an important aspect to influence work
behaviour.

Affiliation
Entrepreneurs with high need for affiliation tend to enjoy working with groups to
maintain a good relationship.
Ability to take risks
Entrepreneur should have the ability to risk time, energy and money for the succession
of its entrepreneurial venture. Ability to take risks is a trait that makes a difference
between entrepreneurs and non- entrepreneurs.

Perseverance

The entrepreneurs should posses this trait to face challenges and overcome them.

Tolerating uncertainty
This is a difficult trait to be learnt by entrepreneurs. When situations of uncertainty
exist, the entrepreneur should be able to tolerate such uncertainty.

Optimistic and flexible

Tend to learn from mistakes and failures and try applying the knowledge gained from
mistakes positively to the next challenge.

2. Why it is important to identify critical success factors?

[Syllabus area 3: Firms objectives, strategies, policies and factors affecting the new
venture]
Answer
Critical success factors are the factors on which the strategy is fundamentally
dependent for a businesss performance.
It is vital to identify critical success factors due to the following:
It drives the strategy for any firm
It helps the organisation to focus on important activities
It helps the organisation to achieve competitive advantage
It helps strategic planners to collect and validate the information
Scenario based question
Diamond Inc. is a family run business that engages in designing and cutting of diamond
jewelry. The company was established for the last 30 years and is reputed for quality
and design.
As the family members run Diamond Inc., there is no formality involved in running the
business. The leadership of the family is highly autocratic and has little trust and
confidence in their subordinates. Motivation of subordinates is mainly through fear and
punishment. The decision making of the business was limited to the top and they

engage in downward communication. The leaders of Diamond Inc. are conscious of

meeting targets and creativity and innovation was not given priority.
The recent financials of the company has shown a decline in sales. Further, it is found
out that there is a high staff-turnover of employees together with high level of
absenteeism.
Required:
As an external consultant to the diamond Inc., analyse the reasons for its drop down in
sales revenue, coupled with the high level of staff turnover and absenteeism.
Answer
Leadership style followed by the leaders of Diamond Inc. seems highly autocratic. As
they have only a little confidence and trust in their subordinates that would make them
feel that they are not part of the business. As the company is in the jewelry business, it
requires a passion for creativity and innovation. The leaders should in fact create an
environment or a culture that supports creativity and innovation for the business to
grow and prosper. It is important to get ideas and opinions of employees and use them
constructively.
It does not seem like the leaders motivate the employees adequately. They should
realise that the employees are a key success factor in their business, as they possess the
skills, talent and techniques required for cutting and designing the diamond jewelry.
In order to improve sales and reduce both staff-turnover and absenteeism, the leaders
of Diamond Inc. should have trust and confidence in their subordinates and should
move towards a more participative approach to leadership.

[Syllabus area 1: Creating, designing and running an entrepreneurial venture]

8 Tough questions
MCQs
1. Characteristics of strategic decisions include
a. Affecting operational decisions
b. Involving major resource changes
c. Concerned with the scope of an organisations activities
d. All of the above

[Syllabus area 3: Firms objectives, strategies, policies and factors affecting the new
venture]
Answer
Correct answer - d
Strategic decisions have all characteristics mentioned under a, b and c. Apart from the
characteristics above, long-term direction, involving building on or stretching resources,
trying to achieve some advantage for the organisation and matching its activities to the
environment in which it operates are some other characteristics of the same.

2. Which of the following statement is true?

a. Uncertainty depends on complexity and stability.
b. Scenario planning, intuition and learning approaches are vital in a dynamic
environment.
c. Complexity makes the environment difficult to understand.
d. All of the above
[Syllabus area 2: Business behaviour and global environment]

Answer
Correct answer - d
When the environment is complex and dynamic, greater will be the uncertainty. In a
dynamic environment, scenario planning, intuition and learning approaches are
essential as they focus on responding to rapid change. Furthermore, diversity of
operations brings complexity and therefore, understanding the environment would be
difficult.

3. Which of the following statement is not true?

a. Cost of borrowing would go up as a result of high interest rates
b. Unemployment is an economic result of recession
c. Exchange rate fluctuations do not affect businesses
d. Inflation creates price distortions
[Syllabus area 4: Corporate performance, measurement and economic analysis]
Answer
Correct answer c
Only c is incorrect. Exchange rate fluctuations do affect business activities, as
businesses would find it difficult to plan the future. This would affect demand for
imports and exports.

Short answer questions

1. Explain the importance of conducting a feasibility study by an entrepreneur.
[Syllabus area 1: Creating, designing and running an entrepreneurial venture]

Answer
A feasibility study is vital in analysing a proposal or an idea as it evaluates viability. The
main purpose of a feasibility study is to decide whether to proceed with the idea or not.

A feasibility study includes historical background of the new business, description of

products or services, details of operations and management, marketing research and
policies, financial plans, legal requirements and tax requirements.
Conducting a feasibility study is important due to the following.

It helps new entrepreneurs to analyse markets current position and growth

potential.

It helps to analyse key competitors and their actions.

It helps entrepreneurs to decide how the new business should approach the
market.

It helps to protect the business from failures.

It helps to determine potential cash flows.

It provides business focus.

2. sStrategies made at the strategic business unit level include generic strategies of
cost leadership, differentiation or focus.
Required:
Determine how a firm could achieve overall cost leadership.
[Syllabus area 3: Firms objectives, strategies, policies and factors affecting the new
venture]

Answer
The cost leadership strategy seeks to achieve the lowest cost position in the industry
and tries to compete on price and generate greater profits.
To achieve overall cost leadership, the firm should take the following actions.

Set up production facilities to attain economies of scale

Minimise overhead costs
Focus on improving productivity
Acquire favourable access to sources of supply
Use of the latest technology
Exploitation of the learning curve effect

Scenario based question

River Reef is a three star hotel. It was established fifteen years ago. The hotel is situated
in the countryside facing a famous river of that country. The environment seems ideal
for a hotel set up and attracts both local and foreign guests until the last financial year.
Financial records of River Reef do not look very appealing in the current year, as there is
a massive drop in sales revenue. The consultants are of the view that it is due to the
poor accommodation services. Further, there were many complaints with respect to
room maintenance and customer service in attending to guest queries and laundry
services.
Required:
You are required to analyse the critical success factors of River Reef.

Answer
A powerful brand name is necessary for a business such as River Reef that operates in
the hospitality industry. A good brand name would always attract and retain customers.
Thus, River Reef should ensure that it carries out its activities without affecting its
brand image.
Atmosphere is another important factor that affects the performance of a hotel. As River
Reef is located in a beautiful surrounding with natural beauty, it is no doubt that it helps
the hotel in attracting and retaining the guests.

Strong financial controls should be in place for the efficient management of short and
long-term finances.
Refurbishment and maintenance are vital in running a hotel like River Reef. The hotel is
criticised for poor accommodation and room maintenance. Thus, the company should
take prompt action to improve the conditions of the rooms and maintenance.
Staff should be adequately trained to enhance guest satisfaction and to handle guest
queries without any delay.
Further, River Reef should have a professionally qualified team of chefs to manage food
and beverages with due care with the applicable hygiene standards.

[Syllabus area 3: Firms objectives, strategies, policies and factors affecting the new
venture]

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