Unit 1:

Need Want
To need a product is to not be able to live To want a product is to desire it, but you can
without it live without it.
Scarcity Opportunity cost
A situation caused by a lack of a good or The benefit lost from the next (second) best
service. We have scarcity because our alternative given up when making a decision.
want are unlimited but the resources to
provide for our wants are limited.
Specialisation definition: Specialisation when applied to labour
Specialisation is when a business, region (division of labour)
or country focuses on producing a limited When a job is broken down into a series of
range (small number) of goods or services small tasks and each task is undertaken by
in which they have an advantage. one person who does it repetitively.

Benefits of specialisation for Drawbacks of specialisation for

employees employees
1. Employees may be paid more if their
1. Workers may become bored.​ ​Doing
skills are in short supply
repetitive tasks increases the chances of
boredom which will lead to demotivation.
2. The skills they have may mean they can
choose the job they want. 2. Workers may eventually be replaced by
machinery.
Benefits of specialisation for Drawbacks of specialisation for
businesses businesses
1. By specialising efficiency increases and 1. Workers may become bored.​ ​Doing
this can lead to larger profits repetitive tasks increases the chances of
boredom which will lead to demotivation,
2. Businesses may develop a positive which may lead to mistakes.
reputation for a particular product or
service. For example, a wedding dress 2. Specialisation in one product puts ‘all your
shop may become well known because of eggs in one basket’. If demand declines for
its specialist products. the good then a business may become
bankrupt.
3. The employees become faster at
producing the goods as they specialise in
one task and therefore they can do it
better (quality may improve)
Benefits of specialisation for the world Drawbacks of specialisation for the world
Scarce resources are used more Some countries struggle to produce a
effectively (products produced more product or service that is required globally.
efficiently)
 Countries can suddenly become beaten on
A country that specialises can ​trade price, meaning that their entire workforce is
(exchange) with other countries for goods no longer in demand – linked to ‘all your
and services that they don’t or can’t eggs in one basket’
produce.
Objectives of a business:

● Maximise profit
● Maximise sales revenue
● Create new products
● Create large brands across the world

Value added How businesses add value:

Added value is the amount added to the By increasing price or decreasing unit
value of a product by a production costs therefore increasing the profit
process. This is calculated by subtracting margin. If the following are done well it
the unit cost of production from the selling allows a firm to increase its price.
price. 1. Through transforming raw materials into a
finished product
2. Design
3. Quality and efficiency
4. Marketing
5. Convenience
Primary sector Secondary sector
Involved in the extracting and growth of Involves manufacturing of products and
raw materials e.g. mining and farming. construction
Tertiary sector De-industrialisation
Involves the production of services e.g. The decline of manufacturing in a country is
banking and communication. called de-industrialisation.
Why the tertiary sector is more Why the secondary sector is less
important in developed economies important in developed economies
a) As economies develop, wages increase As a country develops wages rise.
and people have more income. This extra Therefore, developed countries are
income is spent on services, therefore uncompetitive in the production of
tertiary sector grows. manufacturing goods compared to countries
b) Over time the prices of services have such as India and China. Therefore,
risen much faster than the price of developed countries’ manufacturing sectors
manufactured goods. Therefore, declines.
developed economies have tended to
specialise in services.
Why the primary sector becomes less 3 types of economies:
important as an economy develops 1. Planned. Production decisions made
As an economy develops wages rise. mostly by government, little private sector
Rising wages causes developed countries production.
to become uncompetitive in the extraction 2. Free market. Production decisions made
of primary resources and therefore they mostly by private sector producers, little
have to import them. This decreases the public sector production.
size of the primary sector in the developed 3. Mixed economy. Government planning
country. (public sector) is combined with free markets
(private sector) to produce goods and
services in an economy. The government
may produce products such as defence
whilst the markets produce products such as
ipods.
Public sector Private sector
Public sector organisations are ​run​​ by the
government on behalf of the general Private sector firms are owned and run by
public. Examples: individuals. Example:
● Hospitals (non private) ● BIS
● Schools (local schools) ● SNAP Cafe
● Defence
Summary:
Public Sector Private Sector

Ownership Public Private individuals (through business or share ownership

Owner-managers (small firms) or Boards of director

Control Government
(companies)

Aims Public welfare Profit-maximisation (usually)

Nationalisation Privatisation
Transfer of privately owned businesses to Sale of public owned organisations into the
the public sector. private sector.
Occurs when:
1. Important businesses start to fail
2. Welfare issues are present (industry is
not serving the population well)

Entrepreneur Characteristics of an entrepreneur

An entrepreneur takes the other three 1. Risk seeking (willing to take a chance)
factors of production (land, labour and 2. Innovative (come up with new
capital) and starts a business. They are product/service)
risk takers. 3. Organised
4. Hard working
5. Creative (come up with new ideas)
6. Focused and determined

Rewards for being an entrepreneur Business plan

1. You get to be your own boss A detailed description of a new or existing
2. Profit business, including the company’s
objectives, marketing and financial plans.
 Reasons for drawing up a business Typical contents of a business plan
plan: 1. Business summary
1. Forces the entrepreneur to think very 2. Business details
hard about their business before they start 3. Market research
to set it up. 4. Marketing
2.Sets out the Vision and Aims of the 5. Day-to-day running of the business
business, thus giving the business focus. 6. Finance
3. Sets out the finances of the business
(revenue, costs, profits) and therefore
make it easier for the entrepreneur to
attract finance from banks
4. Forces the entrepreneur to set out how
the business is going to develop and in
what time (a timeline).

Reason why governments support Types of help that government give to

entrepreneurs to start businesses. start up businesses/entrepreneurs:
1. They create employment (provide jobs) 1. Grants (money given to business in
2. They and their employees pay tax order to help it start up)
3. They produce goods and services and 2. Loans
therefore increase GDP
3. Tax relief (reduced tax on company’s
profit)
4. Advice (government agencies advise
entrepreneurs seeking to start a
business)
5. Mentors (government may provide
access to people who have
successfully started their own
business)
6. Training

Ways to measure the Benefits

size of a business

Capital employed The value of all the business assets added up shows how much
the business could be worth. This gives a value for the
(The amount of money
business that reflects what it has invested and what it would be
invested in the business
worth if sold.
i.e. machinery)

Market share This provides useful comparison against businesses in the

same industry. It shows how much of the money being spent in
(The total amount of
the market is coming to the business.
sales a business has as
a percentage of the
total sales)

Number of employees Shows the scale (extent) on which the business operates.

(Total number of people

who work for the
business)

Value of business on This can be a good reflection of a businesses true worth in the
balance sheet marketplace, as many businesses are bought because of their
potential to be worth a lot in the future.
(The price another
business is willing to
pay to own the
business)

Sales revenue This shows how much the business is producing and how much
people are willing to pay for these products. It can be easily
compared with competitors.

Reason why businesses grow: Ways in which businesses can grow

1. Additional revenue and profit
2. Increase market share 1. Internal growth (organic). When a
3. Increased economies of scale business grows due to increased demand for
4. Increased reputation and prestige its product/service. New factories need to be
5. Attract more customers built and more people employed
2. External growth (mergers or takeovers)
- mergers occur when ​two​​ companies merge
together to form ​one​​ bigger company
- Takeovers happens when one business
buys another business. The bought business
no longer exists.

Advantages of ​mergers and takers Problems that growth can cause:

- They allow a business to grow 1. Communication problems. As businesses
quickly (much quicker than internal grow and there are more people employed
growth which relies on increasing effective communication becomes more
difficult.
sales year after year)
2. Morale. The bigger a firm becomes and
- By merging or taking over another the more people that are employed then the
business you may remove a less valued each worker may feel and this
competitor (if the acquired firm was can lead to demotivation.
in the same market) 3. Clash of cultures. Mergers and takeovers
- Financial economies of scale involve two separate companies coming
- Bulk buying economies of scale together. They may have different ways of
doing things (culture) and this might lead to
- Managerial economies of scale
a decrease in productivity.
 - Diversification
- Rationalisation

Techniques to overcome the problems associated with mergers/takeovers/growth

1. Training (helps people to adjust to new role quickly)
2. Management changes – to ensure the larger business works well together and
communicate effectively
3. Incentives for staff – reward staff who have to work harder due to the business
becoming larger
4. Set realistic targets
5. Invest in the business i.e. machinery etc to ensure business can cope with increased
demand
6. Effective IT
7. Communication

Why do some firms stay small Why some (new or established)

1. Objectives of owner (may not want businesses fail
business to become unmanageable) ● Lack of long term funding
2. Size of the market (small market – small ● Initial errors (choosing wrong location
firm) for business etc)
3. Lack of availability of finance (sole trade
● Lack of management skills (poorly
= limited finance for growth = small firm)
4. Optimum efficiency has been achieved skilled manager = poor decision
(MES reached with small amount of making)
output) ● No reputation (less likely to attract
customers)
● Market conditions /The economy is in
recession (in a recession when
demand is low, businesses often fail)
● Large competitors present in market

Why are new businesses more likely to 6 different types of business

fail? organisations in the private sector:
1. No business plan ● Sole trader
2. Under estimated costs (inexperienced ● Partnership
entrepreneur often don’t plan costs well) ● Private Limited Company (Ltd)
3. Over estimated revenue
● Public Limited Company (Plc)
4. Lack of economies of scale (unit costs
don’t fall by mush as more is produced) ● Franchises
5. Established brands already exist in the ● Joint ventures
market (makes it difficult for new business
to achieve high sales)

Unlimited liability (Unincorporated) Limited liability (Incorporated)

If the business goes bankrupt owing If the business goes bankrupt owing money,
money the owner will have to pay all the the shareholders will only lose the amount
debts of the company even if it means they have invested in the company. They
will not​​ have to sell their personal
having to sell their personal possessions possessions to pay for the debts of the
such as their house or car. company.

Important 1. Sole trader (unincorporated)

People are more likely to invest in Ltds
and PLCs because they have limited There is one owner of the business,
liability and therefore their personal although that owner can employ other
processions are protected. This makes it people. Sole trader businesses are easy to
easier for Ltds and PLCs to raise capital set up and require little start up finance.
for expansions and therefore they are
usually bigger companies.

Advantages of being a sole trader Disadvantages of being a sole trader

1. Make all the decisions​​- Sole traders 1. Unlimited liability​​- If the business goes
can make all of the business decisions bankrupt owing money the owner will have
themselves. This means that decisions to pay all the debts even if it means having
can be made quickly and without any to sell their personal possessions such as
conflict of interest. their house or car.

2. Sole trader keeps all of the profit 2. Difficult to raise finance​​- Sole traders
find it difficult to raise finance. This is
3. Easy to set up​​- Sole traders are often
because they are small and have little
very small operations and therefore
collateral​​ so banks are unwilling to lend to
require very little paperwork to set up.
them.
4. Requires little capital​​- As they are
3. Long working hours​​- Sole traders do not
small operations, sole traders often require
earn money when they are not working;
little capital to start their business.
therefore they often have to work long hours.

4. No holiday pay or paid time off​​- When

sole traders do not work they do not get
paid; they do not receive benefits such as
holiday pay or sick pay.

2. Partnership (unincorporated) Deed of Partnership:

A legally binding document that lays out the
Partnerships are usually formed by terms of the partnership and which can be
between 2 and 20 people (although there referred to when conflict arises. It includes
can be more) using a Deed of Partnership. details of:
● Finance provided by each partner
● Salary entitlement of each partner
● Percentage of profit received by each
partner
● Holiday entitlements
 Advantages of being a partnership Disadvantages being a partnership
(rather than a sole trader)
1. Lack of capital​​- Despite having more
1. More expertise​​- Partnerships have access to capital than a sole trader,
more owners (partners) than a sole trader, partnerships still find it difficult to raise large
so can normally call upon more expertise amounts of money.
(2 heads are better than 1 etc)

2. Sharing the profit​​- As a partnership has

2. Less financial risk​​- Liability or risk is more than one owner, therefore profits are
shared among all the partners. usually shared out between the different
partners.

3. More access to capital​​- There are

more partners to invest in the business. 3. Unlimited liability​​- All partners, with the
exception of sleeping partners, are jointly
liable for the partnership’s debts.
4. Can attract investment​​- Partnerships
can attract investments from ​sleeping
partners​ (people who invest in the 4. Conflict of interest​​- Partners may have
business but take no active role in the disagreements over business decisions.
running of the organisation).

3. Private limited company (Ltd) (incorporated)

Owned by shareholders who can invite other people to buy shares so they can raise
additional finance in order to grow. Limited liability.

Advantages of being a private limited Disadvantages of being a private limited

company company

1. Shares​​- Private limited companies (Ltd) 1. Releasing financial information- ​All

can select/choose shareholders which private limited companies have to register
help them raise more capital to finance the their accounts. The accounts have to be
business. audited​ (checked and agreed) by external
accountants, adding to the running costs of
Ltds.
2. More expertise- ​Private limited
companies are often large enough to have
directors who specialise in a particular 2. Legal restrictions-​​ Private limited
area (they are often shareholders). companies have more legal restrictions than
unincorporated businesses.
3. Maintain control- ​Because a private
limited company selects it shareholders, it
is able to keep control of the business
more easily than a Plc.

4. Limited liability- ​Shareholders

(owners) are protected by limited liability.
This means they only risk what they have
invested in the company.

4. Public limited company (Plc) (incorporated)

Can sell their shares to anyone on the stock exchange and therefore can raise large
amounts of finance and grow very large. Limited liability.

Advantages of being a public limited Disadvantages of being a public limited

company company

1. Sell shares to the general public 1. Releasing financial information- ​Plcs

through the stock exchange and have to publish an annual report, which
thereby gain access to large amounts details their financial position. Competitors
of capital in order to grow. can use this information to try to out
maneuver the company.
2. Limited liability- ​Shareholders of Plcs
have limited liability, which limits the risk 2. Dividends- ​Plcs are obliged to pay their
involved with a potential investment. shareholders dividends. Finding the right
balance ​between r​ etaining profit to reinvest
3. Managerial economics of scale- ​Plcs
and​ satisfying shareholders with dividends is
are normally very large organisations that
difficult.
can afford to employ specialist directors to
run the business on behalf of the 3. Losing control- ​As shares are available
shareholders. These specialists improve to anyone in the general public, existing
the efficiency of the company. shareholders can be subject to hostile
takeover bids and can lose control of the
business if an individual or business
purchases 50% or more of the available
shares.

4. Legal issues- ​Public limited companies

are bound by more legal constraints than a
private limited company, and this can make
 them more complicated to run.

Sole Trader One owner

Partnership 2 or more (but usually less than 20)

Ltd Shareholders. Unlimited – but have to be invited to buy shares therefore

usually limited to acquaintance and family of exist shareholders

Plc Shareholders. Unlimited – shares are sold on the stock exchange so

anyone can buy them

5. Franchise

A business is a franchise when a person (the franchisee) pays a company (the franchisor
e.g. McDonalds, Pizza Hut etc.) money so that they can use its name to trade under
(initial start up fee and yearly royalties). The franchisee will be given help and advice to
set up the business by the franchisor. The franchisee is responsible for the day to day
running of the business, e.g. they are responsible for recruitment and training.

Advantages of being a ​franchisee Disadvantages of being a ​franchisee

1. Operating under a well known name 1. Some of the profits have to be paid to the
which should increase the chances that franchisor.
the business will be successful.
Which is more likely to be successful; a 2. The franchisee is not free to make all their
McDonald’s or a burger joint called own decisions as the franchisor will want
Turner’s Taste Bar? things done in a certain way. For example, it
2. Advice and guidance is provided by the may be difficult to be able to sell items that
franchisor to the franchisee. This helps would be very popular locally but not
the business to set up and be successful. globally.
For example: menus, décor, uniforms,
accounting procedures, marketing,
purchasing raw materials, presentation of
goods etc

Advantages of being a ​franchisor Disadvantages of being a ​franchisor

1. Franchisees give them (franchisors) 1. If an outlet is run badly the whole chain
money so that they can trade under their can get a bad name.
name. Franchisors have to do relatively
little but collect a certain amount of money 2. Difficult to control a large organisation
from each franchisee each year. which can have outlets across the world.

2. When franchisees start up businesses

under the franchisors name it means that
the franchisor is expanding faster than it
otherwise would be able to. Think of how
Burger King, KFC or McDonald's have
expanded so quickly.

6. Joint venture Common situations where joint ventures

occur:
A joint venture is an agreement between 1. When a business wants to expand into a
two existing organisations to start a jointly new market (such as a new country) and it
owned third company. has little knowledge of that market.

2. A business might decide to form a joint

venture to share resources and expertise.

Advantages of a joint venture Disadvantages of a joint venture

1. Risks are shared by both organisations. 1. There can often be a conflict of interest
between the two organisations involved

2. Expertise can be offered by both

organisations. 2. Decisions have to be made by both
parties, which slows down the
decision-making process
3. Capital is normally invested by both
organisations.
3. Profits are split between both of the
parties involved in the joint venture

Choosing the right ownership type Objectives definition:

depends upon a number of different
factors, which include: Targets which a business sets itself so that it
● Risk (small business – sole can measure how successful it has been in
trader/partnership have limited reaching its targets e.g. to increase sales in
liability therefore greater risk) market B by 12% in 6 months. Departmental
● Control (the more owners a objectives help to achieve the firm’s
business has the less control an objectives.
individual owner has)
● Size (business to want to become
large usually have to become plcs)
● Ambition of owner

The importance of clear objectives SMART objectives

- Employees need something to
work towards. Objectives help - Specific
motivate people. - Measurable
- Provides a benchmark to assess - Agreed
performance against. - Realistic
 - Objectives help to decide the - Timed
direction a business should take
and what steps are necessary to
get there

Types of business objectives: Social enterprise definition:

1. Survival
2. Increase market share A social enterprise is a business created to
3. Profit maximisation further a social purpose (something that is
4. Expansion of the product range good for the community) in a financially
5. Customer satisfaction sustainable way. The business will aim to
6. Improve company image
make a profit and some of this will be
7. Increase employee satisfaction
reinvested into the business.

Stakeholders
A stakeholder is a person or group with an interest in the operations of a business.

A stakeholders can either be internal (eg employees) or external (eg suppliers)

Internal stakeholders and their External stakeholders and their interests

interests in a business in a business
1. Owners 1. Customers
Increased profit. Reasonable price.

Increased sales. Quality product/service.

2. Employees Increased customer service.

Higher wages. 2. Suppliers

Reasonable price.
Increased benefits.
Secure long term contract.
Secure employment.
Growth (may increase supply order)
Promotion. 3. Government
Expansion (increased employment).

Employee welfare.

4. Local community
Expansion (increased employment).

Environmental concerns.

5. Trade unions
Employee welfare i.e:
 - Higher wages

- Better working conditions

- More benefits (holidays etc)

6. Pressure groups
Environmental concerns.
Conflict between stakeholders Private sector enterprises
One of the major problems a business has The private sector is made up of businesses
is keeping all stakeholders happy. This is run by private individuals and groups, often
because each stakeholder has a different with the aim of making a profit e.g.
interest in the business and would like the McDonalds
business to pursue different objectives.
Sometime the interests of the stakeholders
opposed and this causes conflict.

Public sector enterprise

The public sector is made up of public funded and government run organisations that
often offer services to the public e.g. railroads

Unit 2:
Motivation Benefits of well motivated employees to firms:
The desire to achieve a certain result or outcome. ● Lower absenteeism
The more a person desires the outcome the more ● Lower staff turnover
they will work to achieve it. ● Higher productivity
● More innovation
● Pleasant working environment

The three theories of motivation: 1. Maslow’s hierarchy of needs

1. Maslow’s hierarchy of needs
2. Taylor’s scientific management Work fulfils an important role in satisfying human
needs. Maslow’s Hierarchy:
3. Herzberg’s two factor theory
5. Self actualisation – higher order
4. Self esteem – higher order
3. Love and belonging – higher order
2. Safety and security – lower order
1. Physiological – lower order

Explanation of the Need Maslow’s hierarchy Example of how the need is

satisfied at work
Reaching full potential and Self actualiation (Higher Opportunities to be challenged,
fulfilled in what you do. order) creative, solve problems and make
decisions.
 Recognised and respected for Esteem needs (Higher order) Praise for doing a job well. Awards
what they have achieved. and rewards for achievement.
Praised.
Friendship and trust. Sense of Love and belonging (Lower Teamworking, good communication
acceptance order) and social facilities.
Protection from physical and Safety and security (Lower Safe working conditions and job
psychological harm. Financial order) security
well being
Food, air, water, shelter etc. Physiological needs (Lower Wage
What you need to survive order)

Important: Practical implications of Maslow’s hierarchy for

- Maslow argued that if people had their needs businesses:
met at work then they would be motivated to ● Satisfying workers needs is not just about
work money – other things are important
- Each of the needs have to be met in order ● Firms need to satisfy employees’ needs at
beginning with ‘Physiological Needs’
work if they hope to motivate them
- When a need is met it no longer satisfies; the
need further up the order now motivates (except ● Work is important. It gives purpose and
Self Actualisation which continues to motivate meaning to peoples’ lives.
even when met)

Limitations of Maslow’s hierarchy:

- In reality workers are motivated to meet more
than one need at a time.
- Workers may not seek to have all levels of the
hierarchy met in the work place i.e. they may
wish to have their love and belonging needs met
within their family.
2. Taylor and scientific management Advantages of Taylor’s scientific approach
● Increased productivity and output which
Taylor’s approach: benefited employers
- Study a task and identify the quickest way of
doing it – this is now the new norm
- Match the employee with the most appropriate ● High wages were offered which benefited
skills to the task (strong man shovels coal) employees
- All workers should be supervised and
controlled. Those not working efficiently are
punished.
- Pay scheme should be designed to pay more to
those that produce more (piece rate)
Problems with Taylor’s approach: 3. Herzberg’s Two factor theory
- Workers jobs were repetitive which can lead to
demotivation (work not interesting) and mistakes Hygiene factors (much like Maslow’s lower order
can increase needs)
- Managers control workers. This creates conflict ● Company policy and administration
between workers and managers
- Money is not the only motivator, nor is it the ● Positive relationship with supervisors and
most important one for most people. colleagues
- Theory can only really work in a manufacturing ● Working conditions
setting where jobs are done repetitively. Little
● Salary
role in service sector industries such as banking.
Hygiene factors have to be met in order for workers
not to be dissatisfied (demotivated), however, they do
not have the ability to motivate. If hygiene factors are
met an employee is merely not demotivated, but
neither are they motivated.

Motivators (much like Maslow’s higher order

needs)
● Achievement
● Recognition
● Responsibility
● Interest in work
● Personal growth
These factors have the ability to motivate if they
are met at work, however, only if the hygiene
factors are met first.

Advantages of Herzberg’s two factor theory Limitation of Herzberg’s two factor theory
* Make employers aware that to motivate * Not applicable to all sorts of jobs. Manual workers
workers a business must first make sure that all on hourly pay may not be interested in job enrichment
the hygiene factors are met – fair wage, safe
working conditions * Employees must be want and be ready for the
motivators. Giving people responsibility who are not
ready for it can have harmful effects
* Made employers aware that to motivate
workers their jobs must be designed to be
meaningful and interesting. Businesses should
allow employees the opportunity to grow and
progress in order to motivate them.

Financial rewards is money given to employees in a variety of ways, which include:

Method of financial reward Advantages Disadvantages
Piece rate​​ – worker is paid a Increases speed of work and Workers do not concentrate on
sum of money for each item of therefore increases productivity quality of work as emphasis is on
work they complete. The more speed of work
the complete the more money Often workers not entitled to
they get (Taylorite). Used for sick pay or holiday pay which Workers may ignore company rules,
shop floor workers. reduces costs for firm such as Health and Safety issues, as
they try to speed up output
Wages​​ – a worker is paid a set Flexible as the firm can increase Workers have no incentive to
sum of money for each hour the workers hours by offering complete tasks quickly. Better for
worked up to a set amount of overtime in times when demand them to take it easy and then do
hours – say 40 hours. If the is high overtime to complete the work as
persons works longer than 40 they will receive more pay i.e. wage
hours they receive overtime pay not tied to amount produced.
(an hourly pay at a higher rate) Simple and easy to use for Some workers may resent being
businesses paid the same as a colleague who
they feel is not as productive
Salaries – ​salaried employees Flexible for firms because Little incentive to work hard as
are paid an agreed sum of employees will work longer employee will receive the same
money for a year’s work – they hours to complete the job amount of salary no matter how
receive payment monthly. without having to be paid more. long they spend at work or how
Salaries are not linked to hours much output they produce i.e. salary
worked so no matter how long not tied to amount produced.
an employee spends at work
their salary remains the same.

Incentive Advantages Disadvantages

Bonuses​​ – an extra lump sum of Incentivises employees to be - May be de-motivational if
money that may be paid to an more productive as it will employee misses their bonus
individual or a group of workers increase their monetary reward. payment. They may see it as unfair
when they reach a target level of - May incentivise employee to only
production or sales. concentrate on the part of the job
which produces the bonus and not
the overall job.
Performance related pay​​ – Easier for managers to monitor It can be difficult to measure the
provides financial rewards to and control their staff as they are performance of employees in
employees who meet agreed dealing with them individually service based industries
individual​​ targets. Used for and have the power to increase
managers and executives. their pay by different amounts It does not promote teamwork and
can lead to workers feeling they are
Reduces the amount of time treated unfairly if other colleagues
spent on industrial relations are awarded more
(negotiations with trade unions)
as negotiation are with the
individual only

Profit sharing – ​a certain Workers are more likely to The share given to employees is
amount of the company’s profit accept changes to their working often too small to provide a
(say 10%) is divided up between practices if they can see that it worthwhile incentive
each employee may decrease costs and so
increase profit, therefore Workers may feel that however
benefiting them. hard they work it will not have a
noticeable effect on the company’s
Should improve loyalty to the profit level, so therefore it provides
company and break down the no incentive
 “them and us” barrier if all staff
given same amount
Share ownership​​ – shares in - Reduces labour turnover as Often only available to senior
the company are given to employees are incentivised to managers so can cause resentment
employees usually at some stay in order to collect their among other staff.
future date (if they stay with the shares
company) - Provides an incentive to work
harder as a good performing
company will have an increasing
share price

Non financial rewards (fringe benefits): Benefits of fringe benefits to a business

● Company car - It may be ​cheaper​​ for a business to pay for fringe
● Free medical care benefits rather than increase pay as increases in pay
● Free private schooling are subject to tax.
- Productivity​​ is likely to be improved as workers feel
● Free gym membership
more committed to the company
● Pension - Some benefits ​help retain better qualified staff
(free schooling) who are highly valuable to a firm
 
Benefits for the employees Job design for motivation:
- Employees ​pay no tax​​ if they take the fringe ● Job rotation
benefits rather than pay increases ● Job enlargement
- Workers may get to ​enjoy​​ private health care ● Job enrichment
or sports facilities which means that they are
● Empowerment
likely to be healthier
- Consider Maslow​​ – free car meets esteem ● Teamwork
needs, health club membership meets love and
belonging and safety needs etc.. Fringe benefits
are motivational

Type of job design Advantages Disadvantages

Job rotation – ​involves Stops the employees becoming Productivity may suffer as worker
switching an employee between bored from doing the same job will not be equally good at all tasks
tasks of the same skill level i.e. all the time.
2 hours on till, 2 hours stacking May increase the training needs of
shelves etc If a person is absent then employees
someone else will have the
knowledge to cover their job
(useful in production processes)

Job enlargement – ​allowing Worker may gain greater job Productivity may suffer as worker
worker to perform more tasks of satisfaction from seeing how the will not be equally good at all tasks
the same level in a production whole product is made – seeing
process to enable them to see the end result of their efforts. May increase the training needs of
how the complete product is employees
made.
Job enrichment – ​asking Allows a worker to take on Workers may resent being asked to
employees to perform tasks that greater responsibility do more complex task as they may
are above the complexity of the (motivational according to see it as doing tasks that their
task they currently do (some of Maslow and Herzberg). manager should do.
their managers tasks for
example) Allows workers to develop their
skills and readies them for
promotion

Empowerment – ​involves Allows a worker to take on Workers may resent being asked to
giving an employee the greater responsibility do more complex tasks as they may
authority to make decisions to (motivational according to see it as doing tasks that their
carry out a task. The Maslow and Herzberg). manager should do.
responsibility for the successful
completion of the task remains Allows workers to develop their Managers may be unwilling to give
with the manager however. skills and readies them for up decision making power
promotion

Teamwork –​​organising Meets social needs according to May be disputes within the team as
production into teams rather Maslow so therefore to how tasks should be carried out.
than isolating workers. Team is motivational.
given objectives to achieve and
they receive rewards when these Workers may work harder and
objectives are met. ensure quality because they
“don’t want to let the team
down”

Organisational chart What an organisational chart shows:

An organisational chart highlights the key roles 1. Departments. A business is divided into department,
and responsibilities of a businesses’ employees. each of which is responsible for an area of the
It should show the different departments within business.
the business and which employees and job roles 2. Hierarchy. The level of the organisation that an
are included within each department. individual is on.
3. Chain of command. This shows how
communication and tasks are passed down the
organisation.
4. Delegation. This means who can delegate authority
for a task to who (the person directly below them).
5. Span of control. Shows how many subordinates are
under the control of a manager.

Benefits of organisational charts Types of organisational structures

- Shows who is responsible for which functions 1. Flat structure
and tasks
- Aids clear communication as people understand A flat structure has a wide span of control and
how a message is to be communicated therefore fewer layers in the organisation.
- Shows what a person is accountable for 2. Tall (hierarchical structure).
- Shows to whom a worker is responsible to and
from whom they must take orders from A tall structure has a narrow span of control and
therefore many layers of management

Benefits of having a flat structure Problems of having a flat structure

1. Easier communication as the chain of 1. Fewer management positions, so workers have little
command is shorter. There are fewer levels of chance of promotion
hierarchy for communication to be passed down.

2. As managers have such a wide span of control, it is

2. Fewer management roles, which reduces the more difficult to monitor the performance of their
need for the business to pay costly management subordinates, who may make costly mistakes.
salaries

3. Easier for managers to delegate tasks as they

have a wide span of control

4. More delegation to subordinates, which gives

employees more responsibility, therefore
workers’ motivation might increase (according to
Maslow and Herzberg)

Benefits of having a tall structure Problems of having a tall structure

1. More managerial positions makes it easier to 1. Communication takes longer as chains of command
monitor subordinates’ performance are longer – communication more likely to be
distorted

2. More chance of promotion for subordinates,

which can be motivating 2. More management positions, which can mean the
business has to pay higher salaries, increasing their
costs. Businesses can sometimes change this by
removing a level of management. This process is
called ​de-layering.

The functions/roles of management Delegation

1. Organising (delegate tasks, people and When a manager gives a subordinate decision making
resources. Ensures everyone is working power (authority) to complete a specific task. The
effectively. No duplicated tasks) responsibility for the successful completion of the task
is still held by the manager.
2. Planning (sets aim/targets; plans for
necessary resources,)
3. Coordinating (ensure effective team
 work, holds regular meetings,
aims/objectives linked together)
4. Commanding (guiding employees,
leading/supervising. Ensures employees
keep to task)
5. Controlling (measure/evaluate work of
employees; identify poor performance ad
provide remedy)

Benefits of delegation for the manager Benefits of delegation for the subordinate

1. Delegating jobs to somebody else allows the 1. It empowers the subordinate; having more
manager more time to focus on more important responsibility may increase their motivation (Maslow
tasks and to keep an overview of what is and Herzberg).
happening in the business or department.

2. Taking on more responsibility allows employees to

2. It gives managers the chance to assess their
prove their abilities, which could help them gain
subordinates’ abilities in respect to promotion,
promotion in the future.
helping them to make better decisions in the
future.

Successful delegation depends upon: Leaders have:

● A ​vision ​of the direction in which the
● The manager picking the ​right task​​ for organisation should move
the subordinate (not too easy, not too ● Innovative ideas​​ as to how the vision might be
hard) achieved
● The manager choosing the ​right ● The ​commitment and dedication​​ needed to
subordinate​​ to delegate to follow their ideas through

● The manager ​giving the subordinate

time​​ to complete the task successfully

● The manager ​giving the subordinate the

resources​​ to complete the task
successfully

There are 3 different styles that a leader can 1. Autocratic leadership style
adopt:
● Autocratic The leader makes all the decisions.
● Democratic The leader tells others what to do and controls them
closely in the way they do it.
● Laissez faire
The leader does not consult their subordinates, they
know what they want to achieve and how.
 Advantages of autocratic leadership Disadvantages of autocratic leadership
1. Useful when quick decision making is 1. No two-way communication so can be
required. de-motivating
2. Effective when employing many low skilled 2. Creates “them and us” attitude between managers
workers and workers
2. Democratic leadership style

Workers play a full part in the decision making wherever possible – their opinions are sought and acted
upon.
Democratic leaders delegate decision making power to subordinates and teams of workers.

Advantages of democratic leadership Disadvantages of democratic leadership

- Meets Maslow’s higher order need of Self - Decision making takes longer so may not be
Esteem (opinion sought and acted upon) appropriate when quick decisions are necessary.
- Useful when complex decisions are required
that need specialist skills
- Authority is delegated to workers which is
motivating

- More two-way communication so motivating

3. ​Laissez faire leadership style

Laissez faire (let it be). Workers are left to get on with their work with little or no interference – the leader
may set broad aims and guidelines, but there is little day to day input from the leader.

Advantages of laissez faire leadership Disadvantages of laissez faire leadership

- Positive only in the case when the employees - Employees may lose a sense of direction without the
are very responsible and in cases of creative jobs input of the manager.
where a person is guided by his own aspirations.
In these cases, less direction is required so this - Employees may use the freedom to do very little and
style can be good. be non productive.

- Suitable where staff are highly trained and

where the production of the product is a major
motivator.
Factors effecting leadership styles Trade Unions:
1. The leader’s personality (string willed = A Trade Union is an organisation that workers join,
autocratic etc) which represents the workers in negotiations with
2. The type of workforce (unskilled = company managers. The idea is that the Trade Union
speaks for everybody (collective bargaining) and
autocratic, skilled = democratic, skilled
therefore the workers have strength in numbers and
and creative = laissez faire) are more likely to have their demands met by
3. Culture managers.
4. Context. A workforce is more likely to
accept autocratic leadership when there is
a crisis and decisions have to be made
quickly.
 Benefits to employees of joining a trade Disadvantages of trade unions for workers
union
Increased wages may mean increased costs for firms
- Collective bargaining through a Trade Union and therefore firms can not afford to employ all the
means that employees have a greater chance of workers they used to and therefore some workers may
their demand being met than if they bargained be made unemployed
individually (strength in numbers).

- Trade Unions’ strive to improve workers’ pay

and working conditions.

- Trade Unions provide legal advice (if an

employee wants to sue the employer for
example) and support for their members.

What workers are interested in getting Industrial actions available to Trade Unions
form a company ● Striking
● Working to rule
● Higher wages ● G o slows

● Better working conditions

Advantages of trade unions for firms Disadvantages of trade unions for firms
1. It is easier to negotiate with trade unions than 1. Trade unions increase costs for firms. This means
every single worker. It saves time. that the price of firms’ goods rise and demand falls.
2. If workers have their needs met it is likely they
will be more motivated and therefore more
productive. This increase in productivity may
offset the increased cost incurred by having a
union.
Process of recruitment, selection and training
1. Defining the job role (job analysis)
2. Job description
3. Person specification
4. Internal/external
5. Selection
6. Induction training

Job description: Person specification:

A Job Description states the title of the job and A person specification provides details of the
outlines the tasks, duties and responsibilities qualification, experience, skills and attitudes that
associated with the job. would be expected of a person appointed to do a
Purpose/advantages of producing a Job particular job.
Description: Purpose of a Person Specification
- Provides a clear idea of what the job involves, - Allows employer to ‘profile’ the most desirable
which is helpful when trying to identify the best match for the job offered
candidate - It can be used to ‘screen’ applicants to decide who
- Provides details that will be used to draw up the gets an interview and who doesn’t
job’s advertisement and contract of employment
- Saves times/money and makes selection easier
as it is unlikely than application will be received
from people who do not fit the job description

Advantages of part time employees to firms Disadvantages of part time employees to firms
1. The average cost of a part-time employee is 1. The cost of training large numbers of part time staff
lower than the cost of a full-time employee (per may be high
hour worked)

2. Part time staff may be less loyal (increasing labour

2. Part time employees can be used flexibly to turnover)
ensure that staffing numbers meet demand (e.g.
when demand increases a firm can get part time
employees to work longer hours as they are not 3. Part time staff may be less committed to provide a
working many hours) good service/produce quality products

Advantages of full time employees to firms Disadvantages of full time employees to firms
1. The employee becomes more familiar with the 1. Full-time staff are entitled to many benefits in
business and, in theory, more productive addition to their wages/salary (sick pay, holiday pay
etc) therefore they are more costly

2. Full time staff may not want to adjust their hours to

2. The employee is likely to be more loyal to the
suit demand as they are already working a lot of hours
firm (lower labour turnover)

External recruitment might include placing The method of external recruitment chosen will
advertisement in: depend upon:
Placing advertisement in:
* Job Centres – run by government, these are 1. The size of the firm (small firm – local area job
offices that provide details of job vacancies to centre, large firms may advertise nationally)
those who seek work. This is free of change for
firms to use.
Useful when for: 2. Type of position needed to be filled (low
- recruiting large amounts of workers skilled – job centre/local paper, high skilled –
- recruiting unskilled workers internet, specialist magazine etc)

* Media advertising – local, regional, national 3. Number of positions

newspapers,
 - Local newspaper useful for finding
unskilled workers
- Regional/national newspaper useful for
finding skilled workers

* Specialist magazines
- Useful for finding skilled/qualified
workers who the magazine is aimed at
(TES)

* The internet
- Useful for finding skilled/qualified
workers who the website is aimed at

* Using recruitment agencies (head hunters) –

specialist firms that will find workers that suit the
firm’s needs. The charge a fee for the service.
- Useful when a highly specialised
employee is required e.g. to be the
chairperson of a company

Advantages of internal recruitment Disadvantages of internal recruitment

1. Offers current employees opportunities for 1. Another vacancy is created elsewhere in the firm
promotion and development (motivational – that must be filled
Maslow/Herzberg)

2. Promotes loyalty by providing opportunities

within the business – lower labour turnover 2. No new (external) ideas are brought into the firm
3. A business will have greater knowledge of the
qualities of an internal applicant and so there is
more chance they will select the right person 3. The person recruited may not be the best person for
4. Less need for ​induction training the job, just the most familiar

​ dvantages of external recruitment

A Disadvantages of external recruitment
1. Can attract a larger selection of candidates 1. Can be expensive and time consuming
compared to internal recruitment.
2. The new recruit will need induction training and
2. Can bring new ideas into the business may take some time to become familiar with the
(valuable knowledge and experience from the firm’s operations, so their initial productivity may be
competition) low

3. The successful recruit is likely to be motivated 3. There is more risk of recruiting somebody who is
by the freshness of a new job and will therefore not successful in the job
work harder in the short term

Ways in which candidates are selected by firms:

Type of assessment Advantages Disadvantages
Interview​​ – A face to face Employer has the opportunity to 1. Some people are good at
discussion between interviewer assess the candidate’s: interviews – it’s a skill you can
and interviewee to assess the - Communication skills practise – but might not be good
applicants personality and - Personal qualities (how they employees
personal qualities. are likely to get on with others) 2. Interviewer biased toward
- Verify job relevant knowledge personality types such as their own
Aptitude tests – ​tests of IQ or 1. Skills tests good for judging 1. Doesn’t consider a person’s
specific job based skills e.g. how efficient and effective a personality which is often the most
applicant for secretary job asked person will be important aspect of whether a
to type at speed person is successful in a job.
Psychometric tests – ​tests, 1. Psychometric tests produce a 1. Not and exact science. Many
usually multiple choice, to description of the personality of people don’t believe in it.
assess candidates’ personality the candidate which can be
and preferences. Investment matched against the Person 2. Candidates do their best to
banks often test their candidates Specification to find the most portray a personality that suits the
for their attitude to risk. Used suitable candidate. job during the test and therefore the
for medium to high level jobs. test may not find the best candidate.
Assessment centres – 1. Extensive process and 1. An expensive process.
Candidates attend an assessment therefore more likely to reveal
centre for between one and three the candidates true personality
days to undergo a series of and attributes.
interviews, test and activities
(individual and group). Used for
high level jobs.

Training seeks to:

1. Reduce costs
2. Improve motivation
3. Reduce labour turnover
4. Increase revenues
5. Improve innovation and flexibility

Benefit of training to employer Benefit of training to employee

✓ Motivational – Maslow, Herzberg ✓ Better job performance

✓ Lower labour turnover ✓ Better career prospects (higher chance of

promotion)
✓ Increased efficiency, leading to lower costs
✓ Higher productivity (and possibility higher pay)
✓ Improved health and safety (and fewer
workplace accidents, lowering the costs of ✓ Higher job satisfaction
compensation claims)
✓ Less chance of workplace accidents
✓ Increased revenues and higher profitability
 ✓ Improved innovation and flexibility

There are three types of training: 1. Induction training

● Induction training
● On the job training Induction training is a type of ​training​ given to a
person when they get a job in a company. It includes a
● Off the job training
tour of the premises and introductions to key members
of staff.

Benefits of induction training Drawbacks of induction training

- Help employees to be productive very quickly - Employees will not start work straight away as they
have to complete their induction training.
- Reduces the amount of mistakes an employee
may make - It is possible the new staff learn bad habits from
experienced staff during induction training
- Helps a new employee fit in and feel
comfortable

2. On the job training. 3. Off the job training (internal and external)

Training that takes place whilst an employees is Training that takes place away from where the
actually working e.g. chef being trained whilst employees work (can be in another part of the
they prepare meals. Coaching and mentoring are company or off site). Conferences and college courses
examples. are examples.

Advantages of on the job training Disadvantages of on the job training

✓ Cheaper than off-the-job-training ✗ Quality of training depends on ability of the trainer

available in firm and time given
✓ Employees remain productive – they are
working whilst they’re being trained ✗ Learning environment may not be ideal – noisy,
rushed as staff still have to be productive
✓ Training is specific to the job
✗ Bad habits might be passed on
✓ Opportunity to learn from experienced, expert
staff

Advantages of off the job training Disadvantages of off the job training

✓ A wider range of skills can be obtained from ✗ More expensive than on-the-job training
experts outside of the firm
✗ Productivity may suffer as the member of staff is
✓ Developmental – motivational according to away from the place of work
Maslow/Herzberg
✗ Risk of employees using new skills/qualifications
✓ May lead to formal qualifications, benefiting to seek jobs with other firms
both the individual (in career terms) and the
✗ May not be specific to the individual’s or firm’s
 business (in marketing terms) needs

Advantages of using skilled workers:

- Greater efficiency/productivity – leads to lower unit costs

- Increased reputation and brand image which can allow a firm to increase price

- Less supervision needed, freeing managers for more important tasks

Reducing the workforce (downsizing) – Dismissal and redundancy

reasons:
● Automation (machines doing jobs once Dismissal
done by humans) Being asked to leave a firm because of poor
● Declining sales performance or behaviour.
● Merger or takeover (rationalisation)
Redundancy (surplus to requirement)
● Firm/factory moves Being asked to leave a firm where the skills or
experience of the member of staff are no longer
required.

Advantages of making an employee redundant Disadvantages of making an employee redundant

1. Reduces the wage bill in the ​long term​​. Less 1. The firm will need to give a redundancy payment to
workers to pay will reduce costs. the person who is leaving. This can be expensive in
the ​short term​​ (commonly 2 weeks for every year the
person has worked at the firm).
2. Skills and experience are lost from the firm.
3. It is usually the most experienced employees
(people with the most years – bigger redundancy
payment) that choose to be made redundant.

Workforce planning Downsizing definition

Businesses usually make decisions to increase or To reduce in number of personnel in a company in
decrease (downsize) the number of staff they response to falling demand, automation (becoming
have on the basis of a workforce plan. The stages capital intensive), merger/takeover etc
involved in a workforce plan are:

1. Assessing the current workforce

2. Analysing future workforce needs
3. Identifying gaps
4. Developing strategies to address needs

Legal controls over employment 1. Health and safety law:

1. Health and safety laws
Impact of H&S laws on firms
 2. Employment contract law (including A. Cost (ensuring a safe working environment
unfair dismissal) requires spending money on equipment etc)
3. Discrimination law (age, gender, age etc)
4. Minimum wage law
B. Decreased injuries therefore less working days
lost.

C. Motivational (safety needs – Maslow, hygiene

needs – Herzberg)

Impact of H&S laws on employees

A. Decreased injuries

2. Employment contract 3. Discrimination and unfair dismissal

Impact of Employment Contract laws on firms Impact of discrimination laws on firms

A. Increases costs A. Increases costs

B. Motivational B. Motivational

Impact of Employment Contract laws on Impact of discrimination laws on employees

employees A. Motivational (safety needs – Maslow, hygiene
A. Motivational (safety needs – Maslow, needs – Herzberg).
hygiene needs – Herzberg)

B. Reduces labour turnover

B. Reduces labour turnover

4. Minimum wage Communication

The passing on or exchanging of information from a
Definition: An amount of pay set by the sender to receiver. For communication to be effective,
government below which an employer cannot the message must be transferred quickly and without
pay an employee. any misinterpretations.

Impact of a minimum wage on firms

A. Increases costs

B. Motivational

Impact of minimum wage laws on employees

A. Motivational (physiological – Maslow,
hygiene – Herzberg).
 B. Reduces labour turnover as employees
may feel that their wages are adequate.

For communication to be effective, the One way communication.

business must consider the following: Information is transferred in one direction only, from
- Which communication method best suits the the sender to the receiver. There isn't any opportunity
situation for the receiver to give feedback to the sender.
- The needs of the receiver
- External influences may alter or slow down the Examples:
processing of a message (a phone call may be ● E-mails
interrupted, or you may reach someone whilst ● Letters
they’re driving)
- The communication may need to be duplicated
(phone conversation followed by an e-mail to
ensure that the main points of the conversation
are recorded)
Two way communication Benefits of effective communication for a firm:
● Employees understand what is expected of
When the sender sends a message to the receiver them and this allows then to feel comfortable
and he/she (receiver) sends his/her response to
in their jobs
the sender after understanding the message.
● Staff will work more effectively if they do not
Examples: have to wait too long for agreement and
● Phone feedback
● Face to face ● Customers will receive constant
communication from the firm, aiding sales
growth
● Minimises risk of diseconomies of scale
occurring

Written method of internal Benefits Drawbacks

communication

Memorandum ​(memo) is ✓ Memos can be sent to all ✗ One way communication – no

usually a short message that staff or can be sent to feedback
contains key information. It is specific people or
often used to remind staff of an departments without being
upcoming event or change in the altered. ✗ Paper memos can easily be lost.
normal routine. This form of
communication is now usually
done via email. ✓ Memos are very easy and ✗ Emailed memos may not be
quick to write. read by the receiver.

Facsimile ​(Fax) allows written ✓ Fax is a quick way to send a ✗ One way communication – no
documents, images and notes to hard copy​ (paper copy) of a feedback
be sent via a phone line. The
receiver’s machine will print out document to another person. ✗ Faxes can often be unreliable as
the document out. This is still they may not arrive or may not
used in offices but email be read if the receiver doesn’t
attachments are replacing it. ✓ It is quick and easy to send, know they have been sent the
and it can be delivered to fax.
offices all over the world in a
✗ Not all business have a fax
few seconds
machine

Letters​​ are written ✓ They are a formal ✗ One way communication – no

communications that may communication that staff can feedback
contain vital information. A keep and show to others.
✗ Letter can be used as evidence
staff member may receive one
of errors: employees may use
to signal a pay rise, or one may
them as evidence that they are
be sent to a supplier to signal an ✓ A letter can be sent to more
being bullied or that they were
end to a contract. than one person, saving the
promised a pay rise.
business time.

Newsletter ​– a summary of ✓ This can be very quick to ✗ One way communication – no

news articles and updates that read but contain lots of feedback
are of interest to staff. A information.
✗ Some employees may not read
business may use a newsletter to
the newsletter and therefore not
keep staff up to date with any
know the latest news.
changes, upcoming events or ✓ They can boost morale by
awards they have won. highlighting employee ✗ They can be quite expensive to
success produce

Poster – ​this is a visual method ✓ These are very quick and ✗ One way communication – no
that shows key information in a easy to produce feedback
clear and simple way. The
✗ Businesses cannot guarantee
poster should have very few
that all staff has seen the poster.
words on it and plenty of ✓ Posters can be seen by lots of
images. Businesses often use people at once, for a very ✗ A poster can be confusing if
them to highlight events such as small amount of money. someone doesn’t read it
parties. properly or if it doesn’t contain
enough detail

Email - ​these are electronic ✓ These are quick and easy to ✗ One way communication – no
messages sent via the internet. write and send feedback
They are sent within the
✗ Some people may not check
business by mangers and other
their emails on a regular basis,
employees ✓ The sender can add a
so they may not respond to a
 ‘receipt’ to the email so they query or question quickly
know when the receiver has enough
read it
✗ Email can be used too
frequently, causing staff to
spend too much time answering
emails rather completing other
important tasks

Verbal method of internal Benefits Drawbacks

communication

Meetings. ​A meeting allows a ✓ Face-to-face meetings allow ✗ A few people who want their
group of people to communicate people to voice concerns and opinion to be heard can
with each other and make show emotions, giving dominate meetings. This means
decisions quickly and quicker decisions and that not all employees get the
efficiently. Often an ​agenda​ (list allowing employees to chance to speak.
of topics to cover) will be discuss their opinions and
✗ Meetings can be
handed out and ​minutes ideas
time-consuming for businesses
(summary of decisions)
and do not always produce an
produced at the end
outcome.
✓ Two way communication

Telephones ​are used a lot in ✓ Two way communication ✗ The telephone isn’t always
many businesses on a answered, which means the
✓ The telephone is quick and
day-to-day basis. They allow the message may not be transferred.
direct and can be used to
business to communicate both For example, if the supplier
complete a range of tasks
internally (with other workers) doesn’t answer the phone, they
such as consumer queries,
and externally (with customers). won’t get the message to
orders or speaking to a
change the order.
colleague.

✓ The phone allows a business

to talk to people, who are
away, for example customers
in different countries.
 Method of external Benefits Drawbacks
communication

Email ​can now be sent as ✓ Businesses often send an ✗ One way communication – no
formal documents to speed up email instead of a letter as it feedback
the communication process. For is cheaper but can include
example, a business may attach the same layout and image as
a letter to an email, or write the a letter ✗ Emails are not always written as
email as a formal reply. carefully as letters.
✓ Emails allow a business to
communicate quickly with
external stakeholders.
✗ They can be sent to the wrong
✓ Emails can be saved for person
future references

Letters ​are important for the ✓ Letters give a professional ✗ Letters are time consuming to
business’s image. A poorly image of the business and write
written letter with spelling show it values its
mistakes can damage the stakeholders. For example, if
business’s image. Letters are a customer writes to a ✗ They are expensive to send
used to communicate with business complaining about
customers, suppliers and other its product quality, they may
businesses. Larger businesses be impressed if they receive
✗ One way communication – no
often have a customer relations a letter, as it shows time and
feedback
department that uses letters to effort has been spent on their
answer complaints and praise complaint

Newsletters. ​Many stakeholders ✓ It is a cheap, cost effective ✗ Not all external stakeholders
look at the company’s method to communicate key may read the newsletter, so they
newsletter. This often used to information to a large could miss important
show off new projects, staff number of people. information; for example,
achievement or other shareholders may miss the
business-related news. details of the next AGM
✓ The newsletter can be used (Annual General Meeting).
to boost the image of a
✗ One way communication – no
business.
feedback

Advertisements: ​businesses ✓ They can be very creative ✗ Adverts can be expensive and
may place adverts in a range of and fun, allowing the may not be seen by the target
media (e.g. newspapers, business to improve its market: a 30 second advert
televisions) to inform their during the NFL Superbowl
stakeholders of important image would cost $3.5 million,
information, new products or whereas an advert in the local
offers newspaper will cost a few
✓ Placing adverts in the correct dollars
places means that businesses
✗ One way communication – no
can target customers very
feedback
accurately

Websites: ​many companies ✓ These can be quite cheap to ✗ Only around 35% of the world
have their own website. Even develop and allow people to uses the Internet and so some
sole traders may have a small see products, news and businesses may miss out on
website for their stakeholders to contact details. custom.
see.
✓ Businesses can use websites ✗ Websites can ‘crash’ (stop
to communicate with their working) if not updated or there
stakeholders and offer them are technical problems, which
a variety of ways to contact can cause a loss of custom and
the business. poor image

Telephone: ​businesses still use ✓ The phone can be a quick ✗ A phone line can have a poor
the telephone to contact and cheap way to talk connection, making it hard to
stakeholders. Many larger directly to someone when hear the person on the other
businesses have call centres for face-to-face is not an option. end.
customers to ring, whereas
✓ The phone can allow a
smaller firms may have a direct
business to speak to
line to the shop or factory. ✗ It can often take a long time to
suppliers and customers
speak to someone unless they
anywhere in the world.
are available and near the phone
✓ Two way communication at a specific time.

Video conferencing ​is often ✓ It is direct and nearly as ✗ It can be quite difficult to get a
used to communicate with good as face to face as it time that suits both parties.
groups in other countries. allows the sender and
Skype, for example, gives receiver to see each other.
people and businesses the ability ✗ Video often requires technology
✓ It is cheaper for two offices
to talk over the internet. to be available: for example, the
in different countries to
Businesses now operate all over internet and some expensive
communicate via video
the world, and have offices in equipment.
conferencing rather than to
multiple cities. Video
send employees to the other
conferencing allows them to
office.
connect and keep the same
company ethos and image. ✓ Two way communication

Text messages ​are used by ✓ This is a cheap way of ✗ Like any text message, these
many organisations to contact communicating with can be misinterpreted and
stakeholders with small updates stakeholders. misunderstood.
or important messages. This
✓ Text messages can include
means the businesses can
key information, offers and
contact its stakeholders while ✗ One way communication – no
special content, such as prize
they are on the go. This is a feedback
winners.
direct way of communicating
and can target specific people. ✓ The majority of people have
access to a mobile phone and
can be contacted even when
away from a computer.

Social media ​is the ✓ Quick, efficient and specific, ✗ Some of the more elderly
fastest-growing communication allowing businesses to be stakeholders do not access
method, and businesses use it to very accurate with their social media and prefer other
inform stakeholders in many communication. forms of communication such
different ways. Social networks, as a letter.
✓ Many younger customers
online advertising and mobile
have access to social media ✗ Not all customers will use the
internet access have made social
on their phones. internet on a regular basis and
networking a new
so websites, emails and social
communication channel. ✓ Social media can be creative
media may not communicate
and fun, which keeps the
Many younger customers use the message to them.
business image positive.
their mobile phone to access
social media and this allows
businesses instant
communication channels.

Formal communication Ways in which information technology can

When the official, recognised methods of improve internal communication
communication are used. - E-mails are quick and easy to send. They have
a ‘received’ function so the sender knows they
Informal communication have been received. They can also be stored.
When information is passed though
non-approved, or unofficial methods of
communication are used such as gossip and - Skyping/video conferencing can save time and
rumours. Although informal communication can money by allowing people from different
be frustrating for organisations, as it can be locations to communicate effectively.
misleading or changed, it can also be valuable
and helpful.
Barrier to communication Explanation Example
Method Some methods do not suit the A business makes an employee
situation and the incorrect redundant by email. The email may
method may upset or annoy not get to the receiver.
people. If a business uses an
informal method to pass on a
formal message, stakeholders are
likely to react badly.

Language/Jargon (technical If the wrong vocabulary is used, A UK company uses technical

terms) the receiver won’t understand terms when speaking to a customer
key words. in another country. The customer
has only basic English and doesn’t
understand the technical terms.

Culture Messages can be misunderstood In China, it is considered impolite

as different cultures ​perceive to reject a suggestion or opinion, so
(understand) things in many questions such as ‘Do we have a
ways. deal?’ can cause misunderstandings.

Distractions Noise or bad reception can mean A business telephones its supplier to
a message is not fully increase an order. The supplier
understood by the receiver. doesn’t hear the message correctly
There may also be other and delivers the wrong order.
distractions that stop the receiver
understanding the message, such
as work pressures or being late
for an appointment.

Enthusiasm and emotion These could ​distort (​ alter) the An employee who is verbally asked
original message. Someone who to do something they dislike may
is angry, upset or tired may stop listening and then make a
misunderstand or incorrectly mistake.
send the message.

Amount Too much information may A waiter forgets a customer’s meal

cause the receiver to stop as they received too much
listening or misunderstand. information at once.

Length of chain of If a message is passed through A manager passes on a message for

communication various people before finally all staff. This may be changed
ending up with the receiver, it slightly as it goes through each level
may change slightly as each in a business, as managers
person puts their own summarise the message or alter it
interpretation on the message.
 Words may be changed or the slightly.
meaning altered.

Losing message Some messages may be lost in Some email systems do not deliver
the process. For example, faxes, messages that contain rude words or
emails and memos are all lost by large attachments. This means they
employees as they can be could be lost.
accidentally deleted, misread or
the fax machine not turned on.

Technical problems Some office equipment may not If there is a power cut, computers
be working, stopping a message will not be able to work, meaning
being sent. Machines are also some methods of communication
likely to break or wear out over won’t be available.
time, meaning messages could
be lost or slowed down.

Overcoming the barriers to communication Problems of poor communication

through:
-Training ​– can be given to help with Examples:
communication difficulties or up-skilling
employees. ● Employees are unhappy with their manager as
-​Recruitment​​ – when businesses are hiring they feel they are not listened to
people they can use this process to assess the
communication skills of the applicant.
-​Technology​​ – if communication barriers occur
● Customers do not get a quick enough reply and
due to faulty or broken down technology,
businesses either have to get it replaced or the business develops a poor reputation
repaired.
Chain of Command​​ – sometimes if the chain of
command is too long businesses may remove ● Orders are missed or are incorrect
some layers (​delayering)
Social events​​ – internal communication may
improve if there are social events organised for
the staff as it provides them with opportunities to
interact with people from other departments.

Unit 3:
Marketing definition: Marketing involves:
Marketing is identifying customers’ needs and ● Identifying customers’ needs and wants
satisfying them profitably. ● Designing products or services that meet those
needs
● Understanding the threats from competitors
 ● Informing customers about products
● Charging the right price
● Persuading customers to buy their product
● Making products available in the right
location
Product orientation​​ ​definition: Market orientated definition:
Focuses on making a quality product and then Focuses on finding out what the customer wants
trying to find customers to buy it. through market research and then trying to make a
product to meet customers’ wants.
Satisfying customers’ needs involves 3 things:
1. Adding value
2. Unique selling point (USP)
3. First mover advantage
1. Adding value through marketing: 2. Unique selling point (USP)
The amount of value added to a good through the A feature of a product; its image, price, promotion or
process of marketing (unit cost minus selling price). distribution (place) that is superior to the competition.
This can be done through branding etc What makes the product stand out.
3. First mover advantage: Maintaining customer loyalty - building customer
The advantage gained by being first into a market relationships
etc – for example, extra sales as there are no other To promote customer loyalty (customers who buy
competitors your product and service repeatedly) building a
relationship with the customer is necessary.
Relationship marketing involves communicating with
customers regularly and encouraging repeat
purchases. Firms need to engage their customers with
their brand regularly.
Why customers spending patterns change: Customer loyalty definition:
● The economy (boom = spending increases, When a customer buys the same product again and
recession = spending decreases – for most again.
goods)
● Technology (new technology = people will
want to buy it)
● Fashion (when things are in fashion they are
more often purchased)
Factors that affect individuals’ consumption: How firms respond to customers’ changing
● Income (people with higher incomes buy spending patterns:
more luxury goods) ● Adopting (improving) their product to meet
● Age (as we age the products we buy customers changing needs
changes) ● Launching new products that suit customers
● Lifestyle (single people purchase different changing needs
products to married people with children) ● Selling its current products in new markets
● Discontinuing selling a product for which
demand has declined
Competition within a market might increase How businesses can respond to increased
because: competition:
- Changes in technology making it easier for - Using pricing strategies (e.g. lower prices) to
new firms to enter a market (internet in the increase competitiveness
newspaper market) - Improve quality of service/product by increasing
 - Changes in technology making it easy for training for staff
customers to compare prices of products - Improving operations management to speed up
(compare.com) delivery times
- Changes in government regulation that - Conducting research to develop new products
allows more firms to enter a market - Launching a promotional campaign to increase sales
(breaking up monopolies etc) - Using relationship marketing to develop brand
- Fall in the number of customers in market loyalty

Advantages to consumers of greater Niche marketing definition:

competition: Highly specialised sub part of a larger market.
● Lower prices (when there’s more companies Niche marketing occurs when a firm competes in a
they will compete on price) small segment of a market with which the major
● Greater choice (more firms = more choice) competitors are not concerned with e.g. Classic FM
● Better quality (firms will compete on operates in a niche market.
quality)
Characteristics of a Niche market:
- Premium (high) prices (no economies of scale possible)
- Small sales volume
- Highly differentiated products
- A high skills base

Advantages of operating in a Niche market: Disadvantages of operating in a Niche market:

- product designed to meet the needs of the - does not allow for economies of scale to be
customer exactly and therefore it should sell achieved, therefore high unit cost
well in its market - if a large firm enters the market it will make it
- a premium price can be charged – therefore difficult for the niche market firm to survive
each unit sold should have a high profit as they cannot compete on price
margin - small number of customers and therefore if
some customers are lost if will have a major
detrimental impact on the firm
- firm is likely to remain small even if product
is successful because market is small
Mass marketing definition: Characteristics of a Mass market:
Mass marketing aims for high sales volume at - Low prices (economies of scale possible)
low/lower prices. It is an attempt to appeal to the - Undifferentiated products
entire market. - A wide range of sales outlets
- Extensive promotion
- High sales volume
Advantages of operating in a Mass market: Disadvantages of operating in a Mass market:
- less risk as there are larger numbers of - heavy capital investment in equipment etc is
consumers and therefore a loss of some required
consumers will still leave a lot of consumers - before entering a firm must be sure that
- due to economies of scale producers can enough demand exists for their
enjoy lower average costs and therefore product/service because a lot of money has
charge lower prices already been invested
- good/service not designed especially for the
customers and therefore it may not sell well
outside its original market (internationally)
 Market segmentation definition:
Market segmentation is a process of dividing up a market through identifying groups of consumers with
common needs and wants. This helps establish a target market (customers a firm want to aim their
goods/services at)
Market share definition: How markets are segmented:
Percentage of total market sales held by one brand 1. Geographic Segmentation (different products
or business. are targeted at different customers depending
on where they live in a city or country)
2. Demographic Segmentation (age, gender,
income, social class or ethnicity or religion)
3. Socio-demographic segmentation (different
products are targeted at customers depending
on how well off they are – A = Upper middle
class, B = Middle class etc
Benefits of segmentation to businesses: Marketing orientated business definition:
● Allows businesses to target marketing A business that focuses on finding out the needs of
campaigns accurately – targets the segments the customer (by using marketing research) and then
they are interested in designs and builds a product that meet the needs of
● Allows businesses to identify gaps in the the customer. Market research is key.
market for new products/services – identify
segments whose needs are not being met
● Allows businesses to differentiate their
product from those of their competitors
A market orientated approach will attempt to: Market research definition:
- Create products based on what customers want The process of finding out what consumers want or
- Identify changes in the market and changes in the need from a product before a product is made. The
needs of customers, allowing the business to be the process of collecting and interpreting data about
first to react to change customers and competitors.
- Develop brand loyalty by ensuring customers’
needs and wants are satisfied
If a firm implements market research effectively Both new and existing firms use market research
it can: to investigate:
● Identify the needs and wants of customers - customers’ preferences (what customers want
● Identify what is the best price to charge for from a product, what they are prepared to pay
a product etc)
● Identify how much competition is in the - competition (who they are, their market share
market and their strengths and weaknesses)
● Spot a gap in the market that it can - market segments (needs, habits and lifestyles
profitably fill of different groups of customers)
● Design its marketing mix (price, product, - market size and trends (how many customers
place and promotion) to target the needs of are in the market and whether it is growing or
different market segments. shrinking)
● Allow the business to respond quickly to
changes in customers’ needs

There are two types of data that market research can generate:
1. Quantitative data
2. Qualitative data
 1. Quantitative data 2. Qualitative data
Quantitative market research is based on relatively Qualitative market research is based on the opinions
large samples and is, therefore, statistically valid. It
of a small focus group or in-depth one-to-one
can be expressed in numerical terms, e.g. sales have interviews. It aims to understand why customers
increased by 45%; the market for soft drinks is behave in certain ways or what they think of a
worth over $4billion. product or service. It examines why customers do
what they do. As the groups are small, the findings
are not statistically reliable.
Secondary research definition: Types of secondary data:
Secondary research is the process of gathering data - Sales records (yours or competitors)
that has already been collected or published. - Government data (statistics, social
Secondary data may exist within the business or be demographics etc)
gathered from elsewhere. - Customer information (spending habits etc)
- Information about competitors (Their
websites, company reports etc)
- Commercial data (Mintel reports etc)
Advantages of secondary research: Disadvantages of secondary research:
● Cost –​​ much of it is available free of charge and ● Reliability – ​depending on the source, secondary
is easy to access. data may or may not be reliable. Government
● Access – ​for small firms, secondary research data, for example, may be very reliable; data from
offers access to professionally collected data other sources may, by contrast, be unreliable and
that they would not otherwise be able to afford. potentially misleading.
● Time – ​because it is easily available, using ● Specificity – ​secondary data may not be ​specific
secondary data can save a business a significant (directly related) to a firm’s needs. If a firm has
amount of time – rather than gathering the data particular questions it needs answering, it is
themselves unlikely to find answers in generally published
secondary data.
● Amount of data – ​the large amount of secondary
data available is often a problem in itself. A firm
would need to sort through the data carefully in
order to extract the useful information that it
needs.
Primary research definition: Primary research methods:
Primary research is the gathering of new and ● Questionnaires
original, first-hand information. It can be done ● Interviews
through observation, experimentation, ● Focus groups
questionnaires and interviews. ● Observations
● Experimentation
Advantages and disadvantages of Advantages and disadvantages of interviews:
questionnaires: Advantages
Advantages: • Qualitative data can be produced (descriptive, in
● Quantitative data can be produced depth answers about the way people think and feel)
● Customers views can be obtained • Interviewer can explain questions if there is any
Disadvantages: misunderstanding
● Costly if done in person Disadvantages:
● Poor questions lead to inaccurate results ● Time consuming, costly
• Interviewer bias can be a problem causing them to
not record the interviewee’s answer correctly
 (recording what they think the answer should be
rather than what the interviewee is saying to them)

Focus group definition:

A selection of people who have similar characteristics to target market who feedback their opinions on a
company’s product or service.
Advantages and disadvantages of focus groups: Observations:
Advantages: Watching customers as they shop. Firms try to draw
● Qualitative data can be obtained conclusions about their customers from observing
● Detailed information is obtained their behaviour.
Disadvantages:
● Expensive – group needs to be paid
● Limited data collected
Experimenting
Launching a product into a test market (a very small market) in order to gain customer feedback so that the
product can be altered before it is launch into a large market (movies have test screening for example)
Advantages of primary research: Disadvantages of primary research:
● Timely – ​Primary research is up to date. ● Time – ​While online surveys might be fast, other
● Fast – ​Some types of primary research (online methods, such as interviews, can be very
surveys, for example) can give very quick time-consuming.
responses. ● Cost – ​Primary research can be very expensive to
● Unique – ​Collects data which no other business collect.
has access to (and the results are confidential). ● Expertise – ​Good primary research relies on the
● Specific – ​Primary research focuses on the people doing it. Choosing the most appropriate
particular topic the business is interested in. method and carrying out the research effectively
is not easy. Mistakes and poorly conducted
research are common.
Sampling definition: Types of sampling:
Researching a small percentage of a population to 1. Random sampling – involves selecting
draw conclusions about the whole population. individuals randomly from a population.
2. Quota sampling – building a sample group so
that it reflects the proportion of the
population.
3. Stratified sampling – sampling from a
particular segment of the population.
4. Cluster sampling – gathers a sample from a
specific geographical area.
Factors influencing the accuracy of market 1. Time
research data: Secondary data is often out of date when company
1. Time searches for it. Primary data is up to date when it is
2. Research design collected.
3. Sample size 2. Research design
4. Interviewer and interviewee quality Using the wrong research method can result in weak
5. The human factor data. For example, a postal survey used to research
teenage online gaming habits is likely to yield a very
low response rate.
3. Sample size 5. The human factor
A smaller sample size may be easier and cheaper, Careful market research is behind almost all product
but with fewer people actually surveyed, the results launches and yet 90% of all new products end in
will be less statistically accurate than if a larger failure. Human behaviour is unpredictable and no
sample was used. amount of research can allow for this.
4. Interviewer and interviewee quality
The skill of the interviewer will determine the
quality of the answers. People may give responses
that they think will please the interviewer, or they
may not understand the questions.
Methods of market research result presentation: Advantages and disadvantages of each method:
1. Table/tally chart 1. Table/tally chart
2. Bar chart Allows​​ presentation of data in a simple form.
3. Line graph However​​, unable to display complex analysis
4. Pie chart 2. Bar charts
5. Pictogram Useful when comparing two or more sets of data.
However, limited in how much information they can
present.
Advantages and disadvantages of each method: How important is market research to the
3. Line graph successful introduction of a new product?
Can show​​ the relationship between 2 variables e.g. ● Help find out customers’ needs so able to adopt
price and demand. ​However​​, unable to show products to suit customers
relationship between 3 or more variables. ● Able to determine possible demand so able to
4. Pie chart establish if the product is worth producing, and if
Can show​​ proportion compared to total (i.e. it is to be produced, the correct quantity of good
amount of market share held by firm). Quick and to produce
easy to understand. ​However​​, can be complicated ● Able to determine the effectiveness of
to draw. promotion/pricing strategies
5. Pictogram However:
Similar to a bar chart (uses symbols instead of ● Market research cannot predict how competitors
columns). ​Useful ​when data is simple. will react when a business launches a product e.g.
the competition could lower their price
● Customers’ needs can change rapidly and
therefore market research can become out of date
very quickly

Marketing strategy definition:

How the 4 ps are used/combined in order to sell a product.
A marketing strategy is one that meets Marketing mix (4 ps):
customers’ needs, therefore businesses must:
● Design and produce high quality ​products ● Price (price strategy, price elasticity)
● Charge a ​price​​ that is acceptable to ● Product (quality, packaging, branding)
customers ● Place (market coverage, distribution channel)
● Inform customers about the product through ● Promotion (advertising, public relations,
promotion relationship marketing)
● Make the products available in the right ●
place ​at the right time Combined to make a product attractive to consumers.
A successful marketing mix is one that: Costs of developing and launching a ​new​ product:
● Meets customers’ needs ● Research and development
● Where the 4Ps are consistent with one ● Marketing – advertising
 another
● Provides a USP
Benefits of developing and launching a ​new Brand definition:
product: Name, symbol or feature given to a product that help
● New source of sales revenue it stand out from competitors e.g the Nike swoosh
● New source of profit
Diversification – if product is in different market to
ones a company already has
Benefits of branding a product: Packaging:
● Differentiates​​ the product form What the product comes wrapped in.
competitors’
● Helps creates ​customer​​ ​loyalty (repeat
purchasing)
● Helps ​recognition ​by potential customers
● Develops an ​image
Raises the​ prices​​ when the brand and image
become strong
Uses of packaging: Product Life Cycle definition:
● Promote the product The level of sales at the different stages through
● Differentiate the product on shelve which a product passes over time. Consists of:
● Protect the product from damage - Development (product researched, designed
● Communicate information (e.g. about and tested – high costs and no sales revenue)
ingredients or usage) - Introduction
● Makes the product convenient to use (such - Growth
as easy pour caps) - Maturity
● Makes the product easy to store and display - Saturation
- Decline

Features of different stage PLC:

Features of stage Introduction Growth Maturity Decline
Sales Low but growing Growing quickly High but Declining
growing slowly
Profits None/low Growing High but Low
declining
Cash flow Negative/slightly Positive Positive Positive, but
positive falling
Competitors Few Growing Many Falling
Marketing strategy at different stages of the PLC:

Marketing Introduction Growth Maturity Decline

strategy
Marketing High High (cost per Falling Low
expenditure unit sold falling)
Price Skimming or Price cut/ Competitive Low
penetration increase pricing strategy
strategy used depending on
introduction
strategy
Product Basic Improved Differentiated Basic
Promotion Focus on Generate brand Retain brand Targeted
awareness preference loyalty promotions
Place Few outlets Increasing High number of Falling
(distribution) outlets

Extension strategy definition: Criticisms of the PLC:

Strategies used by firms in order to extend the - In reality, very few products follow the classic life
maturity stage of the PLC (when sales are high). cycle
Examples include: - The length of each stage varies enormously between
- finding new markets/segments for a product products
(Vietnam for western products) - It is difficult to identify exactly where a product is
- Finding new uses for the product on the PLC
- Modifying the product (Mar bar ice cream) - It is almost impossible for a firm to know when a
- Develop the product range product will enter the next stage of the PLC, therefore
- Change the appearance/packaging (Coca it doesn’t help the firm predict the change it is merely
Cola) a guide as to how marketing strategies should change
- Encourage more frequent use (Kellogg’s – when a product moves to another stage of its life
not just for breakfast) cycle.
Pricing methods Factors that will influence the price of a product:
● Cost plus pricing ● the cost of production
● Competitive pricing ● the type of customer being targeted (market
● Psychological pricing segment). Upper middle class = premium
● Penetration pricing price
● Premium pricing ● the amount of competition in the market –
● Price skimming more competition = lower price
● Promotional pricing ● the objectives of the business – profit
● Dynamic pricing maximisation = premium price
● where the product is in the product life cycle

Method Benefits Limitations

Cost plus pricing​​: ✗ Simple​ -​ set percentage for all ✗ If the same percentage is used for all
The unit cost of a products products; customer expectations or
product is calculated geographic differences are ignored
 and then a percentage ✗ Easy to set price according to ✗ Does not take into account
is added to set the profit targets competitor’s price, therefore
price. The % added is company’s product may not be price
the profit margin. competitive.
Competitive pricing​​: ✗ Price matches customer ✗ The firm gains no advantage in terms
Charging the same expectations of price – their price is the same as
price as other firms in competitors’
the market.
Psychological ✗ Encourages higher-priced sales (a ✗ Modern customers are not easily
pricing​​: Setting a customer may think $100 is too convinced by this tactic
price that seems expensive but, psychologically, ✗ Simple, whole-unit pricing ($100) is
cheaper when it sees $99.99 as acceptable) more convenient for both the customer
actually isn’t. and the firm
Penetration pricing​​: ✗ Helps a firm to gain sales in ✗ Once a low price is set, customers may
Charging a low price competitive markets expect it to remain low
when entering an ✗ The low price may not fit with the
established market. overall brand image and may therefore
Aim is to gain market damage sales
share.
Price skimming​​: ✗ Helps the firm to gain maximum ✗ The price may be too high for some
Charging a high price profit early in the product’s life customers
when a product is first ✗ Can help to establish a ✗ A price reduction early in the product
launched on to a premium/high-quality image life cycle because of low sales can
market e.g. new damage brand image
games console. Price
is reduced later.
Promotional pricing​​: ✗ Can increase sales in the short ✗ Reduces profit margins for the period
Reducing the price to term of the promotion
attract customers, ✗ Can increase brand awareness ✗ Customers may not want to buy the
BOGOF, money off ✗ Can stop consumers buying product when it returns to “full price”
coupons competing products if they have as they are used of getting it cheaper.
already ‘stocked up’ on a firm’s ✗ May harm brand image
products
Dynamic pricing: ✗ Helps to maximise revenue ✗ Customers may resent paying different
Price is altered ✗ Can ensure, by lowering prices, prices at different times, and may not
daily/hourly/each that a firm’s capacity is make a purchase if they do not feel
minute to reflect effectively utilised they are getting the ‘best deal’
demand. Used by
airlines.

Other types of pricing: Other types of pricing:

Premium pricing: Geographical pricing:
Charging a high price for a product with a significant Prices vary according to the location of the sales
competitive advantage i.e. hotel on the beach. outlet e.g. petrol is cheap in the city than it is in the
Discriminatory pricing: country.
Different prices are charged to different groups of
people in a market e.g. cinemas charge adults full
price and children half price.
Factors that need to be considered when setting Is price the most important part of the MM?
the price for a product: Yes:
● Production cost. - Price helps attract customers
These must be covered or a loss will be made - Price helps reinforce brand image
● Level of competition.
The greater the level of competition the lower the No:
price is likely to be set at - If other elements of the marketing mix aren’t correct
● Product/what is being sold. then price will not attract customers
Luxury good = high price. Basic good = low price. - If the product/service is located in the wrong place
● Stage of the product life cycle (see PLC then price is less important, for example if a cheap
notes) restaurant is far outside town it is unlikely you’ll
make the effort to visit.
Price elasticity of demand Inelastic demand definition:
Measure the responsiveness of demand to a change in A percentage change in price leads to a smaller
price. Formula: change in quantity demanded
% change in Quantity Demanded
% change in Price
Elastic demand definition: Price elasticity of demand and sales revenue
A percentage in price leads to a greater percentage in Good with price inelastic demand:
quantity demand - an increase in price will increase sales revenue
- a decrease in price will decrease sales revenue
Good with price elastic demand:
- an increase in price will decrease sales revenue
- a decrease in price will increase sales revenue
While PED is important for decision making for a
firm other factors affect decision making eg
competition, state of economy etc

What affects the price elasticity of demand? Types of distribution channels:

1. Number of substitutes​​; if many substitutes good 1. Direct distribution (producer sells directly to
likely to be elastic in demand; if few substitutes or customer)
none good likely to be inelastic 2. Retail distribution (producer to
2. Necessity or luxury;​​ if good is necessity then supermarket/shop to customer)
likely to be inelastic in demand; if luxury then likely 3. Wholesale distribution (producer to
to be elastic wholesaler to shop to customer)
3. Proportion of income:​​ if good takes low 4. Agents (used for selling into markets which a
proportion of income then more likely to be inelastic firm has little knowledge of – i.e. foreign
(change in price hardly noticed), if good takes high markets)
proportion of income then more likely to be elastic in
demand
Advantages of direct selling: Disadvantages of direct selling:
✓ By cutting out intermediaries (who add their own ✗ The factory store outlet may not be close to
mark-ups), the product can be sold at a lower potential customers; when products are sold at a
price, aiding competitiveness. physical location, the extent of the distribution is
✓ Producers benefit from direct customer feedback limited to customers within a reasonable distance
and can respond to changing customer needs of the factory store.
 quickly. ✗ It may be impractical, or difficult, to send items
✓ A direct relationship with the customer can lead ordered over the internet by post (for example,
to increased customer loyalty. household furniture).
✗ The firm does not share the cost of distribution
with retailers.
Advantages of retail distribution Disadvantages of retail distribution
✓ Wide distribution is possible ✗ Retail stores often sell more than one brand of the
✓ Selling through specialist retailers can ensure that same product. The wide choice attracts customers
customers receive product advice e.g. laptops to retailers, but at the same time exposes them to
✓ Selling through premium retailers can helps a competition; brands have to fight against the
product’s brand image competition for customers’ attention.
✗ Retailers add their own mark-up, making the
product more expensive when sold.
✗ There can be loss of control of product (quality,
presentation, environment etc) at point of sale.
Advantages of wholesale distribution Disadvantages of wholesale distribution
✓ Wholesalers ensure that products are available to ✗ Wholesalers add their own mark-up to the
both large and small retailers. product’s price. This may make the product
✓ Wholesalers hold stock, thus reducing uncompetitive.
stockholding costs for the retailer. ✗ The additional stage in distribution increases the
✓ Retailers have access to a wide variety of time a product takes to reach consumers.
products from many producers from a wholesaler ✗ Increased handling as products are processed by
✓ Wholesalers reduce the cost of distributing wholesaler increases the chance of product
products to a large number of retailers. damage.
✗ The producer loses control over product storage
(potentially leading to mishandling and damage).
Advantages of distribution through agents: Disadvantages of distribution through agents:
✓ Agents know and understand the best methods of ✗ The producer loses a degree of control over how
distribution/transport within their own country and where the product is sold so there is a risk of
and can ensure that products get to customers damage to brand image.
quickly and easily. ✗ Agents add their own mark-ups, so the price
✓ Agents understand the language, culture and charged to customers may be high and
tastes of the local market. uncompetitive.
✓ Agents understand the laws and regulations
involved with importing and selling goods within
a particular country.
What determines how a product is distributed?: Promotion definition:
● Marketing aims. Promotion is communicating to customers/potential
Large sales = retail distribution. customers about a product using a variety of methods
Export = Agent. e.g. advertising in a paper.
● Product characteristics.
Perishable = quick distribution. The aims of promotion:
● Market coverage. ● Increase demand for products
The number of outlets a producer wants their product ● Increase customer loyalty (repeat purchasing)
sold in will also affect the distribution method. ● Create, enhance or maintain a brand image
● Cost consideration. ● Raise awareness, emotion or concern for an
The longer the distribution, the costlier it is. issue or product
● Customer consideration/brand image. ● Maintain, protect or increase market share
Customer perceptions about retail outlets and the ● Establish a price for a product that the
desire to create/maintain brand image may affect consumer is willing to pay
distribution.
● Product life cycle
How important is promotion depends upon: Choice of promotion method will depend upon:
● The degree of competition in the market. The - Whether the market is local, national or
greater the competition to more important international
promotion is – (standing out from crowd). - Does the method compliment the other 3 Ps
● The market segment (a niche market will need - The size of the advertising budget
little promotion) - The type of product being promoted
● The marketing emphasis (if the product is - Who is the target market
physically different – it contains a physical - Legal constraints
advantage – it may need little promotion. If - Where the product is on the PLC
the product is not physically different and it is
differentiated through branding then this
branding will require heavy promotion)
● Stage in the product life cycle (introduction –
heavy promotion, maturity – little promotion
etc)
Types of above the line promotion and the advantages and disadvantages:
Advantages of television: Disadvantages of television:
- Large audience can be reached - Very expensive
- Product can be demonstrated – shopping tv - Message is short lived
- Ability to target certain groups (certain people - Viewers tend to avoid TV adverts
watch certain programmes
Advantages of newspapers and magazines: Disadvantages of newspapers and magazines:
- Can have local or national coverage - No movement or sound
- Readers can refer back to ad - Advert can get lost amongst a large number of
- Ability to target certain groups (certain people other adverts
read certain publications)
- Can be relatively cheap
Advantages of cinema: Disadvantages of cinema:
- Can have local or national coverage - Limited audience (not many people go to the
- Ability to target certain groups (certain people cinema regularly)
watch certain movies) - Message may only be seen once
- Sound and movement can be used - Message is short lived
Advantages of radio: Disadvantages of radio:
- Sound can be used - No visuals
- Ability to target certain groups (certain people - Can be ignored by listeners (switch channels)
listen to certain radio shows)
- Cheap to make adverts for radio
Advantages of posters and billboards: Disadvantages of posters and billboards:
- Can have local or national coverage - Posters can be damaged and/or vandalised
- Seen repeatedly - Only limited information can be shown
- Good for short sharp messages
Advantages of internet: Disadvantages of internet:
- Can be updated regularly - Some adverts, such as pop up adverts, are
- Ability to target certain groups (certain people irritating and may damage the company’s
 visit certain sites) rather than enhance it.
- Visits to site and therefore views of adverts
can be measured
- Cheap and easy to set up
Advantages of social media Disadvantages of social media
- Can target specific market - Sponsored links may be expensive
- Cheap method of advertising
The aims of advertisement is to:
- Introduce new products to the market
- Persuade people to buy the advertised product
- Create a brand image for a product
Advantages of public relations (using press Disadvantages of public relations:
releases or press conferences to communicate with - Company does not have full control over what
stakeholders): is communicated by the media
- Cheap as media carry story for free
Advantages of sponsorship (when business pay to Disadvantages of sponsorship:
be associated with a particular event or star): - The behaviour of the star may reflect badly on
- If event or star is successful it can guarantee the brand that sponsors them (Tiger Woods
wide coverage for a company. and Nike)
Advantages of direct mailing/e-mailing: Disadvantages of direct mailing/e-mailing:
- E-mailing is very cheap and can reach a large - Tends to be ignored by the receiver.
number of people
Advantages of merchandising (point of sale Disadvantages of merchandising (point of sale
displays/free samples): displays/free samples):
- Attracts customers to buy product as it makes - Providing free samples can be expensive.
it more prominent/allows for free try - Getting point of sale displays in supermarkets
can be expensive (​firm has to pay​ supermarket)
Advantages of free samples Disadvantages of free samples
- Allows the customer to try the product and - May be expensive to give away product (and
therefore encourages purchase also pay staff to do it)
- Increases awareness of the product amongst
potential consumers
Advantages of BOGOF/money off deals: Disadvantages of BOGOF/money off deals:
- Will encourage purchases - If customers are used of getting the product “2
for 1” or at a reduced price, they may not want
to pay full price for the product when the
promotion ends.
Types of customer loyalty schemes:
- Money off next purchase coupon
- Loyalty card that collect points (used by supermarket, airlines etc)
Advantages of money of next purchase coupon Disadvantages of money of next purchase coupon
- Encourages repeat purchasing (customer - Decreases the revenue the firm gets from the
loyalty) sale of the good
- Encourages people to try the product - When offer ends the customer may no longer
purchase the good
Advantages of loyalty cards Marketing budget definition
- Encourages customer loyalty as customers are A financial plan or forecast for the marketing of a
rewarded for repeat purchasing product for a specified period of time.
 - Allows firm to collect information on their
customers which may help improve their
marketing
The size of a marketing budget will be determined E-commerce definition:
by: Process of buying and selling over the internet.
● The firm’s marketing objective (sales growth Includes business to business buying and selling
= bigger budget needed) (B2B) and business to customer selling (B2C).
● How much competitors spend (may want to
match them)
● The market conditions (lots of competition =
bigger budget needed)
● How much money the firm has (more money
= easier to have a bigger budget)
● The cost of different promotion methods (if
using TV then big budget required)
● Where a product is in its life cycle
(introduction = big budget)
Opportunities of e-commerce to businesses: Threats of e-commerce to businesses:
✓ Businesses can access customers all over the ✗ There is increased competition, as businesses with
world, allowing sales to increase for relatively lower costs can charge even lower prices. For
low costs. example, a business in Thailand may have lower
✓ Costs are much lower for a business as they have running costs and lower taxes to pay.
no shops to run. ✗ Websites may cost large amounts to design and
✓ The business can provide in-depth information on set up, and it may take months to start earning the
each product that it sells, giving reviews, links to money back.
other related products and showing the product in ✗ If a website breaks or needs updating, the website
action. may need to be temporarily closed.
✓ With internet usage increasing, the business can ✗ It may be costly to distribute the goods sold online
now use mobile, tablet and computer technology and they may become damaged whilst been
to sell their products. distributed.
Advantages of e-commerce to consumers: Disadvantages of e-commerce to consumers:
✓ Consumers can now search the internet for the ✗ Consumers may lose money through ​fraudulent
lowest prices. (fake) payment. Illegal companies may set up fake
✓ The internet is a fiercely competitive market websites that appear to sell products.
place, so businesses have to offer acceptable ✗ Consumers cannot try on or touch the products or
prices and quality. This means customers can services that they are buying, which increase the
access higher quality for less money chance that they will not fit or will not satisfy the
✓ The internet allows customers to access reviews customer.
and feedback about businesses. ✗ The time it takes for a product to be delivered can
✓ Consumers can buy products from all over the be very frustrating.
world without having to actually visit that country ✗ If there is a fault or issues with a product, it can
or business. often be very hard to speak to someone. Many
e-commerce businesses try to reduce costs by
having minimal staff allocated to customer
service.
Ways in which a business can use the internet Advantages of internet promotion:
to promote their products: - It’s cheap to set up and use (usually)
- Websites - It can reach target audiences (online
 - Adverts promotions can target the correct people)
- E-mails (direct mailing) - It’s use can be accurately measured (a
- Social media business can measure the amount of times
- Reviews customers click on their advertisement)
- Blog

Marketing objectives may include: The firm’s marketing objectives will then
- Increase sales revenue determine which elements of the marketing mix
- Expand into new market segments (price, product, place or promotion) are most
- Increase market share important and thus will determine marketing
- Increase product usage strategy.
- Develop new products Marketing objective determines the marketing
- Increase product awareness/brand recognition strategy, which determines how each of the 4ps will
be used.

Marketing strategy definition: Factors that influence the marketing strategy

Marketing strategy​ ​is how the business uses its 4 ps chosen:
(and which it prioritises) in order to influence ● Corporate objectives (expansion = market
customers to buy their product. strategy – increase sales)
● Marketing objectives (increase sales – market
strategy = decrease price)
● Stage of the product life cycle
● Level of competition
● Type of product
● The market
● Finance available

Consumer protection laws: The benefits of going into new markets are:
Designed to stop businesses making false claims and ● Spreading risk (if one market fails the
promises about their product. company has other markets to fall back on).
● Increased sales
Consumer protection laws are centred around the ● Culture-specific products (can be altered to
following areas: suit new market)
1. Misleading the customer through promotion ● Increased customer base

2. Faulty and dangerous goods

Goods sold must be ‘fit for purpose’
Problems of going into new markets:
● Market decline (new market may not be growing due to economic recession)
● Different laws – health and safety laws may mean that your product needs to be altered
● Cultural differences (may affect sales of product – brand name might sound strange in new market’s
country)
● Language (difficult to do business if can’t speak language)
● Lack of knowledge of new market decreases likelihood of success.

Method and Benefits Limitations

description
Joint ventures - This spreads the risk across two - The potential revenues and profit will
(entering a new businesses. Often, the costs will be split as have to be split with the other business.
foreign market well so if the entry into a new market fails,
with another each individual business will have lost less - The two businesses may have different
company, money. ideas about certain situations and
possibly one - One business may have expertise and decision making may take longer.
from that experience that the other business will
country) benefit from, which means the venture is
more likely to succeed
- Each individual business does not have to
commit as many resources.
Investment - The business may invest in staff training - Expensive - may be difficult for the
(investing in so staff are more comfortable in, and business to fund, especially if they have
training, new knowledgeable of, the new market. This invested a lot in expansion already.
equipment and improves staff morale and the skills
advertising to available for expansion. - Investment does not guarantee
overcome success.
problems of - This type of investment keeps the business
entering a new ahead of competitors and makes sure they
foreign market) have the most up-to-date equipment and
skills
Testing (having - By testing the product, the business can - Testing may waste time, meaning
a test period in see how the new market responds to it. If competitors release their product or
the new market the product is not popular, then the business service in the new market first.
to see if can choose not to go ahead with the
customers like expansion.
the product)
- The business can use initial comments and
feedback to improve the product or service
before its full launch
Sell in many - By selling in many different markets, a - A business may try to expand into too
different business can reduce the risk of potential many new markets. This may cause
markets (when failures in one foreign market (provided cash flow problems and put the future of
businesses sell sales in other foreign markets are strong). the business at risk
their product or Spreads risk.
service in many
different
markets)

Unit 4:
The role of the production department is to: The production department works with the
● Provide the service the business sells, or marketing, human resources and finance departments
● Produce the product the business sells to support to production or provision of products or
services.
Productivity Production
The amount of outputs (goods or services) that can be Production is the amount of goods and services made
produced from a given amount of inputs (factors of that people want
production)
Measuring productivity Increasing productivity
Productivity can be measured per unit of input, per Either:
worker, per machine or per shift. Formula: 1. producing more outputs with the same amount of
inputs, or
​Total output 2. producing the same amount of outputs with less inputs
whatever you are measuring the productivity of
How to increase productivity/efficiency Production and productivity
1. Increased education and training (allows workers to get Increasing production does not necessarily increase
more done) productivity if the ratio of outputs to inputs remain
2. Increased use of capital equipment (give workers better the same. For example, if a firm initially uses 20
machinery to work with) inputs to produce 10 outputs and the then increases
3. Improve workers motivation production to 40 inputs to produce 20 outputs,
productivity has not increased because the ratio of
inputs to outputs is still 2:1
Advantages of increasing productivity
Increasing productivity will lower a firm’s unit cost of production. This allows them to lower their price which is useful
if they are in a competitive market. Moreover, if their product is price elastic in demand, lowering price will increase
sales revenue

Benefits of using technology to improve Drawbacks of using technology to improve

productivity productivity

● Unlike people, technology does need to be ● Although technology requires low running
paid a wage costs. It normally requires a large initial cost
● Unlike people, machinery can run 24 hours a to purchase the equipment.
day, seven days a week ● A more automated repetitive approach is
● Having a more automated process can mean often de-motivational for workers
that fewer people are needed, which ● Technology can become out of date very
significantly reduces a business’s wage costs quickly, so it may have to be updated to meet
the changing needs of customers
●

3 types of stock: What factors influence the amount of buffer stock

- Raw materials (to be used in production we should hold?
process) 1. How fast the stock is used up – the faster it is
used up the more stock that is needed
- Work in progress (semi finished goods)
2. Storage space available. More space = more
- Finished goods (service sector will only have stock can be held
this one) 3. Nature of the product. Perishable stock = hold
little stock
4. Reliability of suppliers. Less reliable
suppliers = hold more stock
5. Suppliers lead time = hold more
Reasons why a firm might hold a lot of stock: What is the problem with too much stock?
 ● To be able to supply customers straight away 1. Opportunity cost – money tied up in stock
from their finished goods. could be used elsewhere
● To ensure that production doesn’t have to 2. Stock wastage -loss in value due to theft,
damage or going out of date (more likely
stop due to lack of raw materials
when too much stock is held)
3. Storage costs – cost of warehouse, security,
refrigeration etc

Lean production definition. Just in Time definition:

A philosophy that emphasises the reduction of Aims to ensure that inputs into the production
resources in production to their minimum (people, process only arrive when they are needed.
time, materials etc). ​Techniques include Implemented successfully, stock levels of raw
● JIT materials, components, work in progress and finished
● Kaizen. goods can be kept to a minimum.

Advantages of JIT Disadvantages of JIT

- Cash flow is improved (less money tied up in stock) -​​ Advantages of bulk buying are lost as only small
- No wasted or damaged stock amounts are purchased more often
- Stronger links with suppliers - If supplies are late then the production process may
have to stop
- Higher ordering and administration costs

Kaizen definition: Features of Kaizen:

Continuous improvement in the production process, 1. Continuous improvement (small changes very
no matter how small, rather than large one off often)
changes. 2. Elimination of waste
3. Right first time production (right quality first
time every time)

Advantages of Lean Production: Disadvantages of Lean Production:

-​​ improved labour and capital productivity - The attempt to achieve lean production is expensive
- requires less stock, less factory space and less in many ways; e.g. training of staff, purchase of new
capital equipment so costs are reduced machinery etc
- significant marketing advantages from fewer Conclusion:
defects – Quality can be USP For lean production to work employees must try to
- asking workers to suggest improvements can constantly improve the way the business works. This
empower the workers and increase their motivation requires a good deal of employee involvement and
empowerment. This is unlikely to work with an
authoritarian approach to management.

Types of production: Job production definition

- Job One product is produced at a time as a result of a
- Batch customer’s order. Skilled labour usually required e.g.
- Flow tailored suit

Benefits of using job production Limitations of using job production

 ● The product meets the exact requirements of ● Job production is often labour intensive,
the customer; this can give the business a which makes the process very costly.
competitive advantage. ● As products are made to order, they can often
● Tasks are varied for the employees, which can take a long time to produce.
give them more motivation. ● No economies of scale e.g. materials bought
● Businesses that use job production can often in small quantities therefore no bulk buying
charge far higher prices than for mass economies of scale
produced goods.

Batch production definition Benefits of using batch production

When many similar items are produced together in a
● Batch production is flexible and allows a
batch, this is then followed by another different type
business to offer a range of different products
of batch. Each batch goes through one stage of the
on the same production line.
production process before moving onto next stage
● Offers workers a variety of tasks, which can
e.g. T shirts
improve motivation.

Limitations of using batch production Flow production definition

Involves a continuous movement of items through
● Changing from producing one batch to
the production process.
another wastes time.
● Requires a range of machinery (costly) to
allow the different products to be produced.
● Businesses are required to hold a wide range
of raw materials (stock).

Benefits of using flow production Limitations of using flow production

● Capital intensive therefore this increases the ● Flow production is mainly done via
business’s productivity. automation and machinery, which can lead to
● Businesses can order large quantities of raw repetitive and boring tasks for workers,
materials therefore bulk buying economies of resulting in poor motivation.
scale possible ● The machinery required to produce the goods
● Higher productivity and cheaper costs for raw is often very expensive and requires a
materials enables business to have low costs significant capital investment.
and higher profit margins. ● Machinery can break down, which means all
● Businesses can lower their selling price if production has to stop.
they need to increase sales and maintain a ● The production process is ​fixed​ (inflexible):
good profit margin. all products are ​standardized (​ the same),
which makes it difficult to meet any changes
in consumer demand.

Choosing the most appropriate method of 1. The nature of the product

production depends upon: - Custom made one off products = job production
1. The nature of the product (highly individual = job - Products with some variation produced in medium
production etc) amounts = batch production
2. The type of market the business operates in (mass - Identical products produced in large amounts = flow
market = flow production if possible) production
3. The business’s resources (little resources –
unlikely to be able to afford the investment necessary
for flow production)
4. The skill level of the employees (highly skilled =
job production possible)
2. The type of market the business operates in. The three main technologies that are used in
Mass market – flow production because it is production are:
important that the good is:
- Produced in large numbers ● Computer aided design (CAD)
- Unit cost is low so therefore price can be low ● Computer aided manufacture (CAM)
- Quality can be standardised (identical ● Robotics
products)

Niche market – job or batch production because it is

important that a good:
- Stands out from competitors (variation of
product possible)
- Can be produced in small amounts

1. Computer aided design (CAD) Benefits of CAD:

Instead of hand drawing designs, CAD allows - Increases design productivity i.e. easier and quicker
designers, architects and engineers to electronically to produce designs. Designers can change the size
produce images. and features of a design on screen quickly.

- The design can be tested before it is produced. For

example the aero dynamics can be checked before a
prototype is made. This saves time and money.

2. Computer aided manufacture (CAM) 3.Robotics

CAM uses computers to control and manage the
production process. Benefits:
Benefits: - Highly accurate production possible
- It allows consistent output (size, quality etc) - Cheap to run – no need to pay them and they
on a large scale don’t get tired
- It increases productivity as products can be - Can do dangerous production jobs that
made without human involvement humans can’t
 Benefits of using new technology Drawbacks of using new technology
-Increased productivity as technology is faster, more -The cost of purchasing, implementing, maintaining
precise and convenient and upgrading can be extremely high
-Technology helps to enhance product quality, -It can require a lot of time and money spent on
-thereby meeting the needs of customers. Customer training staff to use the new technology
may be willing to pay more for it -Breakdowns will cause huge disruptions
-Reduced waste for businesses as technology is more
accurate

Fixed costs Variable costs

Costs that do not change as output changes e.g. rent, Costs that change as output changes e.g. raw
salaries materials, wages
Average costs Wages are a variable cost
Wages are paid by the hour. Therefore the more
​Total costs hours a person works the more wages they receive =
Number of item produced variable cost.
Salaries are a fixed cost
The cost of producing ​one​ unit Salaries are fixed amount of pay a person receives
each month regardless of how many hours they work
= fixed cost.

Economies of scale
The ​factors​​ that lead to a decrease in ​unit​​ cost as more is produced. Managerial, Marketing, Purchasing,
Financial, Technical and Diversification are the factors that lead to a reduction in unit costs.
Managerial:​​ When firms grow they can hire Purchasing:​​ bigger firms can buy in bulk and
specialised workers who will do there job more therefore reduce the costs of their inputs which will
efficiently therefore reducing unit costs reduce their unit cost
Marketing:​​ the cost of advertising is divided by the Financial:​​ Bigger firms have more collateral,
amount of units produced, therefore the more units therefore banks see them as less of a risk to lend
produced the lower the marketing cost per unit money to. Therefore they charge them a lower
interest rate which reduces their cost of borrowing.
Technical:​​ Bigger firms can use their capital Diversification:​​ Bigger firms will have a wider
equipment all the time because they produce more. range of products in more markets than smaller firms.
Therefore the cost of the capital equipment is divided Therefore if one product/market fails bigger firms
by a larger amount of output therefore reducing the always have other successful products/markets to
cost of machinery per unit of output. help the survive.
Diseconomies of scale Labour relations:​​ Larger firms have greater division
The ​factors​​ that lead to an increase in the ​unit​​ cost of labour which usually leads to a lower unit cost.
of production as output increases ​past a c​ ertain However, if taken too far it can alienate and
point.​ ​ Examples: bureaucracy, labour relations and demotivate workers, therefore their productivity
control & coordination. decreases and unit cost increases.

Control & coordination Communication problems

The larger the business the more difficult it is to The larger an organisation is the harder it is to
coordinate the activities of all employees efficiently communicate effectively as there are more layers of
(i.e. ensuring that they’re all doing what they’re management for communication to pass through
supposed to do) (Chinese whispers). The can be detrimental to a
firm’s performance.
 Break even output How to calculate the break-even point.
The amount of units that need to be sold in order for Formula:
a firm not to make a loss. At breakeven a firm neither Fixed costs
makes a profit or a loss. Sales revenue = total costs. Selling price – variable costs​​ = Break-even
level of output.

Business decisions break even can inform:

● How much should be produced?
● How much should be spend on marketing?
● What price to set for a product?
Price increase effect on break even
Break-even point will move to the left if all other
things remain constant (fewer units required to
break-even)

Price decrease effect on break even

Break-even point will move to the right if all other
things remain constant (more units will be required to
break-even)

Fixed cost increase effect on break even Variable cost increase effect on break even
Break-even point will move to the right if all other Break-even point moves to the right if all other things
things remain constant (more units will be required to remain constant (more units required to break-even)
break-even)
Variable cost decrease effect on break even
Fixed cost decrease effect on break even Break-even point moves to the left if all other things
Break-even point will move to the left if all other remain constant (fewer units required to break-even)
things remain constant (less units will be required to
break-even)

Margin of safety
The ​margin of safety​​ is the amount of sales over a company's break-even point. In other words, the ​margin
of safety​​ is the amount of sales a company can lose before it actually starts to lose money or stops making a
profit

Advantages of break even analysis Disadvantages of break even analysis

- Shows the expected level of profit/loss at different -​​ Assumes that variable cost stays the same (straight
levels of output. This helps managers decide whether line on graph).
a good should be produced. However​​, the concept of economies of scaled shows
- It helps managers spot potential problems at an that variable costs do not stay the same. This makes
early stage and enables them to plan and make the results from break-even analysis unreliable.
changes as required in order to meet targets i.e. -​​ Assumes that selling price is the same for all the
break-even analysis shows a product will not goods sold (straight line on graph).
break-even…………. managers can cut costs or However​​, the same good can be sold at a variety of
increase price to decrease the break-even level of different prices due to sales promotions etc. This
output makes the results from break-even analysis
- Shows the margin of safety the expected sales of a unreliable.
product has so even if sales fall short of this target a -​​ If is only a forecast and will only be as reliable as
profit can still be made. the data upon which the analysis is based

How to lower a firm’s breakeven level of output: How to lower a firm’s breakeven level of output:
Increase price: Decrease costs:
Uses: Uses:
- Increases revenue (if inelastic demand) - Decreasing costs lowers break even level of
- Increases profit margin output
- Decreasing costs is something that a firm has
Limitations:
control over
- Decreases revenue (if elastic demand​) ​and
therefore break even level of output increases Limitations:
- Decreasing costs may decrease the quality of
a product and therefore decreases sales.

Quality definition: Why is quality important?

A quality product is one that meets customers’ ● Allows a business to charge a higher price
requirements and therefore increase profit
● Builds brand image and customer loyalty,
therefore increases sales revenue
● No need to replace faulty products, therefore
reducing costs and improving brand image
● Easy to market and establish in the market.

Methods used by businesses to ensure high quality in 1. Quality control

a production process:
● Quality control Involves checking the product randomly at different
● Quality assurance stages of the production process to assess quality.

Advantage of using quality control Disadvantage of using quality control

- Can help ensure that products meet the - Can be expensive as it requires people and time and
requirements of customers, helping to generate more can lead to waste of raw materials
sales and a better reputation - Does not improve quality; instead quality control
reduces the chance of selling poor quality products
- Can identify poor quality products before they - Does not check all products, so these is still a
become finished goods, which reduces the chance of chance of poor quality products reaching the
selling poor quality products to customers customers

2. Quality assurance Advantage of quality assurance

Checks are carried out within the production process - Making quality a key aspect of everyone’s job
to prevent mistakes from happening. ​All production rather than the role of an individual or department
staff​​ must self check to ensure that what they should ensure that quality improves
produce is of the correct quality. Quality control is
- Quality assurance does not require employing
not needed.
additional quality checkers, so it is cheaper than
quality control

Disadvantage of using quality assurance Factors other than quality that helps a product be
successful:
- The whole workforce must support the system,
- Lower prices
otherwise it will not work
- Product innovation (new improved) (PS4 etc)
- Staff may require additional training to ensure they
- Provide good after sales service
produce the highest quality products

How can a firm improve quality: Factors affecting the location of ​manufacturing
businesses​​:
1. Introduce Quality Control - Proximity to raw materials (particularly when raw
materials are heavy – coal etc)
2. Introduce Quality Assurances
- Cost of site (business have to be able to afford their
3. Train employees – less errors location)
- Infrastructure (access to raw materials and markets
4. Update machinery – makes better quality products important)
with less mistakes - Availability of labour
- Scale of production

- Government influence (grants for setting up in area

of high unemployment etc)
Factors affecting the location of ​service Relocating to a different country.
businesses​​: Factors that influence a business’s decision to
- Cost of site relocate include:
- Proximity to customers ● Growth potential
- Accessibility for customers
Their domestic market may be saturated and moving
- Availability of skilled labour (tech firms locate in abroad may be the best strategy for increasing sales.
Silicon Valley etc) ● Cheaper labour
- Government influence ● Cheaper rents
● Proximity to raw material
 Especially for manufacturing businesses that use
large quantities of raw materials such as steel, coal
etc..
The role of legal controls on location decisions When making location decisions for a business
The following will influence the country a business you must consider the following:
chooses to locate in:
● Legislation 1. Service or manufacturing firm?

Different countries have different laws concerning 2. How much financial resources is available for
health and safety, protection of the environment etc. move?
Therefore some firms will choose to locate in
countries where these laws are more relaxed (it’ll 3. Are sales in the domestic market healthy? If ‘no’,
reduce their costs). then the firm might consider locating overseas.
● Trade barriers

Some countries are subject to trade barriers such as

tariffs and quotas etc. This would make if difficult for
a company in that country to export and as a result
they may choose not to locate in such countries.

Unit 5:

Why do businesses need finance? Use of finance can be split into 2 categories:
● To start up (buy machinery etc) ● Capital expenditure
● To expand (e.g. moving to a larger factory)
Money spent on purchasing fixed assets (premises,
● For takeovers (must pay to buy firm)
machinery etc) that will be used in the business for a
● For new premises/technology period of more than 1 year.
● For research and development
● To manage daily operations ● Revenue expenditure

Money used to cover short term day to day expenses

and to help generate sales (stock purchases, wages,
advertising expenses etc).
Short term​​ sources of finance are used to purchase Short term ​internal​​ sources of finance
items that last for less than 1 year e.g. stock, salaries - Working capital
- Sale of assets
Long term​​ sources of finance are used to purchase
items that last for longer than 5 years e.g. machinery,
factory etc
Long term ​internal​​ sources of finance Short term ​external​​ sources of finance
- Owner’s funds - Debt factoring
- Retained profits - Trade credit
 - Sale of assets - Overdrafts

Long term ​external​​ sources of finance Debt and equity

- Share issues - Debt – this involves using money that must
- Bank loans be repaid with interest e.g. bank loans
- Grants
- Debentures
- Equity – this most commonly refers to
- Venture capital
raising money by selling shares in the
- Hire purchase
company. It can also refer to owners’ funds
- Leasing
- Sale and leaseback

Whether a firm uses debt or equity to finance a Advantages of debt compared to equity
business depends upon: ● Owner/s retain full control of the firm
- owners’ willingness to sell shares (may fear ● Profits are not shared with a lender (no
loss of control) dividends)
- the availability of debt (whether it is possible ● Relatively easy for most firms to get a bank
to get a bank loan etc) loan (if they have collateral)
- the cost of debt i.e. the rate of interest.

Disadvantages of debt compared to equity Advantages of equity compared to debt

● Unlike equity, debt must at some point be ● Benefits from shared ownership and shared
repaid risk
● High interest costs means that much more ● No monthly repayments compared to bank
will have to be repaid than borrowed loan
● Security (collateral) required to receive loan ● Payment often only necessary once a firm
starts to make a profit

Disadvantages of equity compared to debt Revenue definition

● Owners must give up some control of the Money received by a business for the sale of its
business products or services. Formula: quantity sold * price
● Owner must share profits per unit
● Usually only available to Ltds and Plcs

INTERNAL SOURCES OF FINANCE

Owners’ funds: Retained profit:

Money put into the business by the owner themselves Some/all of the profit made by a business can be
e.g. to start up a sole trader or partnership. re-invested into the business (rather than returned to
the owners/shareholders).
Advantages:
-Provides a quick, interest-free source of finance. Advantages:
Disadvantages: ● Provides an interest-free source of funds
- There is financial risk for the owners.
Business owners must be willing to face considerable Disadvantages:
risks – some even use their personal credit cards to ● Not always available. A firm needs to make
pay for business expenses. profits to reinvest them.
● Owners receive less reward for their risk (profit
goes back into business rather than returned
given to owners/shareholders as dividends).

Working Capital: Sales of Assets:

Working capital is the money available to businesses A business can sell its building, vehicles etc to raise
for the day to day running of a firm i.e. to pay for finance.
raw materials etc.
Advantages:
Advantages: ● It can enable a business to release large sums of
● Efficient management of cash is good business money.
practice
Disadvantages:
Disadvantages: ● The firm loses the use of the asset
● Money is not always available. (A firm may need ● Finance is only available if an asset can be sold
its working capital to cover immediate expenses.) (which may take time).
● A firm must ensure it still has sufficient stock to
meet customer demand.

Overdraft:
A firm can have an arrangement with a bank to
SHORT TERM EXTERNAL FINANCE allow it to withdraw more from its bank account
than it has in the bank account – the bank account
will go negative.

Advantages:
Cheaper than a bank loan (if overdraft is repaid
quickly)
A flexible way for businesses to borrow small
amounts for very short periods of time.

Disadvantages:
● Interest rates charged as very high
Interest is charged on a daily basis so therefore
if an overdraft is ran for a number of months it
is very expensive

Trade credit: Debt factoring:

Time taken for buyer to pay for their goods after they Selling debt to debt collectors from customers who
have been delivered. will not pay (bad debtors) for about 80% of the
amount owed.
Advantages:
Interest-free and easily available Advantages:
Disadvantages: ● Provides businesses with quick access to funds.
● Start-ups and young firms may not be offered ● The firm gets most of their money when they
credit as they have not proven their ability to pay. might not have got any if they didn’t sell the
● Trade credit needs to be carefully managed to debt.
avoid ​overtrading a​ nd ​cash flow crisis.
● Early payment discounts if accounts are settled Disadvantages:
● The firm may not receive 100% of the debt.
(paid) before the deadline is lost if a firm takes its
● The riskier a debt is, the lower the percentage
time paying their supplier.
received.
Share issue:
When Ltds and Plcs sell shares in their business.
LONG TERM EXTERNAL FINANCE
Advantages:
● Provides ability to raise a large amount of
money
● No interest rate has to be paid

Disadvantages:
● May lead to loss of ownership by present
majority shareholders
● Dividends have to be paid to shareholders.

Leasing: Hire purchase:

By leasing (hiring) an asset (machine, vehicle etc) Similar to leasing, but it gives the firm the option of
instead of purchasing it a business reduces the owning the asset when the lease period is up.
amount of finance they need to raise.
Advantages:
Advantages: ● The firm owns the asset once all payments are
● There is lower initial capital requirement (less made.
money needed) to gain use of an asset.
● It spreads the impact on cash flow. (Instead of Disadvantages:
● The firm is usually responsible for maintenance
one large purchase payment, the business makes
(and replacement) of the asset.
smaller payments over time.)
● The total cost of hire purchase is usually higher
● The firm does not have to worry about care and
than the cost of purchasing the asset.
maintenance of the asset.
● The firm can replace the asset regularly.

Disadvantages:
● The total cost of leasing is usually higher than
purchasing the asset.
 Bank Loans: Sale and leaseback:
Money borrowed from a bank that has to be repaid Businesses sell an asset (such as a building) and
each month over a period of years with at an interest then lease it back from whom it sold it to in order to
rate. raise short term cash if it has a cash flow crisis.

Advantages: Advantages:
● Quick and easy to arrange (if a firm has ● The firm gains a large injection of capital.
collateral) ● The firm retains use of the asset.
● Can be arranged for different amounts and
Disadvantages:
timeframes (periods).
● The cost of leasing the asset back will be high.
Disadvantages: ● The leasing arrangement may not include
● Depending on the interest rate and amount maintenance.
loaned, bank loans can be expensive.
● Banks usually require some form of security on
the loan (a business building or, in the case of a
sole trader a personal asset such as a house).
● If the business is unable to repay the loan, the
bank will repossess (claim) the asset.

Venture Capital: Debentures:

Venture capitalists are specialist financial providers Long term loans to Ltds or Plcs (not by banks)
to start up or young businesses that are short of which have a fixed interest rate and are repaid over
funds. a specified period of time (15 – 25 years).

Advantages: Advantages:
● It may be one of the few sources of finance ● Provide a source of very long-term finance.
available to a start-up business. ● Interest rates may be cheaper than bank loans.
● Venture capitalists often offer management
Disadvantages:
advice and consultancy as part of the loan.
● Only available to a large Ltd and Plc companies.
Disadvantages:
● Firms have to share ownership and profit with the
venture capitalists.
● Venture capital is usually only available to
high-potential businesses with strong growth
prospects.

Grants:
Grants are money given to a business by the
government usually to set up in a economically OTHER SOURCES OF FINANCE
deprived area which has high unemployment.
Advantages:
● Grants provide a free source of funds.

Disadvantages:
● Often only available for specific types of
businesses or specific areas of a country.

Joint ventures: Franchising:

When two or more businesses joint together to A business can franchise its idea whereby
finance a new venture or product. Usually happens individuals can pay the business for the right to set
when one firm wants to expand into a new market up a franchise using the businesses name and
where the other firm has expertise. products (the franchisee will be closely controlled
Advantages: by the franchisor).
It spreads the risk across two businesses. Often, the
costs will be split as well so if the entry into a new The franchisor is therefore able to grow their
market fails, each individual business will have lost business without significant capital investment.
less money.

- One business may have expertise and experience

that the other business will benefit from, which
means the venture is more likely to succeed
Disadvantages:
- The potential revenues and profit will have to be
split between two business.

- The two businesses may have different ideas about

certain situations and decision making may take
longer. This may make it difficult for a business to
run the expansion in the way they would like.
Change in business status: Micro financing:
Changing from a sole trader to a partnership or from Used in developing countries, micro finance allows
a partnership to an Ltd to increase the amount of people on very low incomes (who would not
additional funding from more owners/shareholders normally be able to borrow from banks) to borrow
that the business will have access to. small amounts of money to start up a small
Advantages: business.
● Can be a way of raising funds and spreading the
risk of ownership.
● Original owners can benefit from new ideas and Crowd sourced finance:
Often used to generate money for micro finance
input.
projects, crowd sourced financing utilises the
Disadvantages: internet to help small businesses launch creative or
● Original owners risk losing control of the environmentally friendly projects.
business.
● Converting to a private or public limited
 company takes time and can be expensive.

Factors affecting the choice of finance used by Cash flow definition:

firms: Cash flow is the money businesses have available to
1. Availability of internal funds (using profit reduces pay for their day to day expenses i.e. paying for raw
dividends) materials and wages. It is not the same as profit.
2. Time Cash flows into and out of a business.
Purchase of long term asset should be done by long Cash inflows:
term source of finance Money coming into a business from sales, bank
3. Cost of borrowing (higher cost = less likely to loans or share capital
borrow) Cash outflow:
4. Type of business (sole trader has limited range of Cash outflow is money leaving a business to pay
options, Plc – many options) wages, bills, loan repayments etc. It is important
5. Control (how much control does the shareholders that a business forecasts its outflows to ensure that
of ltds and plcs want to give up if using equity for they have enough cash in place to cover its expected
finance) costs.
6. Current level of gearing 7. Collateral available

Type of inflow Where it comes from What it might be used for

This is the money that the business receives Businesses normally use revenue
Sales revenue from its customers for the product or service to cover the costs of running the
that it sells to them. business, such as paying suppliers
and bills.

This is a one-off inflow borrowed from a Businesses normally use loans to

Loan bank. pay for a one-off item such as
upgrading machinery.

This is normally a one-off inflow from Businesses normally use share

Share capital selling more shares. capital to pay for business growth
and investments.

Types of cash outflows: Cash flow forecasts definition

1. Payments to suppliers Cash flow forecasts are financial statements that
2. Loan repayments predict​​ the movement of money into and out of the
3. Payment of overheads business over a specified period of time.
4. Wages/salaries etc

The benefits of preparing a cash flow forecast: Why adequate cash flow is important to a
*By forecasting the timing of its cash flow (inflows business:
and outflows) a business can ensure it has enough
money to pay its bills when they fall due. ● Needed to pay day to day suppliers bills,
without which production would stop
*Forecasting can help a business plan for the future
and predict when it might have enough cash to afford
growth and investment opportunities. ● Needed to pay employees, without which
production would stop

● If cash flow is negative a firm may be forced

into liquidation, even if it is making a profit

Dealing with cash flow problems (short term Dealing with cash flow problems (long term
methods): methods):
1. Securing a bank overdraft (brings money into the
business). This will allow the business to run a 1. Emphasis cost management (decreases amount of
negative cash balance on their bank account. money leaving the business)
However​​, interest charges are high.
2. Leasing rather than buying a fixed asset/renting
2. Extending trade credit from suppliers rather than buying a building
A business can ask for more time in which to pay its
suppliers (creditors) (stops money going out of the 3. Sell off unwanted fixed assets (brings money into
business as quickly). the business)
However​​, it may lose discounts for paying on time.

3. A business can ask its customers/debtors (firms

that owe it money) to pay more quickly (brings
money into the business more quickly).
However​​, customers may not like paying early and
may not buy from the business again.
4. A bank loan (brings money into the business)
However​​, it has to repaid with interest.

Working capital definition: Working capital cycle:

Working capital is money a business has for use in
the short term. It is effectively the businesses’ cash
flow. Working capital is used to pay for day to day
expenses.

Liquidity definition: Consequences of liquidity problems for a

Liquidity is the extent to which a business can meet business/why having working capital is
its short-term debts (liabilities) i.e. bills it has to pay. important:
A liquid business will have enough cash to pay its 1 .Suppliers are not paid on time.
bills on time. Firm will not receive a discount for early payment.
2. Bank loans repayments may not be paid on time.
This will incur extra charges from the bank or
repossession of the asset which acted as collateral
for the loan.
3. A business may be forced to use long term
sources of finance to pay off short term cash flow
problems.

How to improve poor liquidity: Definition of profit

1. Extending trade credit from suppliers Sales revenue – costs (revenue expenditure) =
However​​, it may lose discounts for not paying on time. profit. The money a business keeps after all costs
2. A business can ask its customers/debtors (firms have been paid over a particular period of time
that owe it money) to pay more quickly. (usually one year). It is the main objective of private
However​​, customers may not like paying early and sector businesses. Profit is the reward to the
may not buy from the business again. entrepreneur for taking a risk when starting a
3. Emphasis cost management (decreases amount of business
money leaving the business)
4. Avoid further investment as it drains cash from a
business

Why profit is important to a business:

● It is the reward to the owner/shareholder for taking the risk of investing in the business
● It can be used to reinvest in the business
● Its presence will help attract additional investors

Sales revenue/turnover definition Gross profit = sales revenue – cost of sales.

Selling Price X Quantity Sold = Sales Revenue Cost of sales​​ are costs that are directly linked to the
production of a good or service e.g. raw materials,
labour

Net profit = gross profit – overheads (it’s the

more important figure)
 Overheads are expenses/costs not directly linked to
the production of a good or service e.g. salaries,
rent, marketing costs, electricity, loan repayments
etc

Net profit is either:

● Retained within the business for investment

● Distributed to shareholder as dividends

Profit vs Cash - what is the difference? Income statement definition:

Cash: An income statement details the Gross and Net
● Money that flows into and out of a business Profit a firm makes over a particular period of time.
● Is shown by the bank balance or cash in hand It is calculated by subtracting a business’ revenue
● Is recorded in the Balance Sheet as a Current expenditure (both cost of sales – for Gross Profit
Asset and overheads – for Net Profit) from its sales
revenue.
Profit:
● Calculated: sales revenue less total costs =
profit (at the end of a period of time)
● Is recorded in the income statement
Businesses usually have ‘increasing profit’ as an Balance sheet definition:
objective. Therefore, it will target things that will A balance sheet shows how much a company is
decrease costs or increases sales revenue as a way worth (its assets) and it should always equal/balance
of increasing profit, such as: with its liabilities (what it owes). It shows what a
● Increasing the amount of sales revenue. company owns and how it has paid for it (sources of
- Selling a greater quantity of goods finance). It is a snapshot of one moment in time i.e.
- Changing the price of the good (​impact on on the 2​th​ of July 2015.
sales revenue depends upon elasticities of
demand​)

● Improving productive efficiency

This means producing at a lower unit cost

● Cutting down on overheads

Choose a cheaper electricity supplier, reduce the size

of the salaried workforce

● Ordering raw materials in bulk (or try to gain

other economies of scale)
● Use cheaper raw material
Decreases cost of sales, ​however​​ may affect the
quality of the finished product.
Assets Non current assets
Things a business owns. Can be either: Large, one off purchases that are expected to last for
longer than one year e.g. machinery, property,
● Non current assets vehicles, fixtures and fittings

● Current assets Current assets

Items a business owns that it will use with a year
e.b. Inventory, trade receivables (debtors), bank
balance, cash in hand

Trade receivables (debtors) definition:

Individuals or businesses which owe a firm money for goods or services received and not paid for yet.
Liabilities Non current liabilities
A debt – something that is owed by a business. Can Amount of money borrowed that will take longer
be either: than one year to repay e.g. mortgage, long term
● Non current liabilities loan, debentures

● Current liabilities Current liability

Short term debt that will have to be repaid within
one year e.g. Overdraft, trade payables (creditors)

Equitable funds definition. Capital employed

Equitable funds are made up of: How much money has been invested into the
- Share capital or shareholders’ funds (money business from equity (shareholders’ funds, reserves)
put into the business by the owner) and non-current liabilities (long term loans).
- Retained profit (profit made by the business
that should normally be returned to the
shareholders in the form of dividends,
however it has been retained by the firm for
investment).
Income statement shows profit Measuring profitability: Income Statement
Two ratios are used:
Balance sheet shows liquidity ● Gross profit margin (how much as a
percentage a firm keeps as Gross profit)

● Net profit margin (how much as a

percentage a firm keeps as Net profit)

Evaluation of profitability ratios Measuring liquidity: Balance Sheet

● The higher the figures are the better The two ratios for measuring liquidity are:
● The gross profit ratio figure is useful, but the ● Current ratio
net profit ratio figure is far more important.
● Better if they are compared to previous years
to see if the figures are improving or not.
● Need to be compared to similar firms in the A current ratio figure of 2:1 is considered good.
same industry to judge performance This means that for every $1 of current liabilities a
firm has it has $2 of current assets to cover them.
● Acid test ratio
 An acid test ratio figure of 1.2:1 is considered good.
This means that for every $1 of current liabilities a
firm has it has $1.2 of current assets - inventory to
cover them.

Evaluation of liquidity ratios Return on Capital Employed (ROCE)

● Although the current ratio is useful, the acid Capital employed = the amount of money that has
test ratio is far more important. been invested in the business and includes non
● Anything less than 1:1 for either ratio current liabilities and equity.
suggests that the business has liquidity
The ‘return’ is the profit made by the business.
problems that require immediate attention.
● The type of business is very important when ● ROCE
judging the ratios. A supermarket will have
lots of inventory therefore its acid test ratio
may be quite low (the inventory will be
minused)
● A high figure (say 3:1) is not good either as it
means that a firm has a lot of current assets
which is usually inefficient.

Evaluation of ROCE Overall evaluation of a business’s performance:

● The higher the figure the better
● Must be compared to previous years to see if All the ratios are important. However, poor liquidity
the figures are improving or not. ratios threaten the very existence of the business,
therefore particular attention should be paid to these
● Needs to be compared to similar firms in the
(particularly the Acid Test).
same industry to judge performance

Who uses an income statement? Who uses the balance sheet?

- Lenders - Lenders

To access if a firm can repay any loan it has applied Assess whether the business has enough assets that
for the bank can use as collateral (security) on any loan.
- Current shareholders Also, it would want to assess the firm’s gearing.

Assess if enough profit has been made. See how - Investors/shareholders

much profit has been returned as dividends.
- Potential shareholders View the firm’s assets, and how they have been
financed.
Assess if enough profit has been made. See how
much profit has been returned as dividends. - Creditors (suppliers)
- Other companies’ managers
Assess whether the firm has enough working capital
Compare profit ratios as a measure of performance to pay them
- Government

Assess whether enough corporation tax has been paid

Can the success of a business be assessed by using Problems that a fall in profits might cause for a
a balance sheet? company:
Answer – partially: - Lack of profit for reinvesting in the
A Balance Sheet: company (money may have to be borrowed
- Measures the assets of the business and instead)
shows its value - Less dividends for shareholders. May lead to
- Measures its liquidity and therefore its ability them selling their shares and share price fall.
to pay its debts when they are due - Lenders unwilling to lend money to
However, an Income Statement is needed to measure company whose profit is low (non existent).
profitability:
- GPM measure the proportion of SR a firms
keeps after variable costs are paid for
- NPM measure the proportion of SR a firm
keeps after its variable and fixed costs
(expenses) are paid for

These are both important when measuring the

performing of a business.
Conclusion:
A Balance Sheet and an Income Statement are
needed to truly measure the performance of a
business. They are both needed to produce a ROCE
ratio
Inventory
The amount of raw materials, work in progress and finished goods held by a business that are intended for
sale.

Unit 6:

Government economic objectives How falling unemployment affects a business

- Sustainable, steady economic growth (2-3% a - Customers may have more income so sales
year) revenue may grow
- Low unemployment (5-6%) - May be more difficult to recruit more
- Low inflation (general price rises of 2-3% a year)
workers as there are not many available and
- Balance of payment equilibrium (Exports equal
imports) those available may demand high wages
 Economic growth definition:
The percentage increase in the value of goods and services produced in a year.

GDP definition:
The value of all goods and services produced by an economy in a year.

Factors affecting economic growth Advantages of economic growth:

● Labour ● Improvement in living standards

Increases in the size of the labour force will mean Citizens have more goods and services
that more can be produced. Increases in the
education and training of the labour force will mean ● Increased employment
that more can be produced
More goods produced = more jobs for people to
● Natural resources produce them

The discovery of natural resources such as oil will ● Improved health and life expectancy
obviously help economic growth.
In times of rising incomes, people spend more on
● International trade their healthcare and therefore life expectancy
increases
Increased exports = economic growth
● More leisure time
● Technology
When people have enough goods and services they
New, improved technology increases a businesses concentrate on their leisure time.
ability to produce goods (Nestle factory).
Disadvantages of economic growth:
● Government impact 1. Pollution: ​Increased economic activity will often
- Decreasing income tax (so individuals have lead to increased levels of pollution
more money to spend)
2. Congestion: ​As incomes increase pressure on a
- Increasing government spending i.e. build
country’s infrastructure will rise.
roads etc (creating employment – people
have more money to spend) 3. Inflation: ​Economic growth can cause demand
- Decreasing regulations on businesses pull inflation.
(therefore decreasing businesses costs and
therefore more is produced) 4. Exploiting scarce resources: ​Economic growth
means that we use up scarce resources more
quickly.

Whether economic growth is good depends Business/Trade cycle definition:

upon: Economic growth usually takes place is
- ​The type of products that are produced (guns or semi-regular patterns – the trade cycle. It stages are:
bread) 1. Boom (peak):​​ Economic growth increasing,
- Distribution of income (who receives the benefit unemployment low.
of the extra goods produced? – few or many). 2. Recession:​​ ​Definition: A fall in GDP in 2
- Whether the extra goods produced was because of consecutive quarters (6 months). Negative
an increase in the amount of working hours economic growth.​​ Unemployment increases.
 (therefore loss of leisure time) or an increase in 3. Slump (trough): ​Economic growth negative,
productivity (no loss of leisure time) unemployment high.
- Whether pollution has increased. 4. Recovery (expansion):​​ Economic growth
increases, unemployment decreases.

e of business cycle Positive impacts Negative impacts

* Businesses selling cheaper goods may * Luxury goods producers may find
Recession benefit from an increase in demand demand falls as peoples’ income
decrease
* Wage demand by employees will be less
as there will be more unemployment * Construction businesses may suffer as
demand for new buildings falls

* Difficult to raise price as peoples’

incomes as falling

* Businesses selling cheaper goods may * Luxury goods producers may find
ump/downturn benefit from an increase in demand demand falls as peoples’ income
decrease
* Wage demand by employees will be less
as there will be more unemployment * Construction businesses may suffer as
demand for new buildings falls

* Difficult to raise price as peoples’

incomes as falling

* Demand for a wide range of normal * Businesses selling cheaper goods may
Recovery products will increase as incomes increase experience a decrease in demand

* Wage demand by employees will

* It will be easier for firms to raise price as increase as there will be less
peoples’ incomes are rising unemployment

* Demand for a wide range of normal * Businesses selling cheaper goods may
Boom products will increase as incomes increase experience a decrease in demand

* Wage demand by employees will

* It will be easier for firms to raise price as increase as there will be less
peoples’ incomes are rising unemployment

Business responses to recession

Stimulate demand Minimise costs Production Investment
 Cut prices Find cheaper raw materials Reduce spare capacity Cancel planned
(sell assets) investment
Increase promotion Reduce staffing levels
Cancel
ntroduce special offers Introduce flexible working overtime/reduce the
practises working week

Increase productivity Find cheaper production

methods
Stop unnecessary expenditure

Stop hiring new staff

Interest rates definition Firms with low gearing (low level of loans compared
The cost of borrowing money or the reward for to equity) will not be affected too much by changes in
saving money. interest rates as they have few debts to repay with
interest

Interest rate Impact on business Impact on consumer

Reduces cost of borrowing/loans, Mortgage repayments costs decrease, increasing

therefore borrowing to expand consumers the ability to spend
Down easier
Borrowing cheaper therefore consumers borrow
Exchange rate depreciates, more to spend (and save less)
therefore ​exports​ cheaper, therefore
exports increase

Consumers borrow more (and save

less) to spend, therefore demand
increases

Increases cost of borrowing/loans, Mortgage repayments costs rise, reducing

therefore borrowing to expand consumers ability to spend
Up harder
Borrowing more expensive therefore consumers
Exchange rate appreciates, therefore borrow less to spend (and save more)
exports​ more expensive, therefore
exports decrease

sumers borrow less (and save more) to

 spend, therefore demand decreases

If interest rates increase, the cost of borrowing for consumers goes up and therefore consumers borrow less to
spend. This decreases demand for businesses in the economy and this decreases economic growth (and vice
versa).

If interest rates increase, the cost of borrowing for business to Invest goes up and therefore businesses borrow
less to spend (greater return needed from an investment to make it worthwhile) (and vice versa).

If interest rates increase the reward for savings increase and therefore people save instead of borrowing and
therefore there is less demand in the economy and this decreases economic growth (and vice versa).
There are 2 types of taxes that government can The use of government spending and taxation is called
impose: fiscal policy.
● Direct Tax
Government spend money on:
- Income Tax (tax on peoples income) - Healthcare
- Corporation Tax (tax on companies’ profits) - Education
● Indirect Tax
- Defence etc
- Tax on expenditure (i.e. a percentage of taxation
added to the sales price of goods and services).
Reasons why a government might want to increase taxation:
* To decrease economic growth and ensure that the economy doesn’t go into a recession
* To discourage the consumption of some goods (indirect tax on cigarettes and alcohol)
* To generate revenue for the government to spend on healthcare and education etc

Externalities definition: 1. The shareholder view.

The effect a business has on the wider environment
is called externalities. The externalities can be This view states that the most important priority for a
positive or negative. business is to make a profit for its shareholders, who have
taken the risk to invest in the company. The right course
Positive externalities: of action is to maximise profit (within the law).
These are actions a firm undertakes that benefit
those outside the firm. The positive results from a 2. The stakeholder view.
business’ activities felt by those outside the
business. For example training, balance of This view states that a company has a responsibility to all
payments improvement due to exports etc its stakeholders (those with an interest in or influence on
Negative externalities: a business, including the local community, government,
These are costs generated by a business which are workers, suppliers, shareholders etc). The right course of
felt and paid for in some way by the wider action is one which balances the needs of the different
community or environment and not by the business. groups.
For example pollution, congestion etc
Acting in an environmentally and socially How businesses can impact the environment:
responsible way may be more expensive. ​However​​, ● Pollution
it may be more preferable to the: ● Congestion
● Bad publicity ● Land use
 ● Lost sales ● Waste
● Government fines ● Energy use

that may come from acting irresponsibly toward

society or the environment.

Legal controls
Many governments use ​laws​​ to constrain businesses’ harmful activities. These laws might restrict a business by:
- Setting limits on the amount and type of pollution a firm can produce
- Insist that a percentage of business’ energy comes from renewable sources

However​​, all these constraints on a business add to their costs and therefore their price. This can make them
price uncompetitive internationally.

Pressure groups definition: Pressure groups attempt to bring about change by, for
A pressure group is any group which seeks to example:
influence the behaviour of a business or influence ● Drawing media attention to an issue.
government policy. Environmental pressure groups ● Encouraging the boycotting (stop buying) of a
are the most common (Friends of the Earth, Green firm’s product.
Peace etc).
● Petitioning/lobbying (encouraging) government to
change a law to stop a particular activity

Pressure group aims: Advantages of acting environmentally friendly

● Force a business to change its plans (due to ● A firm can emphasise environmental care in their
falling sales) marketing to be more appealing to customers
● Force the government to change laws to ● Recycling and reusing reduces costs
make the activity in focus illegal ● Firm will not attract the negative attention of a
pressure group

Opportunities offered by doing business in an Sustainable development definition

environmentally friendly way include: Using the resources of the earth to provide for the earth’s
● New business opportunities current population whilst not decreasing the ability of the
earth’s future population to provide for themselves.
i.e. provide environmental services (recyclers etc)
or gives the opportunity for firms who act in a Sustainable development actions a firm can take:
highly environmentally friendly way to gain a ● Replacing trees for the ones chopped down to
competitive advantage clear space for a factory
● Lower cost
● Only using energy from renewable sources
Reduce, recycle, reuse = lower costs for businesses ● Rotating crop growth between different fields to
● Customer loyalty avoid using chemical fertilisers
● Employee loyalty ● Minimising water use in the production process

Ethical concerns Ethical decisions businesses have to make:

Ethics are moral guidelines which govern good - Paying staff higher wages vs earning increased profits
behaviour. Behaving ethically is doing what is for shareholders
morally right - Paying suppliers a higher price vs charging customers a
In a business sense this means considering all lower price
stakeholders when making a decision. It goes - Providing or protecting employment vs increased profits
beyond what is legally required of a firm. for shareholders
- ​Shareholder vs stakeholder approach

Advantages to a firm of acting in an ethical way:

-Better employee retention/recruitment
-Improved brand image/reputation
-Long term profit increase due to firm having greater appeal to customers

Globalisation definition Reasons for globalisation:

Where the production, sale and consumption of ● Improved communication (internet etc)
goods and services is spread beyond national
borders “Companies in one nation build factories in This has made international trade easier
another country, and consumers in other countries ● Economic trading blocs (EU etc)
purchase their products”
This has made cross border trade easier within trade blocs
due to reduced/no tariffs or quotas
● Lower labour costs that attract MNCs to Asia etc

Western firms often move production to areas of the

world where labour costs are cheaper and export the
finished goods back to the West – fueling globalisation
● Increasing labour migration

Advantages of globalisation Disadvantages of globalisation

- ​Globalisation allows countries to specialise and - The benefits of globalisation favour rich countries​​. It
therefore increase GDP. is argued that developed countries’ MNCs benefit from
- Consumers get a much wider variety of products lower labour costs while the developing countries get
to choose from. little benefit. However, globalisation is also blamed for
- It promotes understanding and goodwill among causing unemployment in developed countries, as many
different countries businesses have moved their factories to countries with
- Inward investment by MNCs helps countries by cheap labour.
providing employment for the local people.

- Globalisation does not benefit everyone. ​Western

MNCs and their shareholders benefit most. MNCs may
drive small local firms in developing countries out of
business.
- There are no guarantees that the wealth from MNC
investment will benefit the local community.​​ MNCs
often send profits back to their home countries and the
global brands often force small, local firms out of
business.
- It can be argued that globalisation has led to an
increase in environmental and ethical problems. ​A
company may, for example, want to build factories in
other countries because environmental laws are not as
strict. MNCs may also impose poor working conditions
 and low wages on local workers who have little power to
resist.

Opportunities of globalisation for businesses. Threats of globalisation for businesses.

● Increased sales due to more accessible ● Increased competition from overseas firms which
markets (less tariffs and quotas). This can have easier access to your home market
bring about economies of scale (McDonald’s have forced many local restaurants
● Lower labour cost of production if firm out of business around the world).
moves production to a developing country
● Diversification (products in more than one
country). Therefore if demand for a firm’s
goods decrease in one country they always
have other countries to fall back on (not all
eggs in one basket)

Techniques to reduce impact of globalisation: Advantages to a country of using tariffs, quotas and
Tariffs (definition) embargos:
This is a tax on imports. This increases the price of ● Protects domestic jobs
imports and therefore decreases their demand.
Quotas (definition) ● Prevent the importation of undesirable goods
This is a physical limit on the amount of a certain
(poor quality standards etc)
good that can be imported e.g. a quota of 10,000
cars from Japan means that only 10,000 cars from
Japan can be imported in a year ● Prevent countries ‘dumping’ their goods on your
Embargo (definition)
market (selling at below cost price)
A ban on the importation of a certain good.

MNC definition:
Multinational companies are firms that ​produce​​ (not just sell) goods in more than one country i.e. builds a
factory abroad.

Advantages to a firm from being a multinational Disadvantages to a firm from being a multinational
1. Higher sales 1. Diseconomies of scale
MNCs operate in many countries so they have a
very large number of potential customers 2. Cultural and language barriers that make
2. Avoid tariffs and quotas.
operating internationally challenging
By setting up in a country or trading bloc an MNC
avoids protectionist barriers.
3. Access to raw materials 3. May be difficult to compete against established
4. Access to cheap labour. local firms.
By locating in developing countries, MNCs can
take advantage of lower wage rates. 4. Building a factory abroad requires large amounts
5. Multinationals can achieve great economies of of capital
scale e.g. bulk buying
6.Diversification
 5. Exchange rates may affect the business’s profits

Advantages to a country of an MNC entering Disadvantages to a country of an MNC entering

✓ Increased job opportunities ✗ MNCs may offer low wages and poor working
✓ Increased exports from a country (helping conditions for staff
to strengthen its currency) ✗ The jobs created are often low skilled manual jobs
✓ Increased consumer choice that offer little opportunity for long term
development and future economic growth
✗ Profits from MNCs often go back to the MNCs’ own
✓ Investment by the MNCs in infrastructure
countries (​repatriation of profits)​​ and may not be
(roads, rail link, etc.) and in
spent in the host’s country
training/education
✗ Increased competition for local businesses often
✓ Increased funds available to the government
forces local firms to close
from taxes paid by the MNCs
✗ MNCs use up a country’s resources and may
contribute to environmental issues
✗ MNCS often use complex accounting rules to avoid
paying tax in the host’s country

Exchange rates definition: Factors affecting exchange rates

An exchange rate is the price of one country’s -Demand for imports and exports
currency expressed in terms of another country’s
currency. For example: £1 = 1.5 euros. ● If the demand for exports increase then the
demand for that currency increases (appreciation)
Appreciation – when a currency becomes stronger
● If the demand for imports increases then the
Depreciation – when a currency becomes weaker supply of that currency increases (depreciation)

Appreciation Depreciation
A rise in the exchange rate of a currency against A fall in the exchange rate of a currency against another
another currency (a currency can buy more of currency (a currency can buy less of another currency)
another currency)
Factors affecting exchange rates Factors affecting exchange rates
1. Interest rates 1. Interest rates
2. Imports and exports of goods and services
● ↑ interest rates in a country ​increases demand​​ for its
currency (more foreigners wish to deposit funds in the
country) (appreciation)
* ↓ interest rates in a country ​increases the supply​​ for its
currency (foreigners will move their deposited funds out
of that currency) (depreciation)
Factors affecting exchange rates How do exchange rates affect businesses?
2. Import and export of goods and services Changes in exchange rates affect:

● The price of a firms goods exported overseas

● When goods are exported then foreigners ● The price of foreign firms goods imported into
must demand your currency to pay for the
 goods. This increases the demand for the home markets (foreign competition)
currency and therefore appreciates the ● ……. and therefore how profitable a firm is
currency.
● When goods are imported then you must
sell your currency to buy foreign currency
to pay for the goods. This increases the
supply of the currency and therefore
depreciates the currency.

Currency depreciates​​ – exports cheaper, imports of exchange rates on competitiveness.

more expensive – good for domestic business
Evaluation:
Currency appreciates​​ – exports more expensive, ● Exchange rates affect the price of an exporters
imports cheaper – bad for domestic businesses goods abroad. ​However​​, some businesses
compete on one of the other 3 Ps and will
therefore not be affected greatly be a change in
price.

● Firms who find that the cost of their imported raw

materials increase because their currency has
depreciated against the currency of the supplier
can change supplier to a firm from another
country and therefore decrease the impact.

Type of tax Item taxed Impact on business Possible business responses

Higher income taxes reduces Reduce price of goods; focus promotion on

consumer spending power ‘value’; increase price inelasticity
Income Tax Income
Higher income taxes reduce the Increase ​fringe/non financial benefits
incentive to work

Employees receive less pay for

additional work and therefore,
may be less willing to do
overtime

An increase in indirect tax Maintain prices (absorbing indirect tax

lowers consumer spending (as increase – this will decrease the profit margin)
Indirect tax Spending goods are more expensive)
Focus promotion on branding; differentiate
Higher rates of indirect tax force product; find new markets for product
firms into price wars or require
 non-price competition (i.e
branding)

A decrease in corporation tax Open new branches; pursue expansion

may encourage firms to invest (decrease the amount of profit that can be
Corporation Business (to achieve and retain larger taxed)
tax profits profits)
Cancel expansion plans; move operations
Higher corporation tax reduces overseas to a country with lower corporation
(retained) profits and therefore tax.
the ability of business to invest
in expansion/growth