This resource is designed specifically for Unit 2 of the Edexcel BTEC National qualification, 'Business and Management'.
Image: If a company aims to reduce its impact on the environment how will it measure its performance? Copyright: Kenn Kiser
All businesses, whatever sector they are in, will have plans, aims and objectives. In some cases these can be very sophisticated but in some small businesses very modest. Whatever they are a business will need to monitor its performance in relation to these goals.
Aims are the long-term goals of a business. In many cases they are not very exact and can be deliberately vague. Part of the reason is that businesses have found that if they try to be too precise then invariably they will not be able to achieve the aim and this can make the business look bad in the eyes of its stakeholders.
Aims of a business might be:
- Maximise profit
- Maximise revenue
- Be environmentally friendly
- Boost share price
Objectives are the means by which the business will seek to achieve its aims. If we take the aim of 'being environmentally friendly' then the objectives that can help achieve that might be monitoring levels of waste generated by the business, investing in new technology to help improve efficiency, installing energy saving devices, switching its fleet of vehicles to less polluting fuels and so on.
Take two of the aims in the list above and think about what objectives a business might identify to achieve the aim selected. Make a list of the objectives you identify.
Using your list of objectives, what methods might a business use to measure how effectively it is meeting these objectives?
Having identified some intuitive ideas about how to measure performance let's look at some specific ways that business has developed to monitor its activities.
We can divide the issue into two areas - firstly, looking at the factors that the business has a good degree of control over, its internal affairs, and secondly where it does not have quite so much control, the external shocks that occur.
In some cases a business will use particular methods that have been designed to monitor progress and allow the business to plan ahead more effectively. Two of these methods are Gantt Charts and critical path analysis (CPA).
The mind map below summarises these main areas:
Planning for the future involves a degree of risk. The business might be able to plan its internal affairs and monitor its performance against these but with external factors the planning is a good deal more uncertain.
Most businesses will try to factor in what is happening in society as a whole in its planning. It may need to reflect changing trends and fashions in its product range or the service that it offers and if it did not monitor what was happening then it would soon find itself losing competitive advantage.
External shocks come in three main forms:
The macroeconomy refers to the economy as a whole. This includes such things as inflation, unemployment, economic growth, exchange rates, government policy on taxation and so on. Companies who carry out a high proportion of their business abroad may well have plans to minimise the disruption that can be caused by changes in exchange rates but changing interest rates and other world events can make these plans redundant. They will need constant monitoring, therefore, to ensure the business operates efficiently.
Few, if any businesses are immune to the effects of their competitors. Some businesses operate in markets that are highly competitive whereas others may face far less competition but in any event markets are constantly changing - new competitors and new goods and services come onto the market all the time and the business must be in a position of not only recognising what is happening but also being in a position to respond effectively when it does happen.
These are often very difficult to predict and as a result can make life very difficult. They might range from natural disasters like earthquakes and hurricanes to changes in world markets, for example, the sharp increase in oil prices, to war, political change, terrorism and regulation. Many larger businesses operate in a global market and thus must have some way of monitoring what is happening around the world so that they can respond to changing conditions and circumstances.
Hurricane Katrina claims a water-based victim. © Scott Carter, from stock.xchng.
Image: BA, just one company that has to monitor external events closely to ensure it keeps its business on track. Copyright: Jenny W.
British Airways (BA) has been going through difficult times since the attacks on the World Trade Centre referred to as 9/11. It faced a serious fall in demand for its service and had to respond by looking more carefully at its costs. This led to large numbers of workers being made redundant in an effort to make the company more cost efficient and profitable.
Things were looking up for BA by the middle of 2005 but then various factors combined to cause the company other problems. These were just a few of them:
- A dispute between its caterer, Gate Gourmet, and their employees caused some BA workers to go on strike in sympathy with the sacked Gate Gourmet workers crippling BA's services and costing the firm millions of pounds in lost revenue.
- Hurricane Katrina added to the problems of the rising cost of fuel when it knocked out refining capacity and caused the price of oil, from which jet fuel is derived, to hit new highs.
- Increased interest rates in the UK started to hit consumer confidence and spending began to slow down. Economic growth was predicted to be around 3% but in August 2005 stood at just 1.8%.
- Competition from low-cost airlines continued to cause problems to BA especially on its short-haul routes within the UK and in Europe.
- What effects might each of these situations have on BA's planning and the objectives it has set?
- What strategies might BA adopt to monitor the impact on its business?
- What response might BA give to the events above to help keep its objectives on track?
The following links will help you find more about the issues involved.
BBC news stories:
- BA fuel surcharges to rise again
- Hot food back on the menu for BA
- BA strike chaos starting to ease
- Q&A: How well is BA performing?
- BA sees profits more than double
Guardian news stories:
A business might be in a stronger position to monitor the performance of its internal activities. In many cases, the firm will have more direct control and be in a position to have more accurate information about what it is doing.
The basic thinking behind internal monitoring is that you have to know what problems exist to be in a position to sort them out. It's no good trying to treat a headache with a cold compress wrapped around an ankle for example!
Equally, a business might recognise some problems within the organisation but it might be more difficult to identify exactly what the cause of the problem is. Sales might be falling below forecast levels but is this because there is something wrong with the product, is it a problem with the sales team not getting to customers effectively enough, or is it due to problems in production, marketing and so on?
We will look at some of the main ways in which a business might measure and monitor its performance and then look at an example of how this might be put into practice.
This is a technique where the business will measure its own performance against those of its main competitors to see how it compares. In the example of British Airways above, they might compare their 'load factor' - the proportion of seats filled on each flight - against that of a rival airliner flying the same route. BA announced a load factor of 74.2% in 2004. If Virgin Atlantic had a load factor of 80% then BA might have cause to look at what it is doing to try to explain the difference and then take action to increase its sales.
Kaizen means 'continuous improvement' or 'change for the better'. It means not being satisfied with what you have but striving to improve all aspects of the business. To do this of course the business will have to have information on which to base its decision-making. This might involve looking at costs, reducing wastage, training employees into the philosophy of Kaizen, having open communication systems, high quality leadership and flexibility in the workplace. If everyone in the business has a focus on improving what they do then the business as a whole will improve - a sort of 'invisible hand' guiding the improvement of the business.
The workforce can identify and solve many problems themselves. © Photolibrary Group
Management and Leadership
Whatever the sector, worker performance is just one of the aspects of the workplace needing to be monitored. © iStock.com
A crucial part of this is the importance of good communications and relationships within the company. The emphasis on the interpersonal and social skills of individuals is now very high for many businesses. You might have 5 grade A A' levels, a first class degree in business administration and an MBA but if you cannot get on with people and work as part of a team you are of little use to an employer.It is for this reason that BTEC and other vocational courses are being developed and supported by the government as it is felt they provide skills over and above just academic rigour.
Variance analysis is used to monitor what is actually happening to things such as costs, revenues and budgets in relation to that planned. A firm may, for example, have worked out a cash-flow forecast and estimated quarterly revenues of £10 million. If the actual revenue shows a figure below that £10 million then this is referred to as negative variance and may trigger the need to take some remedial action or at the very least inspire some investigation into what may be happening to have caused the negative variance.
If, on the other hand, the revenue figures were greater than £10 million, then this would be referred to as positive variance. This might be good news but the business would still be interested in finding out why it has happened so that it can inform its future planning and build on the information it manages to generate.
Tracking is simply a system that allows the business to keep a record of what is happening in all sorts of areas in order to check its actual performance against planned targets. Tracking could take the form of using a computer system to monitor employee absence, for example. Absenteeism causes disruption to a business, leads to falls in productivity and can delay production, distribution and so on. The business may have identified this as a specific problem that it wants to reduce and may use some sort of tracking system to monitor its new approach to reducing absenteeism.The BBC news story, The continuing cost of absenteeism, gives a good example of some of the problems that absenteeism can cause and how some firms might choose to respond and evaluate strategies to reduce it.
Exception analysis can be likened to an 'if it ain't broke don't fix it' approach. Problems will be analysed when they arise and dealt with at that time. This might sound short sighted and if applied to the whole business then it certainly could lead to the business not spotting opportunities that might present themselves through other monitoring methods already considered.
However, exception analysis may be used in certain types of industry where processes are important but where blips might need to be identified at an early stage. For example, energy suppliers, the chemical industry and certain types of IT provision. As such, exception analysis can be applied to certain parts of the business but would be a part of the overall performance monitoring of the business.
Process Flow Charts
Critical Path Analysis
In some cases there are specific strategies for managing large projects and to facilitate planning. One example of this is critical path analysis (CPA). You can find out more about CPA as well as tackling an activity linked to it by going to the following:
Gantt Charts are used where schedules are important in production. It provides the business and the users with a visual representation of what is happening and when and how long each task in the schedule will take. They can also be helpful in identifying what resources will be needed and when those resources will be needed - extremely useful when individuals might be working on different projects with different deadlines, for example.
The diagram below is an example of a Gantt Chart used by a group working at the University of Bristol. The Internet Development group plan and develop Web sites for a range of business and professional users. When the project is agreed, this is a useful way for those on the team to monitor what is happening and when so that they can plan their time and keep the project on schedule more effectively.
The example below comes from a slightly bigger project that required more detailed planning. It is just a section of the complete Chart. There is software available to enable businesses to develop these Charts such as Microsoft Project.
Image: Nokia has emerged from humble beginnings into a major business dealing in hi-tech equipment. How has it been able to stay ahead of the game and survive for so long? Copyright: Truth Noize
Nokia is a well-known firm in the mobile phone industry. It is one of a small number of manufacturers in the industry with a market share of around 30%. In recent years there have been major changes in the mobile phone market with both external factors and internal factors driving that change.
Your task is to do some research into this business. In particular you should frame your research around the following questions. These are closely linked to the assessment criteria you will have to work to for this unit.
- Provide a summary of the company's performance over the last five years. Your summary should include both financial measures of performance like profitability and return on capital employed but also include other measures such as levels of service provision, corporate responsibility and levels of customer service.
- What have been the key changes in the market in which Nokia is operating in over the last five years?
- Summarise the main aims and objectives of Nokia (you will be able to find these by looking at pages 22-30 of the company's annual report [PDF, 656 KB])
- Using the information you have covered in this section as well as any other sources you may have, describe the main ways in which Nokia could monitor its performance in the light of the targets you outlined in question 3 above.
- Evaluate the importance of the role of management in meeting these targets. In particular, you should comment on the issues facing a company in a changing market and how leadership and management can contribute to the success of a business in meeting its performance targets.
The following links might also be of help to you in completing your task:
- Nokia raises 3Q sales guidance; shares gain - from Cellular News
- Nokia calls in higher third-quarter forecast - from ZDNet
- Nokia's battle to stay world's number one - from the BBC
- About Nokia
- Leadership PowerPoint Presentation - from Biz/ed [174 KB]