Unit 5 – Revision Notes

Question Due for Exam on this Unit

Higher Level Q6 & 7:2002 - Q7:2003 21st January 23rd January
Ordinary Level Q8:2007 - Q7:2006 - Q8:2003 21st January 23rd January

Chapter 15

 Sources of Business Ideas

 Internal Sources  External Sources
 Skills & Hobbies  Family & Friends
 Experiences  Media
 Research & Development  Import Substitution
 Employee Suggestions (Intrapreneurship)  State Agencies
 Brainstorming  Competitors
 Sales personnel  Customer Feedback
 Foreign travel/trade shows
 Market Research

 Development Process of a New Product/Service (Explanation of each)

1. Idea Generation:
 Initial ideas for the new product are thought up. It may take the form of brainstorming.
2. Product Screening:
 Ideas are examined, using SWOT.
 This spots the good ideas and gets rid of the impractical and unworkable ones.
3. Concept Development:
 This involves writing a business plan around the new product.
 A unique selling point (USP) is identified which will distinguish it from other products.
4. Feasibility study:
 Assessing the viability of the product/service.
 It sees if the product is commercially viable (breakeven analysis) & financially viable (cash-flow forecast).
5. Prototype Development:
 The creation of the first working model of the new product.
 It can be used to test the product to see what improvements can be made.
 Samples can be produced.
6. Test Marketing:
 The product is tested on a sample of consumers before going into full production.
7. Production and Launch:
 The product is put into production and introduced to the market.
 The business will select a suitable marketing strategy to persuade consumers to buy the product.
 Unit 5 – Revision Notes
Chapter 16
 Market Research: (Explanation, types , reasons for & Importance of)
 Gathering Information
Market research is the gathering, recording and analysing of facts about some element of the marketing
mix in order to identify and satisfy customer needs in an informed manner.
 Reasons for market research
Include competition, new opportunities, business growth, decision making, risk minimisation.

Types of Market Research

Desk Research is:
 Based on secondary sources of information.
The information already exists and it is already available within a business or from outside sources. E.g.
company reports, government publications, internet.
 It is a cheap form of research
It is relatively cheap which keeps costs down, thereby ensuring a competitive business.

Possible contribution of desk research to business success:

 Daily sales records would indicate if consumer spending patterns have changed.
 The CSO would provide global figures on trends in different industries, competitor behaviour, &
population details of towns (i.e. age, sex, family structure etc.) as to where branches could be set up.

Field Research is:

 Based on primary sources of information.
The information is collected directly from customers/potential customers, e.g. surveys, observation.
 Expensive form of research
It tends to be expensive and time consuming but provides specific information on the target consumer
behaviour.

Possible contribution of field research to business success:

 It ascertains attitudes and opinions of its customers, the business can then make specific changes to their
stores/products/staff based on the feedback received.
 This type of research allows the company to satisfy its customer needs more effectively, encouraging
customer loyalty and increasing the profits of the business.

Importance of Market Research

 Reduces Risk of failure for the product and the business:
Market research makes it more likely that a product will succeed.
It reduces the risk of the business producing products, which the consumer does not want.
 It helps a business to identify threats
Market research can help a business to identify potential threats and sources of competition.
Failure to react to changes in consumer preferences & the presence of competitors can cause successful
businesses to lose market share.
 Helps to identify new markets
Provides information about the size of the market and whether it is growing.
Provides information about the characteristics of the market, e.g. age of people in it, their income.
 Unit 5 – Revision Notes
 Market Segmentation (Explanation, types & Importance of)
 Splits a market
It involves dividing up the market into distinct groups, which have common characteristics.
It allows a firm to identify who their target market is.

Types of market segmentation

 Geographic Segmentation
Market is divided into different geographical areas.
Business can make money by satisfying local needs, e.g. radio stations.
 Demographic Segmentation
Market is divided on the basis of different characteristics of the population e.g. gender & age.
Importance of Market Segmentation
 Helps establish a presence in the market
Allows a new business to start off small in one particular segment and then grow over time by gradually
entering more and more segments.
 Lowers Marketing Costs
Does not waste money marketing to all consumers who may/may not be interested in the product.
Develops a marketing strategy to focus on the customers who are most likely to buy the product.
 Builds Loyalty
Business has the opportunity to build loyal relationships with customers from a young age
There’s then potential for development of future products.

 Target Market
 Target market is identified through market segmentation
That is a precise description of the type of customers a business aims its product at.
The specific segment within the overall market for a product that a business sets its sight on.
 An example of a target market for Penny’s is - budget-conscious consumers who like a bargain.

 Niche Market
 It’s a specialist market
Customers are not satisfied with the mainstream product/service because they have different needs to
the rest of the market.
Customers are willing to pay a high price to the business that satisfies their needs.
 Niche market is identified through market segmentation
Can be by socio-economic class, geographical area
 An example of a niche market is the market for bridal shoes.

 Marketing Concept
 States the customer is the most important person to the business.
 A business focuses on customer needs before production.

Benefits of marketing concept

 Increased profits
Customers are happy so they will buy more of the businesses products.
The business enjoys repeat sales and hence its sales increase.
 Better Reputation
Word of mouth spreads about how good the business is to its customers.
This acts as a form of free advertising for the business.
 Fewer returns & repairs
Customers will have no reason to complain to the business.
This reduces the businesses costs as money is not wasted on returns/repairs.
 Unit 5 – Revision Notes
 Marketing Plan/Strategy
A plan setting out how a business achieves its marketing objectives
 It Identifies market segment
Most business do not try to make one single product to appeal to everyone, they choose
a particular group – target market.
 Develops a marketing mix
Having the right product at the right price in the right place using the right promotion.

Benefits of Marketing Plan

 Face future marketing needs
It gets the entrepreneur to set out the marketing objectives of the business with regards
to product, price, place and promotion and the strategies by which they will be achieved.
This will guide the entrepreneur towards successful marketing.
 Raise finance for marketing
A plan will impress investors when seeking finance.
It can be used to judge whether the idea is commercially viable.
 Motivates marketing staff
A plan shows employees what needs to be achieved and how they can achieve this.
It gives employees something to aim for.
 Identifies marketing weaknesses
Can see internal problems in the here and now in the areas of product, price, place and promotion.
Business can then eliminate such weakness and turn them into strengths.
 Unit 5 – Revision Notes
 Marketing Mix
 Consists of four tools that a business can use to persuade customers to buy its products.
 The four tools are known as the 4P’s: Product, Price, Promotion & Place.

1. PRODUCT
A product is defined as anything that can be offered to satisfy a need or want.
A business needs to give a lot of consideration to the brand name, product design, packaging and
its stage in the product life cycle.

A. Brand Name
A business gives its product a name, a design and/or a symbol to make it easy for consumer to identify it.

Benefits of branding to a business:

 Pricing
A well-known brand name can command a premium price, hence increasing business profits.
 Increased sales
When consumers know a brand it makes it easier for them to buy the product.
The business doesn’t have to rely on salespeople in stores to push its products.
 Brand Loyalty
Over time consumers become loyal to a particular brand and will not change.
This gives the business a competitive advantage over their competitors.
 Easier to launch new products
Consumers already know and trust the brand and will readily accept new products.

Benefits of branding to a consumer:

 Familiarity
Branding helps the buyer to identify a particular supplier’s goods.
It creates and maintains their confidence in the performance of the brand.
 For consumers, less risk
Famous brands have built up key brand characteristics, emphasising quality and benefits that will apply to
any of their products.
Consumers will trust these brand names to fulfil these requirements whichever product they choose.
 
Own brand products
Products that carry the name of the shop that sells them (e.g. ‘Tesco Value’) or a brand name developed for the
shop (e.g. Dunnes uses St Bernard) and not the name of the manufacturer who makes them for the shop.

Benefits of own-brand to a retailer:

 Lower priced goods
The retailer offers customers lower priced goods which attract budget conscious consumers to the store.
 Competitive advantage
The own brand products are not available anywhere else. This differentiates the retailer from others and
helps to win customers, e.g. M&S products.
 Bargaining power
Retailer has more power with famous brands as these brands compete for limited shelf space.
This results in better discounts and terms to the retailer.

Benefits of own-brand to a customer:

 Lower price
Tend to be cheaper than leading brand names while usually being of equally good quality.
 More choice of products
 Unit 5 – Revision Notes
B. Product Design

Good product design incorporates:

 Function:
The product must be well-designed; so that it does the job that it is intended to do.
This is linked into the main clauses of the Sale of Goods and Supply of Services Act 1980.
 Aesthetics:
The product must be practical and comply with safety standards; however it must also look good and be
appealing in terms of shape, size, colour, style and image.
 Cost-effectiveness
Good design ensures that the product can be made at a reasonable cost.

Importance of Product Design

 Increased sales
Businesses that offer well designed products that look good and are easy to use enjoy increased sales.
 Reduced costs
Well-designed products do not break down or develop faults, this minimises the money spent
recalling and repairing badly designed products.
 Saves time
Good design focuses on manufacturing issues at an early stage in the design process.
This shortens product development time, minimises development costs & ensures a smooth
transition into production for quick time to market.

C. Product Packaging
 The container or wrapping in which the product is offered for sale.
 It consists of a variety of materials, glass, paper, metal, and plastic, depending on what is to be contained.

Importance of Packaging
 Increased sales:
First point of contact for consumers
Attractive and eye-catching packaging gets customers attention and attracts them to buy the product.
 Protection:
Packaging safeguards the product during transit, storage and handling.
It also keeps the product fresh, preserving quality until it is used.
 Information
The packaging contains information on contents, ingredients, best before date, health warnings.
It should also give instructions on how to use the product successfully.
 Image
Used to display the product and give it a certain image.
E.g. To give them a manly image, men’s moisturisers are packaged in masculine colours such as black.
 Convenience
A business can put its products into different size packaging for customers to use in different situations.
E.g. Coca-Cola – 2L/1.25L/500ml bottle.
 Unit 5 – Revision Notes
D. Product Life Cycle:
Shows the different stages in the life of a product and sales that can be expected at each stage

Use of a product Life Cycle:

 Illustrates the broad trends in sales revenue
 Identifies points to consider launching new products as older ones are in decline
 Identifies when and where spending is required e.g. advertising during sat. stage

Methods to extend a Products Life Cycle

 Improve the Product:
 The business could improve the design of the product, tweaking a feature.
 E.g. adding internet access to a mobile phone.
 May attract new customers or previous customers may retry the product to find out what has improved.

 Increase/decrease Price:
 Adopting a different pricing strategy may increase sales and revenue
 E.g. selling match tickets at a lower price, this in turn sells out the stadium and maximises revenue.
 Price rise may make the product more exclusive.
 Price decrease may mean existing customers buy more of the product.

 Change the method of Promotion:

 Use a different and more effective promotion technique.
 E.g. Changing to television advertising may be expensive but it could increase awareness of the product,
encourage customer loyalty and increase sales.

 Alter the Place the product is sold:

 Use a different distribution system.
 E.g. Direct selling to customers using the internet.
 Unit 5 – Revision Notes
2. PRICE
 The amount of money the business charges consumers for its product.
o Too high: Consumers will not be able to afford it, the product will not sell.
o Too low: Business might make a loss.
Consumers may think the product is inferior.

Factors that determines the price a business sets for its products
 Cost of the Product
The price should cover the firm’s costs (production, marketing, distribution).
It should include a profit margin.
 Consumers
What can they afford? Need to consider the recession.
 Competitor’s prices
If competitors have a better quality product, yours should be priced lower. Inferior quality – higher price.
 Legal Regulations
VAT/Excise Duties
 Type of Product

Strategies for setting a price

 Price Skimming Strategy
Charge a lot when the product is new and popular, recover costs.
Reduce price later on (as competition enters the market/to help maintain sales).
E.g. mobile phones
 Penetration Pricing Strategy
Charge a low price so it’s cheaper than competitors.
Increase market share.
E.g. Bord Gais charged 10% to 14% less than ESB when they entered the market
 Price Discrimination Strategy
Charge different customers different prices.
Different people can afford different amounts.
E.g. Students/OAPs
 Loss Leader
Charge a price at below cost on a popular product.
Customers while in the shop may purchase other expensive items – impulse buy, increasing sales/profits.
 Premium Pricing
High end pricing to enhance and reinforce a products luxury image.
It attracts status conscious consumers.
E.g. Rolex
 Unit 5 – Revision Notes
 Breakeven Analysis

Breakeven chart:
A graphic representation that allows the business to read the profit or loss figure for any given level of sales

Breakeven Price:
The minimum price a business must charge for its product is one that equals the total costs of making that
product. The business is making neither a profit nor a loss.

Breakeven Point:
The number of products a business must sell just to cover its costs.
The business is making neither a profit nor a loss if it sells this number.

Contribution per unit

Margin of Safety:
The difference between a business’s forecast sales and its breakeven point.
Shows the business by how many its sales can fall from their predicted level before the business
will start making a loss.

Uses of Breakeven Charts

 Calculates how much a business must sell to breakeven.

This tells the business the minimum level of sales it must achieve just to survive.
 Calculates profit and loss
Allows the business to see how much they will make/lose at any given level of sales.
 Calculates a business’s Margin of safety
Works out the amount by which a business’s sales can drop before it starts to lose money.
 Illustrates effects of changes
Shows the effect that a change in the price the business sells its products for will have on profits or the
effect a change in the business’s costs will have on profits.
.
 Unit 5 – Revision Notes
 Preparing a Breakeven Chart
 Do all calculations before preparing the break even chart:
 The breakeven point (Fixed costs/selling price – variable cost per unit)
 Profit at forecast sales (Total revenue – total costs)
 Margin of Safety (Forecast sales in units – BEP in units)

 Draw your chart

 Label units on the horizontal axis (see forecast sales in question for top point)
 Label Revenue & Costs (€) on the vertical axis (forecast sales x selling price for top point)

 Draw in fixed cost line

 Given in question, does not change.

 Draw in total costs line

Total Cost Line

Number of units Variable Cost + Fixed Costs = Total Costs
Zero units: 0 units
BEP: (BEPxVC)
Forecast Sales: (FSxVC)

 Draw in total revenue line

Total Revenue Line

Number of units: Total Revenue
Zero units
BEP: (BEPxSP)
Forecast sales: (FSxSP)

 Show the following:

 Breakeven point
 Profit @ forecast sales
 Margin of safety
 Unit 5 – Revision Notes
3. PROMOTION
 Communicating with customers to let them know about the product and to persuade them to buy it.
 There are four ways to promote a product:
a) Advertising c) Public Relations
b) Sales Promotion d) Personal Selling

A) Advertising
 Paid, non-personal communication about a product or service through various media.
 It creates an awareness of the product in an attempt to convince consumers to purchase.

Types of Advertising
 Reminder Advertising
Lets consumers know a well-known brand is still around.
E.g. Coca Cola regularly uses reminder advertising.
 Informative Advertising:
Give factual information to consumers about the product.
E.g. Sale On, Concert.
 Persuasive Advertising:
Aims to convince consumers that they must have the product, that it is essential to their life and their
happiness. E.g. L’Oreal “because you’re worth it”
 Generic Advertising:
Advertises the product of an entire industry rather than one firm’s product.
E.g. Drink Milk, Eat Cheese.
 Comparative Advertising:
Aims to show consumers that their product is much better than its competitors’.
E.g. Eircom v Vodafone.

Functions of Advertising
 To provide information about a product.
 To remind consumers that the product is still available for sale.
 To persuade consumers to buy the product.
 To offset competitors advertising (defensive advertising).
 To increase the businesses sales and profits.

Types of Advertising Media (know advantages and disadvantages of each)

 Internet  Magazines
 Television  Billboards
 Radio  Direct Mail
 Newspapers

Selecting an Advertising Medium: Business must consider:

 Media habits of the target audience: Use media most likely to be seen by target audience.
 Nature of the product: If a product needs to be seen working, the business must use a visual method.
 The message: If business wishes to convey technical information about a product use a written medium.
 The cost: different media costs different amounts.

 Advertising Standards Authority for Ireland (ASAI)

 Regulates the advertising industry in Ireland
Tries to protect consumers from false, misleading and offensive advertisements.
 Voluntary organisation set up by people who work in the advertising industry
It has no legal powers; it cannot force any advertiser to do anything.
 Its code of advertising standards state that all ads should be:
o Legal, decent, honest and truthful.
o Prepared with a sense of responsibility to consumers and society.
o Obey the rules of fair competition.

B. Sales Promotion
 Unit 5 – Revision Notes
 Sales promotions are the use of short-term incentives to attract customers to the product or services on offer.
 It is designed to create a sense of immediacy by offering reasons to purchase in the short term, thereby increasing
sales.

Techniques include:
 Free Samples
 Money-off Vouchers
 Free Gifts
 Competitions
 Loyalty Cards
 Merchandising

Importance of Sales Promotions

 It enables a business to use its USP to be more competitive. (3m)
 Sales promotions increase sales ‘volume’ in the short term, this should lead to ongoing increased sales in
the long term and in time increased profits. (3m)
 They can be an excellent way to increase product awareness, e.g. it might encourage customers to try
something new by simply offering them the chance to get one for free.
 Customer retention: Loyalty cards for examples rewards loyal customers and also encourages them to
come back more often to take advantage of special offers/rewards.

C. Public Relations

 Public Relations refer to the concerned efforts of a business to create and maintain a positive image of the
business in the minds of consumers & to build a good relationship with them by obtaining favourable publicity.
 Negative product publicity can lead to loss in the market share and customers losing trust in the quality of the
product/service.

Functions of Public Relations

 Attract publicity when launching new products, e.g. PR stunts.
 Target certain customers e.g. Meteor sponsor Irish music awards.
 Build an image that reflects well on the company e.g. public service activities, McDonalds children
charities.
 Defending products that have encountered bad publicity – McDonalds & Super-Size Me.

Functions of Public Relations Officer

 Developing a relationship between the business & the media.
This involves issuing press releases and responding to media queries.
 Developing a relationship between the business & its customers.
This involves ensuring that customer’s complaints are sensibly answered.
 Developing a relationship between the business & the local community.
This is achieved by supporting local clubs and charities and trade organisations e.g. Chamber of
Commerce.

Techniques used in PR
 Events e.g. open days, exhibitions
 News Conferences & Press Releases
 Public Service Activities – Tesco for Schools & Clubs (free computers)
 Sponsorship – e.g. O2 sponsor the Irish rugby team

D. Personal Selling
 Unit 5 – Revision Notes
 A salesperson is in direct contact with the customer and tries to verbally persuade customers to buy a
product or service.
 Sales representatives must have detailed knowledge of the product or service being sold.

 Evaluation of Meteor’s Promotional Methods

Advertising
Meteor advertises a lot on TV and on billboards around the country. The ads are amusing and feature young
people. They emphasise the low prices the company charges for texts and calls and the savings to be made if
customers switch to Meteor.

Evaluation
Meteors ads work well. The company is trying to reach the youth market. Having humorous ads that feature
young people attracts this target market. Constantly emphasising low prices appeals to the youth market because
young people use their phones a lot and may have a limited amount of money.

Personal Selling
Meteor has stores all over Ireland. Its sales people are trained to know all about the latest mobile phones and are
able to give customers advice on which phone to go for and which tariff to choose.

Evaluation
Meteor's personal selling is an excellent method of promotion. Many people who are not very knowledgeable
about technology rely on experts to advise them. Consumers are more likely to buy a phone if the salesperson
explains its features to them and offers her personal recommendation. By using personal selling, Meteor sells
more phones.

Public Relations
As part of its PR strategy, Meteor sponsors the annual Ireland Music Awards.

Evaluation
This is an excellent PR strategy as it ensures that Meteor reaches its target market of young people. Young people
are interested in music and singers and are highly motivated to watch the awards on T V and read about them on
the internet and in magazines and newspapers. When they do so, they will see the name Meteor all the time. It
gives Meteor a 'cool' image to be associated with these awards and singers, which makes Meteor more attractive
to young people.

4. PLACE
 Unit 5 – Revision Notes
 For a product to be successful it must be available in the right place for customers to buy it.
 A business also needs to decide how the product gets from the manufacturer to consumer –
these are called channels of distribution.

Traditional Channel of Alternative Channel of Direct Channel of

Distribution Distribution distribution
Manufacturer
Manufacturer
Manufacturer
Wholesaler

Retailer
Retailer
Consumer
Consumer Consumer

Importance of distribution
 Directly affects a business’s sales
If the product is not there when customers go looking for it, it cannot be sold.
 Affects a business’s profit margin
The more stages there are in the channel of distribution, the more expensive the product becomes
for the consumer. To remain competitive the business may be forced to cut the price at which it sells to
the wholesaler.
 Affects a business’s reputation
If a business has distribution problems and cannot guarantee consistent on time delivery, customers will
grow unhappy with it and its reputation will suffer.

Factors to consider when choosing a channel of distribution

 Cost
The more stages there are the more expensive the product becomes because the wholesaler
and retailer add a profit to the price.
 Nature of the product
Bulky/heavy product? Perishable goods? Is the product easily broken?
 Target Market
E.g. Low price goods (sold everywhere) v’s luxurious goods (sold in selected shops).
 Location of customers
Local (direct channel of distribution)
Worldwide (traditional channel of distribution)
 e-Commerce
Sell directly through business website.
 Payment
Need to consider the cash flow implications of each channel of distribution.
E.g. Large retailers insist on 30 days credit where small retailer may pay on delivery.
 Unit 5 – Revision Notes
 Evaluation of a Business's Marketing Mix – REDBULL

 Product
Red Bull is an energy drink. It was created by an Austrian entrepreneur, Dietrich Mateschitz. He got the idea
from a Thai energy drink. He modified the ingredients for Western tastes and in 1987 Red Bull was
launched.

Evaluation
Red Bull is a very distinctive product. Its unique selling point is that it tastes unlike any other soft drink and,
in contrast to other soft drinks; it has a functional benefit for consumers. The company claims that it gives
customers energy and improves their concentration. These added benefits have made Red Bull the number
one selling energy drink in the world. It sells over four billion cans a year.

 Price
Red Bull uses a premium pricing strategy. The product is priced above that of competitors' products.
Consumers will pay a premium for Red Bull due to the quality of the product and the product's benefits.

Evaluation
This is an excellent pricing strategy. The high price reinforces the idea that Red Bull is a premium quality
product. It encourages more customers to buy it. This is reflected in the fact that it is the world's best-
selling energy drink. As a direct result of this strategy, Red Bull enjoys extremely high revenue and profits.

 Promotion
1. Red Bull is extremely innovative in its promotion techniques. Rather than just sponsoring the events of
others, Red Bull organises its own events around the world, such as the Red Bull Air Race where the world's
top pilots perform flips, turns and tricks in front of tens of thousands of spectators. The Red Bull Flugtag
challenges people to design, build and pilot their own home-made flying machines off a 30ft-high flight
deck.

Evaluation
These Red Bull events create awareness and interest in Red Bull products among the participants and
audiences for these events. They also attract a lot of publicity for the company in local media.

2. Red Bull uses digital and social media to communicate with its target market of young people. More than
20 million consumers 'like' Red Bull on Facebook. The company has also developed smart phone 'apps' to
promote Red Bull.

Evaluation
Using social media helps Red Bull to build up a relationship with its core youth market. Facebook, 'Twitter
and online blogs make it easy for the company to speak directly to young people and for them to exchange
information with Red Bull. It helps the business to form a real connection with its customers.

 Place
Red Bull uses an intensive distribution strategy and makes the product available for sale in a variety of
places, including shops, supermarkets, garages, pubs and restaurants.

Evaluation
Red Bull is very well distributed. It is available in many different locations. This makes it easy for consumers
to obtain it no matter where they are. This ease of access is another reason why Red Bull is the most
successful energy drink in the world.
 Unit 5 – Revision Notes
 Analyse the elements of the marketing mix for a product of your choice.

Product: Mercedes Benz Coupe

 This is one of a range of German made Mercedes cars.

 Brand emphasis on safety and reliability and high quality.
 Very reliable with a high specification.
 It includes a driver’s airbags and ABS among its many safety features.
 It carries an anti-rust warranty.
 Good resale value.
 Prestige market vehicle.

Price
 It is the top model in its price range and its list price is a competitive (compared to other car makes) from
€50,000 - €78,000.
 Finance available - competitive with similar standard cars from other marques.
 Cash customers can avail themselves of a large cash discount.
 Aimed at relatively high income earners.
 Price includes AA membership, service agreements for years etc.

Promotion
 Emphasis is placed on brand loyalty.
 Advertised on television and in business and fashion magazines - targeted market.
 Mercedes are sponsors of many prestige events.
 Free testing at any Mercedes garage nationwide.

Place
 Main Mercedes garages distribute - Nationwide sales and service network locally
 Geographically dispersed service centres. Worldwide
 Reliability, dependability, convenience, service
 Purchase directly from Mercedes importer/Agent in Dublin
 The Coupe can be imported directly from Germany
 Personal Selling

Chapter 15
 Unit 5 – Revision Notes
Business Start-up

 Sole Trader
 A business is set up, owned and run by one person.
 Examples include: farmers, local pubs, butchers.

Advantages
 Easy to set up
Few legal registration requirements: register name if different to family name & register with revenue.
No government permission needed.
 Keep all profits
The entrepreneurs own the business so keeps all profits.
 Confidential type of business
Do not have to publish (make public) financial accounts.
 Quick decision making
No time is wasted having discussions with others.

Disadvantages
 Unlimited liability
If the business goes bankrupt the sole trader is personally responsible for paying back all the
businesses loans. It is added risk – may lose business, home, etc.
 Hard to raise finance
You cannot sell shares to raise money & you can’t bring partners on board. May be difficult to get
loans from banks as sole traders are the business organisation most likely to go bankrupt.
 Requires a lot of effort
The stress that comes from this pressure may cause the sole trader to burn out.

 Partnership
 Set up, owned and managed by between 2 and 20 owners called partners.
 Examples include: Solicitors, doctors.

Advantages
 Easy to set up
Few legal registration requirements: register name if different to family name & register with revenue.
No government permission needed.
Advisable to draw up a contract called deeds of partnership incase any disagreements arise.
 Raising capital
Easier to raise capital than a sole trader, each partner contributes.
 Confidential type of business
Do not have to publish (make public) financial accounts.
 Extended skill base
Each partner may have different skills, making it easier to run the business as work can be divided
between both partners.

Disadvantages
 Unlimited liability
If the business goes bankrupt the sole trader is personally responsible for paying back all the
businesses loans. It is added risk – may lose business, home, etc.
 Slower decision making
Decision making is slower as both partners have to be consulted which may make the business less
flexible and less responsive to change.
 Profits
Profits have to be shared between partners in their agreed profit-sharing ratio.

 Private Limited Company

 Unit 5 – Revision Notes
 Set up by between 1 and 99 owners called shareholders.
 Can be owned by 1 person but must have at least two directors to run it.
 Examples include: River Island & Zara.

Advantages
 Limited liability
If the business goes bankrupt the shareholders are not personally liable for paying back the business debt.
 Raising capital
Easy to raise capital as there can be up to 99 shareholders.
 Divided workload
The workload can be split between the various directors, each of whom has different skills and
experience. This yields better decisions and ideas than a person operating alone would.
 Lower tax
The rate of corporation tax (12.5%) company’s pay on their profits is much lower than that paid by
sole traders or partnerships.
 Continuity of existence
If the owners die, the business does not cease to exist. Once legally established, it can continue to
operate forever provided that is does not go bankrupt.

Disadvantages
 Complicated to set up
They must first apply for permission from the Registrar of Companies. They can’t begin trading until
they receive a Certificate of Incorporation from the Registrar, granting them permission to do so.
 Slower decision making
Decision making is slower as all directors have to be consulted which may make the business less
flexible and less responsive to change.
 Not a very confidential type of business
Ltd must public financial accounts to the public so competitors, employees, etc can see the
company’s financial position and use this to their advantage.
 Profits
A portion of the profits have to be shared between shareholders in the form of dividends.

 Public Limited Company

 Set up by at least seven shareholders and run by two directors who are voted by the shareholders.
 There is no upper limit as to how many shareholders there can be.
 Example: Aer Lingus.

Advantages
 Limited liability
If the business goes bankrupt the shareholders are not personally liable for paying back the business debt.
 Raising capital
Easy to raise large amounts of capital by selling shares to the public on the stock exchange.
 Divided workload
The workload can be split between the various directors, each of whom has different skills and
experience. This yields better decisions and ideas than a person operating alone would.
 Lower tax
The rate of corporation tax (12.5%) company’s pay on their profits is much lower than that paid by
sole traders or partnerships.

Disadvantages
 Complicated to set up
They must first apply for permission from the Registrar of Companies. They can’t begin trading until
they receive a Certificate of Incorporation & a Certificate of Trading from the Registrar, granting
them permission to do so.

 Not a very confidential type of business

 Unit 5 – Revision Notes
Plc’s must public financial accounts to the public so competitors, employees, etc can see the
company’s financial position and use this to their advantage.
 Expensive to sell shares
Brochures (called prospectuses) have to be designed and printed. Advertisements have to be
placed in newspapers. Lawyers and stockbrokers have to be hired to handle the sale of shares.
 May be the target of a hostile takeover
Shares can be freely bought and sold on the stock exchange, so anyone can ask shareholders if they
can buy their shares. If enough sell, the company is taken over.

 Cooperative
 Owned and controlled by its members for the benefit of its members.
 There must be at least seven owners and there is no upper limit.
 Run by a committee of management voted for by the owners.
 Examples include: producer co-ops, worker co-ops and credit unions.

Advantages
 Limited liability
If the business goes bankrupt the shareholders are not personally liable for paying back the business debt.
 Raising capital
Easy to raise large amounts of capital as there can be an unlimited number of owners.
 One member one vote
Very democratic type of business, each member has an equal say in how the business is run.

Disadvantages
 Complicated to set up
They must first apply for permission from the Registrar of Friendly Societies. Also must send in an
annual report to the Registrar.
 Not a very confidential type of business
Co-ops must public financial accounts to the public so competitors, employees, etc can see the
company’s financial position and use this to their advantage.
 Difficult to raise capital
As each member has an equal say, there is less incentive for members to contribute additional
capital to the co-op.

 Production Options
 Unit 5 – Revision Notes

Job Production
 Type of product:
They are unique products. They are made to suit the individual consumer.
 Type of worker:
Generally highly skilled as the products are one off and must be made to exact specifications.
 Type of machinery:
Often made by hand but when machinery is used they must be flexible and capable of doing many jobs.
 Example: Making a wedding dress.

Batch Production
 Type of product:
Making a large amount of product all in one go (production run).The product is the same for all
customers.
 Type of worker:
Generally not as highly skilled as those in job production as they are not creating one-off unique products.
 Type of machinery:
Flexible and capable of doing many jobs
 Example: Making a batch of cakes

Mass Production
 Type of product:
Making a continuous supply of products, 24/7. The product is the same for all customers.
 Type of worker:
Generally unskilled workers in an assembly line.
 Type of machinery:
Expensive, specialised, up-to date machines as they do all the work producing the product.
 Example: Toilet paper

 Finance Options
 Unit 5 – Revision Notes

Short Term Medium Term Long Term

(finance that will take up (finance that will take up (finance that will take longer
to one year to repay) to five years to repay) than five years to repay)
 Accrued expenses  Hire purchase  Grants
 Bank overdraft  Leasing  Debentures
 Trade credit  Medium-term loan  Equity capital

SHORT TERM Cost Risk Security Ownership

Accrued Expenses Free - no interest Failure to repay-means No security needed Retains full ownership
damage to credit rating,
may be ‘cut-off’
Bank Overdraft High rate of interest + Bank can demand full No security needed Retains full ownership
surcharges if limit is repayment any time.
exceeded Failure to repay-means
damage to credit rating
Trade Credit Free if paid on time Failure to repay-means No security needed Retains full ownership
damage to credit rating,
may be difficult to get
credit in future
MEDIUM TERM
Hire Purchase Expensive rate of Failure to repay-means No security needed Retains full ownership
interest damage to credit rating
& repossession of asset
Leasing In long run rent may Failure to repay-means No security needed Retains full ownership
be dearer than buying damage to credit rating
the asset & repossession of asset
Medium Term Loan Interest payable tends Failure to repay-means Security is needed – Retains full ownership
to be cheaper than HP damage to credit rating valuable assets
& leasing & security provided
being taken & sold
LONG TERM
Grants Free & do not have to Government will look No security needed Retains full ownership
be repaid for money back if
conditions of grant are
broken
Debentures Fixed rate of interest Failure to repay-means Security is needed – Retains full ownership
must be paid every damage to credit rating valuable assets
year & security provided
being taken & sold
Equity Capital Dividends are paid to If business goes No security needed Control is diluted as
shareholders but bankrupt directors are shares (and votes) are
directors decide how banned from getting given to investors
much involved in another
company for 3 years

 Business Plan
 Unit 5 – Revision Notes

1. Description of the business

Name product
Target Market
Location

2. Management
Name
Education
Work Experience

3. Market Analysis
Market Research & findings
Desk
Field

4. Marketing Plan
 Product
Brand/USP/Package
 Price
Strategy/How it is set
 Place
Channel of distribution/Where to sell
 Promotion
Advertising/Sales Promotion/Personal Selling/Public Relations

5. Production
Method
 Type of product Importance of a Business Plan
 Type of worker
 Type of machinery Face future:
Having a plan provides a focus for the business by setting out the
6. Finance objectives of the business and the strategies by which they will
Sources be achieved.
 Short term
 Medium Term Raise capital:
 Long term It can be used when seeking finance for a business venture/
Cash Flow grants from various bodies.
 Receipts
 Payments Assessing Performance:
It provides a benchmark against which performance can be
measured/targets set. If not reached then corrective action can
Signed: _______________________ be taken to get back on target.

Anticipates problems:
In preparing a business plan all aspects of a business are
analysed. A SWOT analysis may be carried out. Any problem
areas can be identified and steps taken to deal with them.

Chapter 18
 Unit 5 – Revision Notes

 Business Expansion
 The main aim of a commercially business is to make profit. This can be done by growth and success.
 The two main methods of expanding a business are called organic growth & inorganic growth.

1. Organic: This is slow and internal growth. The profits from one shop are used to buy another shop.

A. Exporting
 A business can grow by selling its products in different countries. The business will sell more
products and make more profits.
 Baileys grew by exporting all over the world. It first launched in Ireland in 1974. Today it is sold in
over 130 countries worldwide and is the top-selling liqueur in the world.

B. Franchise
 The original owner (franchiser) grants permission to other entrepreneurs (franchisees) to copy his
idea exactly and set up an identical business to his in return for a fee. Franchiser sets rules for
running of the business.
 O’ Brien’s sandwich bars have expanded throughout the world through franchising.

Advantages of Franchising as a method of expansion

 Little capital required

The original owner (franchisor) does not need a lot of finance to expand his business as the
franchisees are the ones who put up most of the money.
 Economies of scale
The bigger the business, the lower the cost of making each product becomes. Buying more supplies
means bigger discounts from suppliers.
 Less supervision required
The business expands without the franchisor getting involved in the detailed management and
supervision of each business.
 Dedicated franchisees
The franchisee invests her own money in the new franchise so she has a vested interest in its
success.

Disadvantages of Franchising as a method of expansion

 Risk of Reputation
If any of the franchisees make a mistake in terms of poor quality standards or staff problems, this can
damage the entire brand.
 Loss of Control
The franchisor loses control over the day to day management of each franchise, with little direct
influence over which employees are hired or the level of customer service being offered.

2. Inorganic: this is fast and external expansion.

A. Strategic alliance
 Two businesses agree to co-operate with each other on a single business project (joint venture).
The business remains separate from each other but benefit from each other (synergy).
 Swatch and Mercedes who worked together to make the ‘SMART’ car.

Advantages of an Alliance as a method of expansion

 Unit 5 – Revision Notes
 Cost effective expansion
The businesses involved split the costs of the venture & can share equipment & other assets.
 More successful expansion
Both parties can brainstorm ideas with each other & share knowledge & expertise to come up with
the best possible business venture.
 New Markets
An alliance can be used to attract new customers to each business, thereby increasing each
businesses sales and profits. E.g. Tesco & Bord Gas Energy.

Disadvantages of an Alliance as a method of expansion

 Disagreements
May happen if one business feels they are not getting as much out of the project as the other.
Smaller businesses may feel their identity is being obscured by the higher profile of the bigger
business.
 Lose customers
Customer may be unhappy with an alliance as they feel that they have a restricted choice or they
may be unhappy with the choice offered to them.

B. Merger
 Also called an amalgamation, is where two separate businesses voluntarily agree to join together
permanently to form one larger business (synergy).
 Irish Life, an insurance company, and Irish Permanent, a building society, merged in 1999 to form Irish Life
and Permanent plc. It is now one of the biggest financial service companies in Ireland.

Advantages of a Merger as a method of expansion

 Economies of scale
The bigger the business, the lower the cost of making each product becomes. Buying more supplies
means bigger discounts from suppliers.
 Increased Profits
Allows two businesses to cut out all duplication, e.g. cutting staff.
 Synergy
Two businesses do better as one than the sum of their separate performances.

Disadvantages of a Merger as a method of expansion

 Conflict
Mergers can lead to a clash of cultures as managers might disagree over the best methods to use
because each is used to doing things his own way.
 Reduces employee motivation
In the short term employees may become worried about the security of their jobs, as mergers often
lead to redundancies. This may lead to lower productivity.

C. Takeover
 Also called an acquisition, is when one business takes control of another buying 51% of its shares.
The business that is bought out then becomes part of the acquiring company.
 Takeover can be hostile or friendly.
 Eircom bought Meteor in 2005.

Advantages of a Takeover as a method of expansion

 Unit 5 – Revision Notes
 Economies of scale
The bigger the business, the lower the cost of making each product becomes. Buying more supplies
means bigger discounts from suppliers.
 Increased Profits
Allows two businesses to cut out all duplication, e.g. cutting staff.
 Quick access to new ideas and products
When one business buys another it immediately acquires that businesses ideas, products, machines,
staff and markets.

Disadvantages a Takeover as a method of expansion

 Capital required
Takeovers can cost a lot of money. If they borrow money, it debt equity ratio increases, increasing
the risk of bankruptcy. If they sell shares, existing owners lose a degree of control over their business.

 Reasons for Business Expansion

 Defensive Reasons: bigger businesses are stronger, richer and better able to fight back.
 Economies of scale
The business may want to grow to reduce costs. The bigger the business, the lower the cost of making
each product becomes.
Dunnes Stores get discounts from suppliers because they buy so much from them.

 Diversification
The business expands by taking over or merging with a business in a totally unrelated area.
If one company goes through a bad patch & makes a loss, profits from the other companies can keep the
business going.
Richard Branson has spread the Virgin names over many different industries – airlines, record label, TV,
cosmetics.

 To protect supplies
Business may grow to ensure it has a consistent supply of good quality, reasonably priced raw materials.
It might merge with or takeover the company it buys its materials or products from which guarantees that
it will get all the supplies it needs in the future at cost prices.
This is called backward vertical integration.
Example: An ice-cream manufacturer takes over a dairy company ensuring a constant supply of milk.

 To protect distribution
Business may grow to defend itself against its competitors.
It might merge or takeover the company that sells its products on to consumers to ensure its products are
on sale in key markets.
This is called forward vertical integration.
Example: A brewery might take over a number of pubs guaranteeing a market for its products.

 Offensive Reasons: so it becomes the biggest and best in the industry with the highest level of profits.
 Eliminate competition
A business may take over a competitor in order to get rid of the competitor and thus keep control.
EU have a Competition Policy in place to avoid a business creating a monopoly by takeovers.
Ryanair tried to take over Aer Lingus in 2006. Had it succeeded it would have become the only major
international airline and controlled the Irish market.

 Asset stripping
 Unit 5 – Revision Notes
Entrepreneur sees an opportunity to make money by using the businesses assets better or by selling them
off to make a profit.

 To acquire new products

When one business takes over another it immediately acquires that businesses ideas, products, machines,
staff and markets.

 Psychological Reasons: associated with an entrepreneurs personal ambition & motivation

 Ambition
Many people want to build their business into the biggest. They want the fame and sense of
achievements that comes from growing the biggest business in the world.
Bill Gates has built Microsoft into the largest most successful software provider in the world.

 Challenge
May people get a thrill from starting a new business from scratch again to see whether they can make it a
success.
Richard Branson’s new venture is tourist holidays into space.

 Finance for business expansion

 Unit 5 – Revision Notes
Expansion is the long term growth of a business so long term sources of finance must be used.
Equity Capital Debt Capital
Control Issue of shares may dilute control of the Will not impact on control of the
business. business.
Interest None – no obligation to ordinary Fixed Interest repayments must be
Repayments/Dividend shareholders. However, if dividends are made e.g. Debentures or
s routinely small or not paid, this may Fixed Dividends e.g. 8% Preference
adversely affect share price. Shares
Risk of bankruptcy Low – the business is lowly geared. The High – the business is highly geared.
business has no long-term debt and no Fixed interest repayments on debt
interest repayments. Business less likely capital must be made regardless of
to become bankrupt, as fewer creditors. profitability. Increased risk of
bankruptcy – more creditors, who may
seek to have business wound up &
assets liquidated to pay debts.
Collateral No security required Security is required
Tax Implications Dividends to ordinary shareholders are Interest repayments are tax deductible.
not tax deductible.

 Choosing Finance for Expansion.

Businesses need to consider:
 Cost – Equity Capital v’s Debt Capital
 Security – Equity Capital v’s Debt Capital
 Tax Implications – Equity Capital v’s Debt Capital
 Ownership – Equity Capital v’s Debt Capital

 Implications of Business Expansion

FOR: SHORT-TERM IMPLICATIONS LONG-TERM IMPLICATIONS

Share Price When a business expands, its share price should Bigger businesses make bigger profits and therefore the
increase because investors want shares in big share price should increase because investors will pay
successful companies and will pay more to get them. more to buy shares in more profitable businesses
Products Bigger businesses have a bigger range of products for A bigger business has more money to spend on market
the customer. For example, Eircom took over Meteor. research and product development. This should lead to a
It now offers its customers landline and mobile bigger range of products.
phones.
Management The business may need a new organisation structure. The bigger the business grows,the harder it becomes for
For example, when two businesses merge, the new one person to manage and so the greater the amount of
business will only need one Chief Executive Officer. delegation (sharing out responsibilities) needed.
Finances The business will have to raise finance to pay for the Bigger businesses have a better credit rating and more
expansion. This will involve selling shares or collateral and find it easier to get loans. Also, investors
borrowing. want to put their money into successful firms, so it will be
easier to raise equity capital in the future.
Supplies Bigger businesses get quantity discounts from Bigger businesses get quantity discounts from suppliers
suppliers because they buy in bulk. They also get because they buy in bulk. They also get quicker delivery
quicker delivery and better service because they buy and better service because they buy so much from the
so much from the supplier. supplier.
Profits The costs involved in expansion (paying for the new Economies of scale should lead to increased profits.
business, redundancy packages and so on) may lead
to a decrease in profits.
Employees Employees may be worried about their jobs because Big successful businesses provide better pay, job security
mergers and takeovers normally mean job cuts. This and increased promotion prospects for employees.
may result in lower employee morale and motivation.
Customers Customers will enjoy a bigger range of products in a Although customers enjoy more products and lower
bigger business and at lower prices (due to economies prices, they may be turned off by the impersonal service
of scale). offered by big businesses.
 Unit 5 – Revision Notes
 Importance of Irish Business Expanding in Ireland
It’s really important for the Irish economy that Irish businesses grown bigger here in Ireland (domestic market).
 Revenue from taxes
Bigger businesses make bigger profits which result in more taxes for the Irish government to spend on
improving the country’s infrastructure, repaying national debt, offering more grants to entrepreneurs.
 Job creation
Bigger businesses means more jobs which result in lower unemployment levels and a higher standard of
living for Irish people.
 Spin-off effects
Bigger businesses need to buy more raw materials and ingredients from Irish suppliers, which in turn help
them to expand.
 Economies of scale
Bigger business means its unit costs decrease, therefore they can charge a lower price for their products.
This helps to lower the cost of living (inflation) in Ireland.

 Importance of Irish Business Expanding Abroad

It’s vital that Irish businesses expand abroad in foreign markets.
 Job creation
Increased sales abroad can lead to more jobs being created in Ireland, which result in lower
unemployment levels and a higher standard of living for Irish people.
Baileys hired more Irish people in its production factory to satisfy international demand.
 Improved balance of payments
A lot of money is brought into the country, making Ireland richer.
 Foreign Currency
Exporting brings foreign currency into Ireland, which can be used to pay for goods and services that are
imported.
 Improved international relations
We become friendlier with countries that we export to. As a small country Ireland depends on support
from bigger more powerful states.