DP IB Business Management: Your notes

HL
6.1 The Business Management Toolkit
Contents
SWOT Analysis
Ansoff Matrix
STEEPLE Analysis
Boston Consulting Group (BCG) Matrix
Business Plan
Decision Trees
Descriptive Statistics
Circular Business Models
Force Field Analysis
Gantt Charts
Hofstede’s Cultural Dimensions
Porter's Generic Strategies
Contribution
Critical Path Analysis
Simple Linear Regression

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 SWOT Analysis
Your notes
Understanding SWOT Analysis
SWOT Analysis is an analytical tool used by businesses to identify
Internal strengths and weaknesses
External opportunities and threats
Effective SWOT analysis can help senior managers to understand the current business
position and future changes that may occur so that appropriate strategic decisions
may be made
Factors Considered in a SWOT Analysis

STRENGTHS WEAKNESSES

What the business is good at What the business does poorly

For example: For example:
Qualities that separate the Ways in which the business lags
business from rivals behind competitors
Internal resources such as skilled Resource or capital limitations,
staff or a particular innovation including labour and finance
Possession of assets such as Lack of a competitive advantage
capital, patents or intellectual
property Lack of a unique selling
proposition (USP)
A loyal customer base
Poor online presence
Effective leadership

OPPORTUNITIES THREATS

Options a business may exploit to Hazards that have the potential to

enjoy further success damage business performance
For example: For example:
Developing markets for specific New or emerging competitors are
products become apparent gaining market share
Few competitors exist A changing legal or political
environment negatively impacting
A changing legal or political on business processes and
environment positively impacts on decisions
business processes and decisions
Social or technological
Social or technological developments threaten
developments create an obsolescence of products

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 emerging need for the businesses Economic indicators becoming
products less favourable
Economic indicators becoming Your notes
more favourable Negative press coverage

A potential for positive media Changing customer attitudes

coverage of the business towards the business

Once a SWOT Analysis has been completed by a business, appropriate decisions can be
made to improve performance
Strengths should be harnessed
Weaknesses should be eliminated
Opportunities should be seized
Threats should be mitigated

Diagram: example SWOT analysis

An example of a SWOT Analysis for a small cafe business

Having compiled the SWOT Analysis the owner of the cafe may conclude that the
business should
Seize the opportunity presented by the growing interest in locally sourced
ingredients by promoting the cafe's strength of its seasonal, locally sourced menu,
especially given the threat from large competitors
Make use of the government funding for staff training to attempt to reduce staff
turnover

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 Increase the volume of sales to a geographically wider target market by teaming up
with delivery apps and establishing an inexpensive social media presence
Your notes
Evaluating the SWOT Analysis Tool
The usefulness of SWOT analysis depends on a range of factors
Factors Affecting the Usefulness of SWOT Analysis

Factor Explanation

The quality & The accuracy and reliability of the data used for SWOT
relevance of data analysis greatly influence its usefulness
used
If the information used for analysis is outdated, incomplete
or biased, it can lead to flawed conclusions and ineffective
decision-making

Objectivity & bias SWOT analysis requires a fair and unbiased assessment of
the organisation's internal and external factors
If the analysis is influenced by personal biases, preconceived
notions or subjective opinions, it can undermine the
usefulness of the analysis

Depth of analysis Superficial analysis may overlook important factors or fail to

capture the complexity of the organisation's environment
A comprehensive and thorough analysis can provide more
accurate insights and improve the usefulness of SWOT
analysis

Stakeholder SWOT analysis should involve input from various

involvement stakeholders within the organisation, including employees,
managers, customers, suppliers, and industry experts
Their diverse perspectives can provide a broader
understanding of the organisation's strengths, weaknesses,
opportunities and threats, thus increasing the usefulness of
the analysis

Dynamic nature of As market conditions, technology and consumer

the business preferences change over time, the relevance of identified
environment strengths, weaknesses, opportunities and threats may also
shift
Regular updates and revisions to the analysis are necessary
to ensure its usefulness

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 Ansoff Matrix
Your notes
Development of Corporate Strategy
Ansoff’s Matrix is a tool for businesses who want to grow quickly and have a growth
objective
It is used to identify an appropriate corporate strategy and identify the level of risk
associated with the chosen strategy
The model considers four elements, which are broken down into two categories
The market - existing and new markets
The product - existing and new products

Diagram: Ansoff's matrix

Ansoff’s Strategic Matrix

Market penetration
The least risky strategy to achieve growth is to pursue a strategy of market penetration
This involves selling more products to existing customers by encouraging
More regular use of the product
Increased usage of the product
Brand loyalty of customers
Market development involves finding and exploiting new market opportunities for
existing products by
Entering new markets abroad

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 Repositioning the product by selling to different customer profiles (selling to other
businesses as well as direct to consumers)
Your notes
Seeking complementary locations
E.g. M&S Food has achieved significant growth since teaming up with fuel
retailers such as BP and Applegreen and providing express retail outlets
Product development
Product Development involves selling new or improved products to existing
customers by
Developing new versions or upgrades of existing successful products
Redesigning packaging and aesthetic features
Relaunching heritage products at commercially convenient intervals
E.g. Lindt relaunches Christmas-themed products each year, often with a
subtle design change, to recapture the interest of customers

Diversification
Diversification is the most risky growth strategy as it involves targeting new customers
with entirely new or redeveloped products
Examples of diversification include
UK supermarket Tesco launching a range of financial products including current
accounts and credit cards
Café chain Greggs launching a range of themed clothing products

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 STEEPLE Analysis
Your notes
STEEPLE Analysis
STEEPLE analysis examines factors outside of the business (external) that are likely to
impact the business
STEEPLE analysis can support effective decision-making as senior managers will gain a
better understanding of the complex context within which the business operates
STEEPLE Analysis is particularly useful in the following situations
Product development
STEEPLE analysis can provide guidance on whether the business should keep selling
a product to a particular region
Workforce planning
STEEPLE analysis can help identify emerging business changes that can affect the
future job market
Strategic business planning
STEEPLE analysis is beneficial when starting a business planning process as it
provides a detailed guide that includes growth targets, brand positioning, and
potential risks
Marketing planning
STEEPLE analysis provides a business with information on external factors which
could be used to create a marketing strategy
An Explanation of the STEEPLE Factors

External Explanation Examples

Factor

Social The extent to which personal Greater numbers of

attitudes and values, culture and people graduating from
demographic change are university have increased
expected to affect the business the quality of workers
including available to European
businesses
Social mobility
A more health-conscious
Education population provides a
Ethics & Religion lucrative market for
businesses selling fitness
Migration and lifestyle products
Health profile
Population growth and
demographic structure

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Technological The extent to which technological Developments in
change and innovation are communication
Your notes
expected to impact the business technology have reduced
including the need for business
travel
Research & development
Rapid developments in
Production and distribution technology have reduced
processes and efficiency the length of product life
Quality and new materials cycles and increased the
need for businesses to
Intellectual property carry out ongoing
research, development
Online presence and innovation
The technology used in
communication

Economic The extent to which economic High rates of fuel and food
indicators are expected to directly inflation in parts of Europe
impact business performance have reduced the level of
including disposable income for
most households
Inflation
A historically low
Exchange rates unemployment level has
Cost of living made recruitment more
challenging for many EU
The stage of the Business businesses
Cycle and GDP growth
Unemployment levels

Environmental The extent to which changes in Increased interest in

attitudes and government policy environmentally
towards environmental protection responsible and ethically-
as well as the impact of global produced goods has
warming expected to impact the created new markets for
business including businesses to exploit
Changing infrastructure - for Strict rules on the disposal
example in favour of green of commercial waste have
transportation networks increased costs for
businesses
Energy availability & cost
Disposal of materials
Changes in climate and
weather patterns
Air quality

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Political The extent to which local and The UK’s decision to leave
national government is expected the EU in 2016 has led to
Your notes
to influence the business including the reintroduction of
trading restrictions for
Government stability and British businesses
relationships with key trading importing goods from
partners suppliers in Europe
Tax regulations The reduced level of
Trade restrictions threat from terrorism in
Ireland has helped to
Political Ideology and attitude boost tourism
to Business
Fiscal policy
National security status
Investment in public services

Legal The extent to which changes in law Changes to the level of tax
and regulations are expected to levied on high sugar
impact the business including products (sodas) across
Europe has increased
Taxation selling prices and
Employment prompted some
businesses to redevelop
Advertising their product to reduce
the sugar content
Health & Safety
A rise in the level of the
Compliance and ‘red tape’ minimum wage increases
created by regulatory bodies business staffing costs
such as the Health and Safety
Executive

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Ethical The extent to which moral Many supermarkets have
principles ought to be considered implemented 'above and
Your notes
in the decision-making process, beyond' policies related
for example to the sale of alcohol and
tobacco and require
Being truthful about products customers to prove that
and using responsible they are significantly older
marketing practices than the minimum legal
Paying staff and suppliers on age of sale
time and in full
Trading fairly
Being accurate and realistic
about financial performance
Avoiding discrimination

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 Boston Consulting Group (BCG) Matrix
Your notes
Boston Matrix & the Product Portfolio
The Boston Consulting Group (BCG) Matrix is a tool used by businesses to analyse their
product portfolio and make strategic decisions about each product
The matrix classifies products into four categories based on their market share and the
market growth rate
Cash Cow
Problem Child/Question Mark
Star
Dog

Diagram: the Boston matrix

The classification of products in the Boston Matrix according to their market share and the
growth rate in the market as a whole

By categorising products into these categories, businesses can allocate resources

more effectively, optimise their cash flow and develop marketing strategies that align
with the product's potential
The Boston Matrix, Cash Flow and Marketing Strategy

Product Type Explanation Implications

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 Cash Cow Cash cows are products They generate significant
with a high market share in positive cash flow but have low
Your notes
a mature market (the growth potential
entire market is no longer
growing) The business invests minimal
resources in cash cows as they
are seen as stable sources of
income
Marketing efforts focus on
maintaining their market share
and profitability
Cash cows are valuable assets
and can be used to fund the
development of new products

Problem Problem child or question There is often a negative cash

Child/Question mark products have a low flow as businesses usually
Mark market share in a high- invest in problem child
growth market products to increase their
market share and turn them
These products have the into stars
potential to become stars
if the company invests in If the investment does not
their development result in growing the business
may discontinue the product
Marketing efforts focus on
increasing their market share
and brand recognition

Star Star products have a high They generate significant

market share in a high- positive cash flow and have
growth market the potential for continued
growth
The company typically
invests in stars to maintain Marketing efforts focus on
or increase their market building brand recognition,
share increasing market share, and
maintaining profitability
Stars are valuable assets and
the business should focus on
maximising their potential

Dog Dog products have a low They generate little revenue for
market share in a low- the company and have no
growth market growth potential
Businesses often move away
(divest) from these to focus on

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 more profitable products
Marketing efforts for dog
products are minimal or zero Your notes

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 Business Plan
Your notes
Business Plan
A business plan sets out key aspects of a business and how the owners intend it to
develop
The main aim of producing a business plan is to reduce the risk associated with starting a
new business and help the owners raise finance
Producing a business plan forces the owner to think about every aspect of the
business before they start, which should reduce the risk of failure

Diagram: elements of a business plan

Common Elements of a Business Plan

Having carried out research to support the plan, the business will be well-informed
about the potential problems and chance of success and can select the most
appropriate source of finance based on this information

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 A well-written business plan can help a business obtain finance
Lenders (e.g. banks) and other investors will be able to explore the plan and make an Your notes
informed decision about whether the business is credible and worth the financial
risk
Investors (e.g. venture capitalists) will use the business plan to explore whether
there is an opportunity to increase the value of their investment and make a
worthwhile profit
The business, having carried out research to support the plan, will be well-informed
about the potential problems and chance of success and can select the most
appropriate source of finance based on this information
A business plan should be a regularly-updated working document
As the business grows plans are likely to change as it faces new threats and
opportunities
Key Elements in a Business Plan

Element Explanation

Executive Summary This section provides an overview of the business idea, its
unique selling proposition, target market, and financial
projections
It should be concise yet compelling enough to grab the
reader's attention

Company A description of the business mission, vision, and values

Description Information about the legal structure, location and any unique
advantages or intellectual property the business may have

Market Analysis A thorough analysis of the target market, including its size,
growth potential and key trends
Identification of target customers and their needs
A competitor analysis to understand their strengths and
weaknesses

Products or A detailed explanation of the products/services the business

Services will offer, highlighting their features, benefits and any
competitive advantages they may have

Marketing & Sales A description of the intended marketing and sales approach,
Strategy including marketing channels, pricing strategy and
promotional tactics
A description of how customers will be attracted and their
loyalty captured

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Organisation & An overview of the organisational structure of the business
Management and the key members of the team, including their
Your notes
qualifications, experience and responsibilities

Operations & A description of how the business will operate on a day-to-

Implementation day basis, including the production process, stock
management and any key partnerships or suppliers

Financial A detailed financial forecast for the business, including

Projections projected income statements, balance sheets and cash flow
statements
An outline of funding requirements and any existing or
potential sources of finance

Risk Analysis A consideration of the potential risks and challenges the

business may face and the intended strategies for mitigating
them

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 Decision Trees
Your notes
Decision Tree Diagrams
A decision tree is a quantitative method of tracing the outcomes of a decision so that
the most profitable decision can be identified
Research-based estimates and probabilities are used to calculate likely outcomes
The net gain from a decision can be identified and used to consider whether an
investment is worthwhile
Using decision trees provides several key advantages to the decision making process
Constructing a decision tree diagram may reveal options that haven't previously
been considered
Managers are forced to consider the risks associated with their choice, ahead of
implementation
The quantitative approach requires deep research to be carried out

Decision tree diagrams

The key elements in a decision tree diagram are
Decision points
Outcomes
Probabilities
Expected monetary values

Diagram: a simple decision tree diagram

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 Your notes

A simple decision tree based on the choice of whether to invest in opening a new store or
expand its website

Points where decisions need to be made are called Decision Points and are represented
by squares
Square A represents the fact that a choice is required on opening a new store or
expanding the website
Points where there are different outcomes are represented by circles called nodes
Circles B and C represent points at which the different options have a range of
outcomes - success or failure
The probability or likelihood of each outcome is shown on the diagram
A certain outcome has a probability of 1
An impossible outcome has a probability of 0
Opening a new store has a 0.7 probability of success and a 0.3 probability of
failure
Expanding the website has a 0.6 probability of success and a 0.4 probability of
failure
The monetary value of each decision is based on the expected profit or loss of the
outcome

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 If opening a new store is successful a £420,000 profit is expected
If opening a new store is unsuccessful a £24,000 loss is expected Your notes
If expanding the website is successful a £480,000 profit is expected
If expanding the website is unsuccessful a £32,000 loss is expected
Calculating expected monetary values
To compare the options, a business should take into account the expected values of
each decision presented in the decision tree diagram
To calculate the expected monetary value of a decision, the following formula is used
(Expected value of success x Probability) + (Expected value of failure x Probability)
Using the example above the expected value of opening a new store is
(£420,000 x 0.7) + (-£24,000 x 0.3)
= £294,000 + -£7,200
= £286,800
Using the example above the expected value of expanding the website is
(£480,000 x 0.6) + (-£32,000 x 0.4)
= £288,000 + -£12,800
= £275,200
As the expected value of opening a new store is higher at £286,800, than that of
expanding the website at £275,200, based purely on financial terms, the business
should choose the option to open a new store

Variations in the decision tree diagram

In some cases, the decision tree diagram provides expected revenues rather than
profit or loss for the range of outcomes
In these diagrams, the costs related to each outcome are also provided
To calculate the expected value of each outcome, costs must be deducted from
expected revenues

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 Your notes

A decision tree based on a decision whether to launch a new product or improve an

existing product

Explanation
To calculate the expected monetary value of a decision, revenues and costs are
included in the diagram
(Expected value of success x Probability) + ( Expected value of failure x Probability) - Cost
The expected value of launching a new product is
(£520,000 x 0.6) + (-£54,000 x 0.4) - £280,000
= £312,000 + -£21,600 - £280,000
= £290,400 - £280,000
= £ 10,400
The expected value of improving the existing product is
(£225,000 x 0.9) + (-£22,000 x 0.1) - £190,000
= £202,500 + -£2,200 - £190,000
= £200,300 - £190,000
= £ 10,300

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As the expected value of launching a new product is marginally higher at £10,400 than
that of improving the existing product at £10,300, the business should choose the
option to launch a new product Your notes
In this case the decision tree has demonstrated that there is little between the two
options and the business should look at other factors that may inform their decision

Worked Example
Caramelac is a lactose-free chocolate product manufactured by a large multinational
confectionery business. In recent years increased competition from other well-
known brands has started to impact on sales of the product and managers are
determined to maintain Caramelac’s market share.
Market research has shown that the business has two options:
a) Redevelop the product
b) Create a new advertising campaign
The expected outcomes and the probabilities of success and failure are shown in the
decision tree below

Calculate the expected values of each option and decide, on financial grounds, which
option the Caramelac's brand managers should choose. (6 marks)

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 Answer:
Step 1 - Calculate the expected value of redeveloping the product Your notes
(£840,000 x 0.5) + (-£84,000 x 0.5)
= £420,000 + -£42,000
= £378,000 (2 marks)
Step 2 - Calculate the expected value of the advertising campaign
(£660,000 x 0.6) + (-£76,000 x 0.4)
= £396,000 + -£30,400
= £365,600 (2 marks)
Step 3 - Interpret the outcomes and make a decision
As the expected value of redeveloping the product is higher at £378,000 than that of
the advertising campaign at £365,600 (1 mark), the business should choose the
option to redevelop the product (1 mark).

Examiner Tips and Tricks

Expected values are not the same thing as profit or revenues generated by a choice.
In the above example, launching a new product is expected to either generate a
positive revenue figure of £520,000 or generate a negative revenue figure of
£54,000. It is never forecast that a revenue figure of £200,300 will be achieved. This
is purely a figure used in making the choice between this option and the alternative
and does not represent the actual amount of revenue that is expected to be
achieved.

Limitations of Using Decision Trees

Constructing decision trees that can support effective decision-making requires skill to
avoid bias and takes significant amounts of time to gather reliable data
A decision tree is constructed using estimates which rarely take full account of external
factors and cannot include all possible eventualities
Qualitative elements such as human resource impacts are not considered, which may
affect the probability of success of a decision
The time lag between the construction of a decision tree diagram and the
implementation of the decision is likely to further affect the reliability of the expected
values

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Descriptive Statistics
Your notes
Mean, Median & Mode
Simple statistical analysis may include calculating the average of a given set of
numerical data, using one of three methods
The mean is commonly considered the true average - where all the numbers in a
data set are added and then divided by the number of numbers
The median is the middle value in the list of numbers
The mode is the value that occurs most often in a set of data

Worked Example
RapidKleen kept a record of mobile vehicle valets carried out each day during a busy
holiday period.
Find the mean, median, mode, and range of mobile valets during the period using the
following data:

Day 1 2 3 4 5 6 7

No. of valets sold 14 10 12 12 14 15 14

[6 marks]
Answer:
Step 1: To calculate the mean, first add together each of the values

14 + 10 + 12 + 12 + 14 + 15 + 14 = 91
Step 2: Divide the total by the number of values
91 ÷ 7 = 13 [2 marks]
Note that the mean in this case isn't a value from the original data set
This is a common result - you should not assume that your mean will be one of
your original numbers and you should not be surprised when it isn't
Step 3: To calculate the median first rewrite the data set in numerical order
10, 12, 12, 14, 14, 14, 15
Step 4: Identify the middle number
There are seven numbers in the list, so the middle one will be the (7 + 1) ÷ 2 = 8 ÷ 2 =
4th number:
10, 12, 12, 14, 14, 14, 15

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 So the median is 14 [2 marks]
Note: The formula for the place to find the median is "([the number of data Your notes
points] + 1) ÷ 2", but you don't have to use this formula
You can just count in from both ends of the list until you meet in the middle if
you prefer, especially if the data set is small
Step 5: To calculate the mode rewrite the data set in numerical order
10, 12, 12, 14, 14, 14, 15
Step 6: Identify the number that occurs most often in the list
14 occurs three times
14 occurs x3
12 appears x2
10 appears x1
15 appears x1
As it appears most frequently, the mode number of valets sold is 14 [2 marks]

Standard deviation
The standard deviation is a measure of the spread of numbers within a set of data
It is a particularly useful tool for planning when managers have wide ranges of data and
need to organise resources effectively

Worked Example
FreshBite is a pre-packaged sandwich manufacturer which produces a range of
products that are sold in cafés and refreshment stands in tourist attractions such as
theme parks.
Freshbite's sales are highly variable - the business regularly suffers from high levels of
wastage as a result of having large quantities of unsold stock. On several occasions it
has also been unable to fulfil orders from customers as it has not produced enough
units.
The business has recently employed a new operations manager who has suggested
that calculating the standard deviation of sales would aid planning. He has requested
the last month's sales data to allow him to calculate this.

Product Last month's sales ($)

A 110,000

B 27,000

C 12,000

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 D 54,000

E 7,000 Your notes

Calculate the standard deviation of last months' sales for Freshbite.

[4 marks]
Answer:
Step 1: Calculate the mean
110,000 + 27,000 + 12,000 + 54,000 + 6,000 = 210,000
210,000 ÷ 5 = 42,000 [1 mark]
Step 2: For each product, subtract the mean and square the result

Product Last month's sales ($000s) Minus mean = Squared =

(000's)

A 110 68 4,624

B 27 -15 225

C 12 -30 900

D 54 12 144

E 7 -35 1,225

[1 mark]
Step 3: Add up the squared differences and express in an expanded form
4,624 + 225 + 900 + 144 + 1,225 = 7,118
= 7,118,000 [1 mark]
Step 4: Find the square root to identify the standard deviation

, ,
7 118 000 = .
$ 2667 96 [1 mark]

Note - in this instance, a significant standard deviation from the mean informs
Freshbite's managers that they need to carefully plan for significant variations in sales.
This may include detailed market research as well as capital investment to reduce
wastage (for example, further freezers).

Quartiles
Quartiles
Quartiles are the values that divide a list of numbers into quarters

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 Analysis of data using quartiles allows a business to see the distribution and spread of
data
Your notes
The first quartile is the lower 25% of a list of numbers
The second quartile is the lower 50% of a list of numbers
The third quartile is the lower 75% of a list of numbers
The top quartile is the highest 25% of a list of numbers
The interquartile range excludes outlying data in the top and bottom quartiles and
examines the middle spread of data
The Application of Quartile Ranges to a set of data

First Quartile

Second Quartile

Third Quartile

Top Quartile

Interquartile Range

3 3.5 4.5 5 6 6.5 7.5 8

Worked Example
BestGrip is shoe manufacturing business that employs a team of sales managers who
receive performance-related monthly bonuses on top of their monthly salaries.
Bonuses are awarded to those sales managers who achieve sales in the top quartile.
Sales data for the month of May are shown in the table below.

Salesperson Volume of Sales

A 24,300

B 25,350

C 26,650

D 22,100

E 26,200

F 27,800

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 G 22,950

H 28,450 Your notes

I 23,750

J 29,200

K 27,350

L 27,900

Identify the sales managers to be awarded a bonus in May.

[4 marks]
Answer:
Step 1: Put the list of data into order, from smallest to largest

Salesperson Volume of Sales

D 22,100

G 22,950

I 23,750

A 24,300

B 25,350

E 26,200

C 26,650

K 27,350

F 27,800

L 27,900

H 28,450

J 29,200

[2 marks]
Step 2: Divide the list into four equal parts:

Salesperson Volume of Sales

D 22,100 Quartile 1

G 22,950

I 23,750

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 A 24,300 Quartile 2

B 25,350 Your notes

E 26,200

C 26,650 Quartile 3

K 27,350

F 27,800

L 27,900 Quartile 4

H 28,450

J 29,200

[1 mark]
Step 3: Identify the data within the top quartile
In this case, sales managers L, H and J will receive a performance-related bonus in
May [1 mark]

Graphs & Charts

Analysis of data contained in graphs and charts and the communication of complex data
in these forms are important business skills
Data may be presented in a range of forms
1. Bar charts
Bar charts show data that are independent of each other such as sales per store

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 Your notes

An example of a bar chart showing sales revenue of a selection of home video

entertainment formats in the USA in 2017

(Source: British Council)

2. Pie charts
Pie charts show how a whole is divided into different elements such as total sales
divided amongst different product types

An example of a pie chart showing Apple's quarterly revenue by category in April 2021

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 (Source: Six Colours)
Your notes
3. Infographics
Infographics are easy to understand visual representations of data

An example of an infographic used by Mars to communicate key business statistics

(Source: Mars)

Worked Example
Maggri Spice Ltd manufactures a range of hot curry pastes that are sold online and in
specialist stores.
In 2022 total sales were $180,000, with sales for individual products shown in the pie
chart below.

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Calculate the value of sales of Blue Heat curry paste in 2022.
[2 marks] Your notes
Answer:
Step 1: Identify the percentage of total sales attributed to Blue Heat
In this case, 23.9% of total sales can be attributed to Blue Heat
Step 2: Convert the percentage to a decimal
23.9% = 0.239 [1 mark]
Step 3 - Multiply total sales by the decimal
$180,000 x 0.239 = $43,020
Blue Heat curry paste achieved sales of $43,020 in 2022 [1 mark]

Examiner Tips and Tricks

You can make use of descriptive statistical techniques throughout both exam papers.
They are particularly useful when making comparisons or supporting chains of
analysis to lead to a judgement. You do not have to wait to be told to use them in your
work - become accustomed to applying them to data in your work as you move
through the course.
Interpreting data using these tools is a higher level approach to application and
demonstrates that you are making optimum use of data presented in case study
materials - this really does impress the examiner!

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 Circular Business Models
Your notes
Circular Business Models
A circular business model is an approach to business designed to minimise the
consumption of scarce resources and reduce waste whilst maximising the use and
value of resources
Materials and products are recycled, reused, or regenerated rather than being
disposed of after use
A circular business model is also known as the cradle-to-cradle approach
In a circular business model, products are designed with durability, reparability, and
recyclability in mind
The focus is on creating products that can be easily disassembled and their
components reused or recycled
This promotes the use of renewable resources, reduces dependence on finite
resources and minimises a businesses environmental impact
Adopting a circular business model requires a shift in mindset including
Involving multiple stakeholders including businesses, governments, consumers
and investors
Rethinking business processes, product design, supply chains, and waste
management practice
Key Principles of a Circular Business Model

Principle Explanation

Design for Products are designed to have a longer lifespan reducing the
longevity need for frequent replacement

Resource Resources are used efficiently throughout the product

efficiency lifecycle, minimising waste and optimising material usage

Recycling & reuse Materials from products that have reached the end of their life
cycle are recycled or reused to create new products or
components

Product as a Instead of selling products, businesses provide them as

service services, such as leasing or renting, encouraging product
sharing and extending their lifespan

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 Biomimicry Nature-inspired design principles are used to create products
and processes that mimic natural systems resulting in greater
Your notes
sustainability

Collaboration & Businesses collaborate with suppliers, customers and other

partnerships stakeholders to create closed-loop systems and promote the
exchange of materials and knowledge

Advantages of a circular business model include

reduced waste generation
decreased reliance on finite natural resources
cost savings through resource efficiency
enhanced brand reputation
increased resilience to resource scarcity and price volatility

Patagonia: an example of a circular business

One example of a business with a circular business model is outdoor clothing company
Patagonia which has implemented several initiatives to promote sustainability and
reduce waste
Its circular business model focuses on extending the life of products, promoting repair
and reuse, using recycled materials and encouraging responsible consumption
The "Worn Wear" program encourages customers to repair and reuse their clothing
instead of buying new items
The business offers free repairs for their products and also sells used clothing
through their online platform, extending the lifespan of their products and
reducing the overall demand for new clothing
Patagonia has made efforts to use recycled and environmentally friendly materials in
their products
E.g. they have introduced a line of clothing made from recycled plastic bottles and
recycled polyester and use organic cotton to minimise the environmental impact of
their manufacturing processes
Patagonia encourages responsible consumption by actively discouraging customers
from purchasing products they don't need
E.g. advertising campaigns with slogans like "Don't buy this jacket" raise
awareness about the environmental consequences of excessive consumption

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 Force Field Analysis
Your notes
Force Field Analysis
Force field analysis involves managers identifying the driving and restraining forces
that surround a strategic change decision
Once identified these forces can be analysed to determine whether a decision
should go ahead

Driving forces
Driving forces are factors that could justify that strategic change is needed
Internal driving forces may include:
Outdated machinery or product lines
Declining team morale
The need to increase profitability
External driving forces may include:
A volatile market
Disruptive technologies e.g. AI
Changing demographic trends

Restraining forces
Retraining forces are factors that could prevent or limit change
Internal restraining forces may include:
Fear of the unknown
The existing organisational structure
"That's not how things are done here" attitudes
External restraining forces may include:
Existing commitments to partner organisations
Government legislation
Obligations towards customers

Weighting the forces

Driving forces and restraining forces are weighted from 1 to 5 in terms of their relative
importance
A value of 5 is most important and 1 least important

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Diagram: force field analysis
Your notes

Force field analysis for the field above

Four driving forces justify a decision for change
Their weightings are 5, 4, 3 and 2
The total value of these driving forces is 5 + 4 + 3 + 2 = 14
Four restraining forces prevent or limit change
Their weightings are 4, 3, 2 and 1
The total value of these restraining forces is 4 + 3 + 2 + 1 = 10
The relative weight of driving forces is greater than the relative weight of restraining
forces
There is a good chance that this decision would be successful
To maximise the chance of success driving forces could be further strengthened or
restraining forces weakened/eliminated

Worked Example
After several years of poor financial performance the owners of Lujosa Ltd are
considering the relocation of their factory from Spain to Indonesia.
Department managers have provided feedback on the idea. They have identified the
following driving and restraining forces.

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 Force Description Weighting

Driving Need to reduce production costs to increase 5 Your notes

profitability

Outdated production machinery in Spanish factory 3

affects volume and quality of output

Difficulty of recruiting and retaining skilled 1

employees in Spain

Restraining Costs of relocation including construction and 4

fitting of a brand new factory in Indonesia

Employee resistance to job losses 2

Disruption to production during the change period 4

(a) Use force field analysis to determine whether Lujosa's owners should go ahead
with the decision [4]
Step 1: Construct the force field analysis

[1]
Step 2: Calculate the relative weight of driving forces
5+3+1=9
[1]
Step 3: Calculate the relative weight of restraining forces
4 + 2 + 4 = 10

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 [1]
Step 4: Compare the relative weights of driving and restraining forces Your notes
The relative weight of restraining forces (10) is greater than the relative weight of
driving forces (9)
There is little chance that this decision would be successful and should
be abandoned
[1]

(b) Identify two actions Lujosa's owners could take to allow the move to Indonesia
to go ahead [2]
Relevant actions include
Outsource production during the relocation process
Research ways to reduce costs of building and fitting of the new factory
Consult and engage with workers to reduce fears of redundancy
[2]

Evaluating Force Field Analysis

Force field analysis is a valuable technique for assessing the factors influencing a
situation
However it has limitations, particularly in situations where precision is required
It is most effective when used alongside other decision-making tools to ensure a
comprehensive understanding of the situation
Force field analysis has a range of strengths and weaknesses
Evaluating Force Field Analysis

Strengths Weaknesses

Simple and Visual Subjective

Easily understood by Relies on perceptions/judgements
stakeholders of individuals or teams
Simple diagram makes it Can lead to bias in the analysis
accessible

Comprehensive Lacks Quantitative Data

Considers both the driving Challenging to assign specific
forces and restraining forces weights or measures to the forces,
which limits the precision of the
This helps in understanding the analysis
complexity of a situation

Identifies most critical factors Snapshot

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 Visualising/ranking helps clarify Does not account for how forces
which forces have the most might change over time
significant impact on the desired Your notes
change This is crucial in dynamic/evolving
business environments

Assists Decision-Making Doesn't Provide Solutions

Provides a structured way to It is a diagnostic tool, not a
evaluate pros and cons of a prescriptive one
proposed change or decision
Managers need to develop
appropriate strategies

Aids Communication Limited in Complex Situations

Teams discuss and share their Oversimplifies analysis and fails to
perspectives on the driving and capture the intricacies of the
restraining forces problem
Leads to a shared
understanding/better
collaboration

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 Gantt Charts
Your notes
Gantt Charts
A Gantt chart is a project management tool used to visualise and plan tasks and their
dependencies over time
It lists the tasks to be performed on the vertical axis
Time intervals are shown on the horizontal axis
The width of the horizontal bars in the graph shows the duration of each activity
The current schedule status can be illustrated in the diagram

Diagram: Gantt chart

An example of a simple Gantt chart used to plan the development and launch of a web
app

In this example the project comprises seven distinct activities

Market research
Starts on 8th January and ends on March 17th
Duration of 40 days
Currently 40% complete
App design
Starts on 16th February and ends on July 20th

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 Duration of 154 days
Currently 84% complete Your notes
Development
Starts on May 29th and ends on September 3rd
Duration of 98 days
Currently 51% complete
Testing
Starts on July 29th and ends on September 7th
Duration of 40 days
Currently 48% complete
Launch
Starts on September 8th and ends on November 18th
Duration of 72 days
Currently 0% complete
Support
Starts on October 1st and ends on December 31st
Duration of 92 days
Currently 0% complete
Maintenance and documentation
Starts on June 13th and ends on December 11th
Duration of 152 days
Currently 72% complete
Gantt charts can also show who is responsible for an activity and any dependencies
between activities

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 Your notes

A Gantt chart used to plan construction tasks for the year

This example shows the tasks the business has been employed to complete over the
year
Project managers for each task are identified in the key
Dependent tasks are identified by lines

Worked Example
Neuheit Möbel is planning to relocate its head office. The operations manager has
identified the tasks required to complete the relocation efficiently
Relocation is expected to commence on 1st July. It is hoped that it will be complete by
1st December

Task Preceded by Duration (weeks)

A - 3

B - 4

C A 3

D B 6

E C/D 2

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 F E 1

G F 4 Your notes

H F 2

I H 3

(a) Construct a Gantt chart using the data in the table [4]

[4]
(b) Identify the total number of weeks the head office relocation is expected to
take [2]
4 months x 4 weeks = 16 weeks
1 month x 2 weeks = 2 weeks [1]
16 weeks + 2 weeks = 18 weeks [1]
(c) State whether the head office relocation will be complete by 1st December [1]
Yes - the relocation will be complete by mid-November

Evaluating Gantt Charts

The effectiveness of Gantt charts as a project management tool depends on the
specific project's characteristics
They are useful for projects with well-defined timelines and dependencies
They are less useful for highly dynamic or complex projects
Gantt charts should be combined with other project management tools to maximise
their usefulness

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 An Evaluation of Gantt Charts in Project Planning

Strengths Weaknesses Your notes

Visual clarity Complex & time-consuming

Easy for team members Projects with many tasks and
/stakeholders to understand dependencies are difficult to schedule
the schedule at a glance in a Gantt chart
Easy to compare planned Creating/maintaining Gantt charts uses
timelines with actual progress management time particularly when
changes are frequent

Resource allocation & Inflexibility

communication
Adjusting the schedule is difficult when
Can show when specific many tasks are dependent on each
resources are needed for other
various tasks
Focus on the time taken may not
Can share project timelines provide a clear view of the level of
and plans with team members demand of different tasks
and increase transparency

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 Hofstede’s Cultural Dimensions
Your notes
Hofstede's Cultural Dimensions
Hofstede's model is a way of understanding the culture of a country based on its
cultural values
It can help organisations improve communication and cooperation between
people from different cultures
It provides a framework for understanding how cultural differences can affect
business dealings
The Hofstede organisation uses surveys to generate scores for each country using six
different variables
These scores are then accessible to businesses to use in their decision-making
process
The tool is most useful when the scores of different countries are compared with
each other

Diagram: country rankings using Hofstede's model

A comparison of cultures using Hofstede's model

(Source: Country Comparison Tool)

Six different dimensions are used for comparison
Each dimension is expressed on a scale that runs from 0 to 100
If a score is under 50, the culture scores relatively low on that scale
If any score is over 50, the culture scores high on that scale
An Explanation of Hofstede's Six Cultural Dimensions

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 Dimension Explanation Examples
Your notes
Power Power Distance is defined as the Low-scoring
Distance extent to which the less powerful countries include
members of institutions and Australia, the USA and
organisations within a country expect Finland
and accept that power is distributed
unequally High-scoring
countries include
Mexico, Russia and
Philippines

Individualism The degree of interdependence a Low-scoring

society maintains among its members (collectivist)
countries include
In Individualist societies people China, Pakistan and
are supposed to look after Malaysia
themselves and their direct family
only High-scoring
(individualist)
In Collectivist societies people countries include the
belong to 'in groups' that take UK, South Africa and
care of them in exchange for Italy
loyalty

Motivation A high score (Decisive) on this Low-scoring

Towards dimension indicates that the society countries include
Success will be driven by competition, Norway, Portugal and
achievement and success Chile
A low score (Consensus-oriented) on High-scoring
the dimension means that the countries include
dominant values in society are caring Germany, Japan and
for others and quality of life Australia

Uncertainty The extent to which a society tolerates Low-scoring

Avoidance or avoids uncertainty and ambiguity (tolerant) countries
include Sweden,
The extent to people feel Tunisia and Namibia
threatened by unknown situations
and have created beliefs and High-scoring
institutions that try to avoid these (avoiding) countries
are reflected in this score include Spain, Turkey
and Ecuador

Long-term The extent to which society has to Low-scoring (long-

Orientation maintain some links with its own past term) countries
while dealing with the challenges of include Ukraine,
the present and future Latvia and Norway

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 Low score countries prefer to High-scoring (short-
maintain traditions and norms term) countries
include Venezuela, Your notes
Those with high scores encourage Morocco and Saudi
modern education as a way to Arabia
prepare for the future

Indulgence The extent to which people try to Low-scoring

control their desires and impulses (restrained) countries
based on the way they were raised include Poland,
Indonesia and Estonia
These are defined as restrained and
indulgent societies High-scoring
(indulgent) countries
include Argentina,
Ireland and New
Zealand

Using Hofstede's Model

Hofstede's model can help businesses to make informed decisions and develop
appropriate strategies when operating in international markets
In particular the model can help a business to
Understand cultural differences across locations in which it operates
Focus its market research and product development
Tailor its promotional activities
Structure HR, training and team management appropriately
Determine suitable international expansion strategies
Consider approaches to corporate social responsibility

Applying Hofstede's cultural dimensions to AirBnB's

international operations
Launched in 2008, Airbnb is a US-based company operating an online marketplace for
private hosts to promote short- and long-term homestays and experiences
The company acts as a broker and charges a commission from each booking
It operates in around 220 countries around the world and generated its first profit in
2022
AirBnB Hofstede Analysis

Cultural Explanation Application to AirBnB

Dimension

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 Power In low power countries, In Australia AirBnB's
Distance AirBnB considers the needs promotional activities focus on
Your notes
of a broad range of people the convenience and ease of
whose focus is on elements booking/paying for stays in
of a product that make their properties
tasks easier
Mexican promotional activity
In high power countries, focuses on financial returns for
AirBnB focuses on meeting property owners and possible
the needs of key decision cost savings for users of the
makers by emphasising their platform
products benefit the whole
family or company and how
products can make their
leadership a success

Individualism In countries with high Advertisements for senior roles

individualism AirBnB's in AirBnB's London office
recruitment and selection emphasise the performance-
processes emphasise the related pay and bonus rewards
personal success that the business offers
recruits could achieve by
working within the business Host recruitment policies in
Malaysia emphasise the wealth
In low individualism that groups of AirBnB
countries, AirBnB emphasises properties in areas that lack
the social and collective hotels can generate for
aspects of working for the communities
business

Motivation In decisive societies, AirBnB In the US AirBnB has

Towards has set challenging targets established regional sales
Success for growth into new markets headquarters in major cities
which operate independently
AirBnB's approach in and compete to attract large
consensus-oriented volumes of hosts and bookings
societies' is less target-
driven, emphasising quality In Norway AirBnB has
and the minimisation of developed its Airbnb Plus and
negative impacts of short- Beyond by Airbnb schemes
term lets on populations which focus on encouraging
hosts to offer high-quality,
premium priced properties

Uncertainty In countries with high In Sweden AirBnB lettings

Avoidance tolerance to uncertainty, the include a former military hut, a
AirBnB market tests many of lighthouse and several
its new services and treehouses!
encourage hosts to make
more unusual properties In Spain all AirBnB hosts are
available to rent encouraged to provide

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 In countries with low standard facilities in their
tolerance to uncertainty, the properties such as a private
range of properties available entrance Your notes
for rent is relative narrow and
standardised

Long-term In long-term outlook In Latvia AirBnB hosts receive

Orientation countries, AirBnB may extensive guidance and
emphasise its commitment practical support on achieving
to social responsibility by carbon neutral status for their
encouraging its hosts to rental properties
adopt environmentally
friendly practices in its In Chile the availability of low-
properties cost housing has significantly
worsened since AirBnB's
In short-term outlook successful marketing
countries, AirBnB's focus is campaigns to recruit hosts in
more profit- or sales- major cities
focused

Indulgence In restrained societies, Polish citizens take fewer

products may be designed to holidays than their European
appeal on the basis of logic, counterparts - AirBnB's
common sense or good value properties in Poland tend to be
large and are aimed at longer
In indulgent societies, AirBnB family stays
encourages its hosts to offer
aspirational properties that In New Zealand AirBnB has a
appeal to people's desire to growing selection of very
'treat themselves' short-term, super-luxury
'experience' properties

Evaluating Hofstede's Model

Whilst Hofstede's model can help businesses make better decisions, it has been
criticised as outdated and for leading to confirmation bias
An Evaluation of Hofstede's Cultural Dimensions Model

Strengths Weaknesses

Structured framework makes Generalisation

comparison easy
Culture is complex and dynamic -
It is a structured framework for reducing it to a set of dimensions
understanding and comparing can reinforce stereotypes
cultures, which improves
awareness

Credible model Lack of nuance

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 Research into the model involved It treats a country as if all its people
thousands of respondents from share the same characteristics -
different countries this is often not the case, especially Your notes
in very large countries such as the
US

Clear and simple Ethnocentrism

The small number of dimensions Hofstede's model is rooted in
makes the model accessible and Western cultural values so may not
easy to apply capture the true nature of non-
Western cultures

Practical application Changes over time

Understanding cultural Cultures shift due to various
dimensions can help with adapting factors, including globalisation and
strategies and communication so generational shifts
they are effective in different
countries

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 Porter's Generic Strategies
Your notes
Porter's Generic Strategies
Porter’s Generic Matrix identifies a range of strategies a business can utilise to increase
their success
The matrix considers two factors
Its source of competitive advantage (cost or differentiation)
The scope of the market in which it operates (mass or niche)
Porter's generic strategies provide a clear framework for businesses to determine the
most appropriate strategy to succeed in the mass market or within a smaller niche
market
It emphasises the importance of developing distinctive capabilities and avoid being
'stuck in the middle'

Diagram: porters generic matrix

Porter's generic matrix identifies suitable strategies for mass and niche markets

The model encourages businesses to make strategic choices that are difficult for
competitors to copy
Pursuing one strategy forces the business to make explicit choices about its direction
and concentrate on it
The model does not offer guidance to businesses on specific tactics or implementation
The model often overlooks external factors such as technological change, economic
conditions and changes in laws which could impact competitive position

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Stuck in the middle
Porter argued that failing to adopt one of the strategies risks a business being ‘stuck in Your notes
the middle'
This means it is unable to compete successfully with rivals in the market because
each strategy is different
A business should select its strategy and concentrate its resources on pursuing it
rather than simply responding to its competitors actions
Pursuing a mixture of strategies is also not feasible in the long term
For example, cost leadership and differentiation are unlikely to be financially
compatible
Low prices combined with high quality can negatively affect consumer
perceptions of the product

Mass Market Strategies

Cost leadership
Most suitable for businesses that have a significant cost advantage over rivals
Cost leadership with parity is where a business has lower costs than rivals but
charges the same price
Examples include hotel chains such as Premier Inn and Ibis Styles
Cost leadership with proximity is where a business has lower costs and charges a
lower price than rivals
Examples include budget airlines such as Southwestern and Ryanair
Evaluating the Cost Leadership Strategy

Advantages Disadvantages

Economies of Scale Risky

Cost leadership involves large- May result in a price war if more
scale production and lower unit than one business in a market
cost pursues this strategy
Competitive Pricing Quality Concerns
Cost leaders can offer lower prices Low costs/prices are often linked
than their competitors which to poor quality
attracts more customers
Barriers to Entry
New rivals struggle to fund required
capital investment

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Differentiation
Businesses that cannot be the most competitive on cost should make its products Your notes
distinct from those of rivals
Successful differentiation allows a business to charge a premium price and achieve a
high profit margin
Examples of businesses that adopt a mass market differentiation strategy include Coca
Cola, Samsung and Volvo
Coca Cola's trusted and well-known branding includes its logo, brand colours and
characters such as the Coca Cola truck
Samsung's cutting-edge mobile phones have the most advanced package of
technical features in the mass market
Volvo's focus on safety and build quality allows it to charge premium prices in the
mass market

Diagram: ways to achieve differentiation

Businesses can achieve differentiation through branding, customer service, design

features and quality

Evaluating a Differentiation Strategy

Advantages Disadvantages

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 Premium Pricing High Costs
Customers are willing to pay more Researching, developing and Your notes
for unique features, quality or maintaining unique features requires
brand image significant budgets
Brand Loyalty Customer Preferences
A strong brand image can lead to Fashions, trends and customer
less price-sensitive, loyal preferences change over time
customers
Fewer Competitive Pressures
A differentiated product is
difficult for rivals to imitate

Niche Market Strategies

Businesses that operate in niche markets should adopt one of two focus strategies that
closely meet the needs of its specific group of customers

Cost focus strategy

A cost focus involves being the lowest cost competitor within the market niche
Examples of businesses that adopt a cost focus strategy include Carnival Cruise
Line and Glasses Direct
Carnival Cruises sells cruises to locations including the Caribbean and Europe
and is well-known for it's eye-catching low fares that can be offered due to its
fleet of smaller vessels that operate at full capacity
Glasses Direct is an online retailer of spectacles that sells popular styles of
lesser-known brands at very low prices as a result of its low overhead costs

Differentiation focus strategy

A differentiation focus involves offering specialised products within the niche market
Examples of businesses that adopt a differentiation focus strategy include Hotel
Chocolat and Brompton Bicycle Retail Ltd
Hotel Chocolat sells a range of premium, fair-trade celebration confectionary
in its chain of beautifully-designed retail outlets
Brompton Bicycle Retail sells innovative products such as the folding bicycle
that closely meet the needs of its wealthy commuter target market
An Evaluation of Niche Market Strategies

Strengths Weaknesses

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Focusing on a specific niche allows a Focusing on a small segment limits
business to tailor its products or services sales potential
Your notes
to a particular audience
If the niche market shrinks or
Can be highly profitable as low changes, the business may struggle
competition allows high prices to be to break even
charged
Larger competitors might enter the
Serving a niche market well can lead to niche market and outcompete the
strong customer loyalty focused business.

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 Contribution
Your notes
An Introduction to Contribution
Contribution is generated where the production process adds value
This added value contributes to paying a businesses indirect costs (fixed costs)
Contribution is the difference between sales revenue and variable costs
The amount left over contributes towards paying the fixed costs
Contribution per unit is calculated using the formula

Selling price − Variable cost per unit

Total contribution is calculated using the formula

Contribution per unit × Quantity of output

Key uses of Contribution Analysis

Make or Buy Analysis Contribution Costing Absorption Costing

Determining whether to A method of costing where A method of costing that

manufacture in-house or only direct costs are allocates both direct and
purchase from a third-party allocated to products indirect costs to products

Make or Buy Analysis

This process helps to decide if a business product should be manufactured in-house or
outsourced to a supplier
If the cost to manufacture (CTM) is lower than the cost to buy (CTB) a business
should manufacture the product in-house
If the CTB is lower than the CTM a business should outsource production to a third-
party supplier

Worked Example
Renflux can manufacture processors for $3.50 per unit. It can buy the same product
from suppliers for $4.30 per unit. It expects to sell 6,000 processors per month.
Renflux has fixed costs of $8,000 per month. [4 marks]
Step 1 - Identify the cost to make (CTM) and cost to buy (CTB)
CTM = $3.50

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 CTB = $4.30
Step 2 - Identify the quantity needed to be sold to cover fixed costs Your notes
Fixed costs
−
CTB CTM

= ,
$ 8 000 [2]
. −
$ 4 30 $ 3 50.
= 10, 000 units
Step 3 - Identify whether Renflux should make or buy
Fixed costs would only be fully covered if Renflux were to sell 10,000 units
In this case it expects to sell only 6,000 units
Renflux should therefore make the processors in-house [2]

Make or buy analysis is a quantitative decision-making method

However, qualitative factors should also be considered before the decision is made
Qualitative Factors that can Affect Make or Buy Decisions

Qualitative Factor Explanation

1. Available Whether the business has sufficient staffing, production

capacity facilities and storage to manufacture in-house

2. Timeframe Whether the need for the product is urgent

Whether production timescales may be affected if products
are not available

3. Expertise Whether the business has the skills and know-how to

manufacture the product
Whether the supplier has particular capabilities in
manufacturing the product

4. Reputation of Whether the supplier delivers on-time and within budget

suppliers
Whether specifications and desired quantities can be met

5. External Whether exchange rates or protectionist barriers affect price

influences or delivery of products from suppliers

Contribution Costing

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 Contribution costing is a method of costing where direct costs are allocated to
products or departments of a business
Your notes
It assumes that indirect costs must be paid during a particular time period
regardless of the level of production for each product
Each profitable product contributes towards paying these overheads

Example: Lickety split desserts

Lickety Split is a seaside ice cream café
It sells a range of ice cream and sorbet-based desserts
The table below shows a contribution analysis for its top-selling products
Contribution Analysis for Lickety Split's Top-Selling Desserts

Product Average unit price Average variable cost Unit contribution

($) ($) ($)

Super Sundae 8.95 3.45 5.50

Nutty 9.95 4.25 5.70

Surprise

Fruit Supreme 8.95 4.30 4.65

Ice Magic 8.95 2.25 6.70

ChocoLick 9.95 6.60 3.35

Data analysis
Ice Magic is the strongest product
It earns the highest contribution ($6.70) per product sold
ChocoLick is the weakest product
It earns the lowest contribution ($3.35) per product sold
Twice as many ChocoLick as Ice Magic desserts would need to be sold to generate
the same level of contribution
All of Lickety Split's products are profitable because the unit contribution is positive in
each case

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 This positive contribution can go towards paying Lickety Split's indirect costs of
operating the café
Your notes
Absorption Costing
This method determines the most appropriate way to apportion indirect costs to
products or departments of a business
Indirect costs need to be apportioned so that all costs of production are fully
covered
Selling prices are then set accordingly
This ensures that the business is able, at the very least, to break even
A simple way to apportion indirect costs is to split them equally across products or
departments

Example: Lickety split desserts

Lickety Split is a seaside ice cream café
It sells a range of ice cream and sorbet-based desserts
The business has monthly indirect costs of $7,500
Indirect costs are split equally across the five top-selling desserts
The table below shows an absorption costing analysis for its top-selling products
Absorption Costing Analysis for Lickety Split's Top-Selling Desserts

Product Average Average Unit Indirect Cost Break Even

unit price variable contribution Allocation Point
($) cost ($) ($) ($) (desserts)

Super 8.95 3.45 5.50 1,500 273

Sundae

Nutty 9.95 4.25 5.70 1,500 263

Surprise

Fruit 8.95 4.30 4.65 1,500 323

Supreme

Ice Magic 8.95 2.25 6.70 1,500 224

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 ChocoLick 9.95 6.60 3.35 1,500 448
Your notes

Data analysis
Indirect costs of $1,500 are allocated to each product equally
The break even point for each product can be calculated using the formula

Indirect Costs
Break Even Point = Unit Contribution
As long as each product achieves its break even point Lickety Split's indirect costs will
be covered

Examiner Tips and Tricks

Other criteria that may be used to allocate indirect costs including
Floor area occupied by a product or department
Sales volume or value
Number of employees
Output levels
Use the data provided to accurately allocate the indirect costs to the relevant
product - and in the correct proportions

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 Critical Path Analysis
Your notes
The Nature & Purpose of Critical Path Analysis
Critical path analysis is a project management tool that uses network analysis to plan
complex and time-sensitive projects
It involves the construction of a visual model of the project that includes key elements
A list of all activities required to complete the project
The time (duration) that each activity will take to complete
How each project activity depends on others
Critical Path Analysis shows
The order in which activities must be completed
The longest path of project activities to the completion of the project
The earliest and latest that each project activity can start and finish without
delaying completion of the project as a whole
Activities within a project that can be carried out simultaneously are identified
The critical project activities which if delayed will cause the project as a whole to
over-run
Those project activities where some delay is acceptable without delaying the
project as a whole
The shortest time possible to complete the project
It allows managers to identify the relationships between the activities involved and to
work out the most efficient way of completing the project
Resources such as raw materials and components can be ordered or hired at
precisely the right time they are needed
Working capital may be managed efficiently
Where delays occur managers can identify the implications for the project’s
completion and redirect resources if required

The Components of Network Analysis Diagrams

Diagram: network analysis

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 Your notes

An example of a simple network diagram showing key elements

A network diagram must always start and end on a single node

Lines must not cross and must only be assigned to activities
Explaining the Elements of a Network Diagram

Element Description

Node A node is a circle that represents a point in time where an activity is

started or finished
The node is split into three sections
The left half of the circle is the activity number
The top right section shows the earliest start time (EST) that an
activity can begin based on the completion of the previous activity
The bottom right section shows the latest finish time (LFT) by which
the previous activity must be completed

Activities An activity is a process or task within a project that takes time

Activities are shown on the network diagram as a line which link nodes
A description of the activity or a letter representing the activity is usually
shown above the line

Duration The duration is the length of time it takes to complete an activity

The duration is shown as a number of time units such as hours or days
below the activity line

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Calculating Earliest Start Times
Working forward from Node 1, it is possible to calculate the Earliest Start Time for each Your notes
activity by adding the duration of each task

An example of a simple network diagram showing Earliest Start Times

Network diagram analysis

The EST for each activity is placed in the top right of each node
Node 1 is the starting point of the project and where both Activity A and Activity B
begin
Activity A and Activity B are independent processes
Activity A has a duration of 2 days and its earliest start time (EST) is 0 days
Activity B has a duration of 3 days and its EST is also 0 days
Activity C and Activity D both begin at Node 2 and are dependent upon the
completion of Activity A but are independent from each other
Activity C has a duration of 3 days and its EST is 2 days
Activity D has a duration of 5 days and its EST is also 2 days
Activity E begins at Node 3
Activity E has a duration of 4 days and its EST is 3 days
Activity F begins at Node 4
Activity F has a duration of 2 days and its EST is 5 days
Activity G begins at Node 5
Activity G has a duration of 1 day and its EST is 7 days

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 Activity H begins at Node 6
Activity H has a duration of 3 days and its EST is 7 days Your notes
Node 7 is the end point of the project
Calculating Latest Finish Times
Working backwards from Node 7, it is now possible to calculate the Latest Finish Time
(LFT) for each activity by subtracting the duration of each task

An example of a simple network diagram showing Earliest Start Times and Latest Finish
Times

Network diagram analysis

The LFT for each activity is placed in the bottom right of each node
Node 7 is the end point of the project, which has a latest finish time of 10 days
Activity H has a duration of 3 days
The LFT in Node 6 is 7 days (10 days - 3 days)
Activity G has a duration of 1 day
The LFT in Node 5 is 9 days (10 days - 1 day)
Activity F has a duration of 2 days
The LFT in Node 4 is 8 days (10 days - 2 days)
Activity E has a duration of 4 days
The LFT in Node 3 is 3 days (7 days - 4 days)
Activity D has a duration of 5 days
The LFT in Node 2 is 4 days (9 days - 5 days)

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 Activity C has a duration of 3 days
The LFT in Node 3 is 4 days because Activity D is the more time-critical of the Your notes
two activities that are dependent upon the completion of Activity A and so its
LFT is recorded
Activity B has a duration of 3 days
The LFT in Node 1 is 0 days (3 days - 3 days)
Activity A has a duration of 2 days
The LFT in Node 1 is 0 days because Activity B is the more time-critical of the two
starting activities and so its LFT is recorded
The LFT in Node 1 is always 0

Identifying the Critical Path

The critical path highlights those activities that determine the length of the whole
project
If any of these critical activities are delayed the project as a whole will be delayed
The critical path follows the nodes where the EST and LFT are equal
In the diagram below nodes 1 3 6 and 7 have equal ESTs and LFTs
Activities that determine these nodes are B E and H
These activities are marked with two short lines
The critical path is therefore BEH

An example of a simple network diagram showing the critical path BEH

Identifying and Calculating Float Time

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 Float time exists where there is a difference between the Earliest Start Time (EST and
the Latest Finish Time (LFT)
Your notes
Where float time is identified, managers may
Transfer resources such as staff or machinery to more critical activities
Allow extra time to complete tasks to improve quality or allow for creativity

An example of a simple network diagram showing float nodes (4 and 5) and a critical node
(6)

Float time analysis

The total float refers specifically to spare time that is available so that the overall project
completion is not delayed
The total float for a specific activity is calculated by
LFT for the activity - Duration of the activity - EST for the activity
Using the diagram above the following total float times can be calculated for Activities A
to H

Activity LFT - Duration - EST = Total Float

A 4 2 0 2

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 B 3 3 0 0
Your notes
C 8 3 2 3

D 9 5 2 2

E 7 4 3 0

F 10 2 5 3

G 10 1 7 2

H 10 3 7 0

The critical activities B E and H each have a total float of 0 days

Worked Example
The network diagram below shows the activities involved in a new promotional
campaign for a small fashion accessories business as well as the time (in weeks) it is
expected that each activity will take to complete.

Calculate
a) The earliest start times and latest finish times for each node. (4 marks)
b) The total float time for activity G. (3 marks)
Step 1 - Calculate the Earliest Start Times (EST)
Node 1 EST = 0

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 Node 2 EST = 0 + 3 = 3 but 0 + 4 = 4 so 4
Node 3 EST = 4 + 5 = 9 Your notes
Node 4 EST = 4 + 2 = 6
Node 5 EST = 9 + 3 = 12
Node 6 EST = 6 + 4 = 10
Node 7 EST = 4 + 6 = 10
Node 8 EST = 12 + 2 = 14 but 10 + 4 = 14 and 10 + 5 = 15 so 15
Step 2 - Calculate the Latest Finish Times (LFT)
Node 8 = 15
Node 7 = 15 - 5 = 10
Node 6 = 15 - 4 = 11
Node 5 =15 - 2 = 13
Node 4 =11 - 4 = 7
Node 3 =13 - 3 = 10
Node 2 = 10 - 6 = 4
Node 1 = 4 - 4 = 0
Step 3 - Calculate the total float time for Activity G
Total float = LFT for the activity - Duration of the activity - EST for the activity
= 11 weeks - 4 weeks - 6 weeks
= 1 week

Evaluating Critical Path Analysis

Although Critical Path Analysis can be useful in project planning, the method has some
limitations
Evaluating Critical Path Analysis as a Project Planning tool

Limitations Explanation

Very lengthy or complex projects Supervisors and specialist network

involve a very large number of planning software may be required
activities that have numerous
dependencies

Network analysis often relies on Significant research and good

estimates and forecasts communication with suppliers is

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 required to make a network diagram
really useful
Your notes
Network analysis does not guarantee Project managers will need to be highly
the success of a project skilled and will need experience of
working with complicated plans

Resources may not prove to be as Employees may require additional

flexible as hoped when managers training in order to transfer to critical
identify float periods tasks
Machinery and other capital resources
may need to be adapted or upgraded

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 Simple Linear Regression
Your notes
Interpreting Scatter Graphs
Scatter graphs allow businesses to compare two variables such as sales volume and
advertising to establish if there is any correlation between them

Diagram: typical scatter graph

An example of a scatter graph showing the number of sales managers employed by a

business and the volume of Items sold

Types of correlation
A correlation exists where there is a relationship or connection between two variables
A positive correlation means as one variable increases, so does the other variable
A line of best fit that slopes upwards can be identified
A negative correlation means as one variable increases, the other variable decreases
A line of best fit that slopes downwards can be identified
No correlation means there is no connection between the two variables
It is not possible to identify a line of best fit

Diagram of positive, negative and no correlation

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 Your notes

The main types of correlation between two variables

Correlation does not always indicate a relationship or causation between two sets of
variables so businesses need to conduct research to establish whether a relationship
exists as well as the strength of that relationship

Line of best fit

A line of best fit (regression line) is a visualisation of a correlation between two sets of
data
It is drawn roughly through the middle of all of the points on a scatter diagram
The line may not go directly through any data points - but should have the same
amount of data points above it as below it
A strong (positive or negative) correlation exists when data points sit close to
the line of best fit
The further the distance between the line of best fit and the spread of data
points, the weaker the (positive or negative) correlation
Where a line of best fit can be identified and when causation is determined, a business
can extrapolate the data to make predictions around changes to either of the variables
E.g. extrapolation the line of best fit in the example below, the business could
predict that employing seven sales managers would be result in likely sales of 46
units
Extrapolation assumes that what has happened in the past will be the same as what will
happen in the future

Diagram of a line of best fit

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 Your notes

An example of a scatter graph with a line of best fit showing the number of sales managers
employed by a business and the volume of items sold

Extrapolation works best when there is a strong correlation between the two data sets

Examiner Tips and Tricks

When drawing a line of best fit, you should try to include as many data points above
the line as below the line.
Watch out for outlying data - if there is more than one outlier above the line, adjust
your line of best fit upwards. Similarly, if there is more than one outlier below the line,
adjust your line of best fit downwards. Just one outlier should not influence your line of
best fit.

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