SECTION 1- Understanding business activity
CHAPTER 1- business activity
THE ECONOMIC PROBLEM
Need- a good or service that is essential for living.
Want- a good or service that people would like to want, it is not essential for living, mostly luxury
items.
Scarcity- it is the basic economic problem. It is when unlimited wants exceed limited resources.
Opportunity cost- it is the next best alternative given up by choosing another item.
Business- a business is where the 4 factors of production are combined to make products
which satisfy people’s wants.
Factors of production- are the resources needed to produce goods and services. There are 4
factors of production and they are in limited supply.
4 factors of production:1. land - natural resources obtained by nature
2. labour- physical and mental effort put in by the workers in the production process.
3. capital- finance, machinery and equipment needed for the production of goods and
services.
4. enterprise- the risk taking ability of the person who brings the other factors of production
together to produce a good or service. The reward for enterprise is profit from the
business.
DIVISION OF LABOR
Division of labor is when the production process is split up into different tasks and each worker
performs one of these tasks. It is a form of specialization.
Specialization- it occurs when people and businesses concentrate on what they are best at.
Instead of everyone doing every job, tasks are divided among the people who are skilled and
efficient at them.
Advantages● Workers are trained to do a particular task and specialize in it. Thus, increasing
efficiency.
● Saves time and energy: production is faster.
● Quicker to train labours as needed to concentrate on one task only.
● Skills development: can master their skills as are doing the same task repeatedly.
Disadvantages● Workers get bored doing the same task repeatedly
● There might be a possible drop on efficiency
●
If a worker who is appointed to do a special task is absent, the whole production process
will be put at halt.
THE PURPOSE OF BUSINESS ACTIVITY
Issues1. People have unlimited wants.
2. The 4FOP required to make goods are in limited supply
3. Scarcity results from limited resources and unlimited wants
4. Choice is necessary when resources are scarce and this leads to opportunity cost.
5. Specialization improves the efficient use of resources.
ADDED VALUE- is the difference between the selling price of a product and the cost of
bought-in materials and components.
Why is it important1. Can pay costs
2. Make profits
How to increase added value1. Reducing the cost of production- added value is the selling price subtracted from the
cost. Reducing cost of production will increase the added value of the business.
2. Raising prices- by raising prices, selling price of the product will be increased,
broadening the margin and increasing added value of the business.
MIND MAP
CHAPTER 2- classification of businesses
STAGES OF ECONOMIC ACTIVITY
1. PRIMARY SECTOR- Involves use/extraction of natural resources.
2. SECONDARY SECTOR- involves manufacturing of goods using the resources from the
primary sector.
3. TERTIARY SECTOR- consists of all services provided in an economy.
De-industrialisation- it occurs when there is a decline in the importance of the secondary
sector, manufacturing sector of industry in a country.
Reasons for changes in relative importance of the three sectors1. Sources of some primary products become depleted.
2. Most developed economies are losing competitiveness in manufacturing to newly
industrialized countries.
3. As the country's total wealth increases and living standards rise, consumers tend to
spend a higher proportion of their incomes on services such as travel than on
manufactured goods that are produced from primary products.
MIXED ECONOMY
A mixed economy has both private and public sectors.
1. Private sector- Business not owned by the government. Owned by private individuals.
Their main aim is to make profits, and all the cost and risks are taken by the individual.
2. Public sector- Business owned and controlled by the government. Their aim is to
provide essential goods and services to the public in order to increase welfare of the
citizens. Their objective is not to earn profit. It is funded by tax-paying citizens’ money, so
they work in the interest of these citizens to provide them with services.
In a mixed economy both private and public sectors exist.
Capital- it is the money invested into a business by the owners.
MIND MAP
CHAPTER 3- enterprise, business growth and size
H- hard working
O-optimistic
R-risk taker
S- self confident
E-effective communicator
C- creative
I- innovative
I- independent
ENTREPRENEUR AND ENTREPRENEURSHIP
Entrepreneur- is a person who organises, operates and takes the risk for a new business
venture. An entrepreneur brings the four factors of production together to produce goods and
services.
Benefits of being an entrepreneur● Independence- able to choose how to use time and money.
● Able to put own ideas into practice.
● May become famous and successful if the business grows
● May be profitable and the income might be higher than working as an employee for
another business.
● Able to make use of personal interest and skills.
Disadvantages of being an entrepreneur● Risk- many new entrepreneurs' businesses fail, especially if there is poor planning.
●
Capital- entrepreneurs have to put their own money in the business and, possibly, find
other sources of capital.
● Lack of knowledge and experience in starting and operating a business.
● Opportunity cost- lost income from being an employee of another business.
CHARACTERISTICS OF ENTREPRENEURS1. Hard working
2. Risk taker
3. Creative
4. Optimistic
5. Self-confident
6. Innovative
7. Independent
8. Effective communicator
BUSINESS PLAN
A business plan is a document containing the business objectives and important details about
the operations, finance and owners of the new business. Provides a complete description and
plans of the business for the coming initial years.
Contents of a business plan1. Description of the business- brief history and summary of the business, and the
objectives of the business.
2. Products and services- what business sells and delivers, strategy for continuing or
developing products/services in the future to remain competitive and grow the business.
3. The market- describes the market the business is targeting. Description should include● Total market size
● Predicted market growth
● Target market
● Analysis of competitors
● Predicted changes in the market in the future
● Forecast sales revenue from the product
4. Business location and how products will reach customers- describes physical
location if applicable, internet sales or mail order. Also, how will it be delivered to the
customers.
5. Organisation structure and management- describes the organisational structure,
management and details of employees required. Includes number and level of skills
required for the employees.
6. Financial information
Includes:
● Projected future financial accounting statements for several years or more
into the future.
● Sources of capital
● Predicted costs
● Forecast cash flow and working capital
● Projections of profitability and liquidity ratios
7. Business strategy- how business intends to satisfy customer needs and gain brand
loyalty.
GOVERNMENT SUPPORT FOR BUSINESS START-UPS
A startup is a company typically in the early stages of development.
Why does the government support start-ups?
1. Reduce unemployment- new businesses create new jobs to help reduce
unemployment.
2. Increase competition- new businesses will give consumers more choice and compete
with already established businesses.
3. Increase output- economy benefits from increased output of goods and services.
4. Benefit society- entrepreneurs may create social enterprise which offer benefits to
society other than jobs and profit.
5. Can grow further- all large businesses were small once. By supporting today’s new
firms the government may be helping some firms that grow to become very large and
important in the future.
How governments support business start-ups?
1. Organise advice- provide business advice to potential entrepreneurs, giving them
information that are useful in starting a venture, including legal and bureaucratic ones.
2. Provide low cost premises- provide land at low cost or low rents for new firms.
3. Provide loans at low interest rate
4. Give grants for capital- provide financial aid to new firms for investment
5. Give grants for training- provide financial aid for workforce training
6. Give tax breaks/ holidays- high taxes are disincentive for new firms to set up.
Government can thus withdraw or lower taxation for new firms for a certain period of
time.
MEASURING BUSINESS SIZE
1. Number of people employed- more the number of people employed larger is the
business, however, a business adopting automated techniques will require less number
of people in comparison to business, adopting labor intensive techniques. Therefore, the
size cannot be compared.
2. Value of output- calculating the value of output is another way of calculating the size of
the business. However, capital intensive business will have higher output in comparison
to labor intensive business.
3. Value of sales- sales will be more of consumer goods rather than luxury goods.
However, two businesses cannot be compared based on value of sales because of the
different nature of goods.
4. Value of capital employed- more capital employed in capital intensive businesses in
comparison to labor intensive businesses.
Ways to measure success of a business1. Higher profit
2. Larger market share
3. Increased brand image/ brand name
4. Increase in net worth
Why the owners of the business may want to expand the business● Possibility of higher profits for owners
● More status and prestige for the owners and managers
● Lower average costs
● Lager share of its market
BUSINESS GROWTH
Businesses want to grow because growth helps reduce their average costs in the long-run, help
develop increased market share, and helps them produce and sell them into new markets.
There are two types of growth. Internally and eternally.
1. Internal growth- occurs when business expands its existing operations. This growth is
often paid by profits from the existing business. This type of growth is often quite slow
but easier to manage than external growth.
2. External growth- this is when business takes over or merges with another business. It
is sometimes called integration as one firm is ‘integrated’ into the other.
A merger is when two businesses agree to join their firms together to make one
business.
A takeover occurs when one business buys out the owners of another business, which
then becomes a part of the ‘predator’ business.
External growth can largely be classified into three types:1. Horizontal merger/ integration- this is when one firm merges with or takes over
another one in the same industry at the same stage of production.
Benefits● Reduces the number of competitors in the market, as two firms
become one.
● Opportunities of economies of scale
● Merging will allow the businesses to have a bigger share of the total
market.
2. Vertical merger/ integration- this is when one firm merges with or takes over
another firm in the same industry but at a different stage of production.
Therefore, vertical integration can be of two types:1. Backward vertical integration- when one firm merges with or takes over
another firm in the same industry but at a stage of production that is
behind the ‘predator’ firm.
Benefits● Merger gives assured supply of essential components
● Profit margin of the supplying firm is now absorbed by the
expanded firm
● Supplying firms can be prevented from supplying competitors.
2. Forward vertical integration- when one firm merges with or takes over
another firm in the same industry but at a stage of production that is
ahead the ‘predator’ firm.
Benefits● Merger gives assured outlet for their product
● Profit margin of the retailer is now absorbed by the expanded firm
● Retailers can be prevented from selling the goods of competitors.
3. Conglomerate merger/ integration- this is when a firm merges with or takes
over another firm in a completely different industry. This is also known as
‘diversification’.
Benefits● Conglomerate integration allows businesses to have activities in more
than one country. This allows the firm to spread its risk.
● There could be a transfer of ideas between two businesses even though
they are in two different industries. This transfer of ideas could help
improve quality and demand for the two products.
Drawbacks of growth● Difficult to control staff- as a business grows, the business organisation in terms of
departments and divisions will grow, along with the number of employees, making it
harder to control, coordinate and communicate with everyone.
● Lack of funds- growth requires a lot of capital
● Lack of expertise- growth is a long and difficult process that will require people with
expertise in the field to manage and coordinate activities.
● Diseconomies of scale- this is the term used to describe how average costs of a firm
tends to increase as it grows beyond a point, reducing profitability.
Why do businesses stay small?
● Type of industry- some firms remain small due to the industry they operate in.if they
were to grow too large they would find it difficult to offer close and personal service
demanded by consumers. It is often easy for new businesses to be set up and this
creates new competition.
● Market size- if the firm operates in an area where the total numbers of customers is
small, such as in rural areas, there is no need for the firm to grow and thus remains
small. Or something that appeal to limited number like luxurious cars or designer clothing
● Owners objective- not all owners want to increase their size of firms and profits. Some
of them prefer keeping their businesses small and having a personal contact with all the
employees and customers, having flexibility in controlling and running the business,
having more control over decision-making, and to keep it less stressful.
Why do businesses fail?
● Poor management- this is a common cause of business failure for new firms. The main
reason is lack of experience and planning which could lead to bad decision making. New
entrepreneurs could make mistakes when choosing the location of the firm, the raw
materials to be used for production, etc, all resulting in failure
●
●
●
Over-expansion- this could lead to diseconomies of scale and greatly increase costs, if
a firms expands too quickly or over their optimum level
Poor financial management not using money efficiently- if the owner of the firm
does not manage his finances properly, it could result in cash shortages. This will mean
that the employees cannot be paid and enough goods cannot be produced. Poor cash
flow can therefore also cause businesses to fail
Change in the business environment- the demands of customers keep changing with
change in tastes and fashion. Due to this, firms must always be ready to change their
products to meet the demand of their customers. Failure to do so could result in losing
customers and loss. They also won’t be ready to quickly keep up with changes the
competitors are making, and changes in laws and regulations
Why are new businesses at risk?
● Less experience
● New to the market
● Less sales
● Don’t have enough money to support the business yet
MIND MAP
CHAPTER 4- types of business organization
BUSINESS ORGANIZATIONS
Limited liability- means that the liability of shareholders in a company is limited to only the
amount they invested.
Unlimited liability- means that the owners of a business can be held responsible for the debts
of the business they own. Their liability is not limited to the investment they made in a business.
PRIVATE SECTOR
1. Sole traders- a business or organization owned and controlled by one person. Sole
traders can employ other workers, but only he/she invests and owns the business.
Advantages of being a sole trader● Easy to set up- there are very few legal formalities in starting and running a sole
proprietorship. A less amount of capital is enough for the sole trader to start the
business. There is no need to publish annual financial accounts.
● Full control- sole trader has full control over the business. Decision-making is
quick and easy, since there are no other owners to discuss matters with.
● Sole trader receives all the profit- since there is only one owner, he/she will
receive all the profits that are generated by the business.
● Personal- since it is a small form of business, the owners can easily create and
maintain contact with customers, which will increase customer loyalty to the
business and also let the owner know about customer wants and preferences.
Disadvantages of being a sole trader● Unlimited liability- if the business has bills/debts left unpaid, legal actions will be
taken against the investor, where their uneven personal properties can be seized,
if their investment doesn't meet the unpaid amount. This is because the business
and the investors are legally not separate (unincorporated).
● Full responsibility- since there is one one owner, the sole owner has to
undertake all running activities. he/she doesn't have anyone to share his
responsibilities with. This workload and risks are fully concentrated on him/her.
● Lack of capital- as only one owner/investor is there, the amount of capital
invested in the business will be very low. This can restrict growth and expansion
of the business. Their only sources of finance will be personal savings or
borrowing or bank loans.
● Lack of continuity- if the owner dies or retires, the business dies with him/her.
2. Partnerships- a partnership is a legal agreement between two or more (usually upto
twenty) people to own, finance and run a business jointly and to share all profits.
Partnership agreement- is the written and legal agreement between business partners.
It is not essential for partners to have such an agreement but it is always recommended.
Advantage of partnerships● Easy to set up- similar to sole traders, very few legal formalities are required to
start partnership business. A partnership agreement/partnership deed is a legal
document that all partners have to sign, which forms the partnership. There is no
need to publish annual financial accounts.
● Partners can provide new skills and ideas- partners may have some skills and
ideas that can be used by the business to improve business profits.
● More capital investments- partners can invest more capital than what a sole
trader only by himself could.
Disadvantage of partnerships● Conflicts- arguments may occur between partners while making decisions, this
will delay decision-making.
● Unlimited liability- similar to sole traders, partners to have unlimited liabilitytheir personal items are at risk if business goes bankrupt.
● Lack of capital- smaller capital investment as compared to large companies.
● No continuity- if an owner retires or dies, the business also dies with them.
3. Franchise- is a business based upon the use of the brand names, proportional logos
and trading methods of an existing successful business. The franchisee buys the
licence to operate this business from the franchisor.
Advantages to franchisor● Rapid, low cost method of business expansion
● Income from franchisees in the form of franchise fees and royalties.
● Franchisees will better understand the local tastes and so can advertise and sell
appropriately.
● Can access ideas and suggestions from franchisees.
● Franchisee will run the operations.
Disadvantages to franchisor● Profits from the franchise needs to be shared with the franchisee
● Loss of control over running business
● If one franchise fails, it can affect the reputation of the entire brand.
● Need to supply raw material, product and provide support and training.
Advantages to franchisee● An established brand and trademark, so chance of business failing is low
● Franchisor will give technical and managerial support
● Franchisor will supply the raw materials/products
Disadvantages to franchisee● Cost of setting up business
● No full control over business- need to strictly follow franchisor’s standards and
rules
● Profits have to be shared with franchisor
● Need to pay franchisor franchise fees and royalties
4. Joint ventures- is an agreement between two or more businesses to work together on a
project. They will share their capital, risks and profits.
Advantages● Reduces risks and cut costs
● Each business bring different expertise to the joint venture
● The market potential for all the business is the joint venture is increased
● Market and product knowledge can be shared to the benefits of the businesses.
Disadvantages● Any mistakes made will reflect on all the parties in the joint venture, which may
damage their reputations.
● The decision-making process may be ineffective due to different business
cultures or different styles of leadership.
Unincorporated business- is the one that does not have a separate legal identity. Sole traders
and partnerships are unincorporated businesses.
Incorporated business- are the companies that have separate legal status from their owners.
Shareholders- are the owners of a limited company. They buy shares which represent
part-ownership of the company.
Joint-stock companies
These companies can sell shares, unlike partnerships and sole traders, to raise capital. Other
people buy these shares and become a shareholder of the company. Therefore, they are jointly
owned by the people who have bought stocks. These shareholders then receive dividends that
are a part of profit and a return on the investment for shareholders.
The shareholders in the company have limited liabilities. That is, only their individual
investments are at risk if the business fails or leaves debts. If the company owes money, it can
be sued and taken to court, but it's shareholders can’t. The companies have a separate legal
identity from their owners, which is why the owners have limited liability. These companies are
incorporated.
Company enjoys continuity.
shareholders will elect a board of directors to manage and run the company in its day to day
activities.
There are two types of companies:1. Private-limited companies- one or more owners who can sell its share to the people
known by the existing shareholder.
Advantages● Limited liability
● Sales of shares
● Separate legal identity
● Original owner retains control
● More ability to raise capital
● Continuity
● Better status in the market
Disadvantages● Lengthy legal formalities
1. Article of association
2. Memorandum of association
● Shares can be sold only existing shareholder and transfer needs consent
● Less privacy- account sent to registrar to companies
● Reusing capital for expansion
2. Public-limited companies- two or more owners who can do well it's shares to any
individual/organisation in the general public through stock exchanges.
Advantages● Limited liability
● Separate legal visit
● Incorporated business
● Continuity
● Raising large amounts of capital
● No limit on the number of shareholders
● Easy to buy, seek and transfer shares
● Higher status
● Easy to attract suppliers
Disadvantage● Legal formality are complicated
● Less privacy- publication of account
● The regulation and control protect shareholders interest
● Difficult to control
● Expense of selling shares to the public
● Original owners loss of control
Annual general meeting- is a legal requirement for all the companies. Shareholders may
attend and vote on who they want to be on the board of directors for the coming year.
Dividends- are the payments made to shareholders from the profits (after tax) of a company.
They are the return to shareholders for investing in the company.
CONTROL AND OWNERSHIP OF PUBLIC LIMITED COMPANIES
1. Sharehold
● Thousands, millions
2. Annual general meeting
● Election of country direction
3. Directions
● Professional manage
● Make decision
● Responsibility to run the business
● Appoint managers
4. Divorce between ownership and control
● Shareholders own
● The directors and managers control
5. Objectives
● Increased status
● Increase growth
6. Justify their large salaries
7. Reduced dividends
● Expand plans
● Replacing directors
● Inexperience
● Bad publicity
● Unstable
PUBLIC SECTOR
Public sector includes all the businesses owned by the government and run by the directors
appointed by the government. Usually provide services like water, electricity, health services,
etc.
There are two main business in public sector1. Public corporations- it is a business in the public sector that is owned and controlled by
the state government. Public corporations are owned by the government but it does not
directly operate the business. Government ministers appoint a board of directors, who
will be given the responsibility of managing the business.
Public corporation objectives1. Social objectives
● Keep prices low and affordable
● Keep people in job to reduce unemployment
● Often public services in all area
2. Issues
● Keeping to objectives cost huge amount of money
● Often make huge loses
● “Subsidies” often paid by government
3. Other objectives
● Reduce costs, even at the cost of job
● Increase efficiency
● Operate like a private sector firm
● Cut services that make loss which might lose some customers too.
4. Corporization
● Public corporation running as though it is in the private sector, not public
sector
● Preparing for privatisation.
Public corporation advantages● Some business are considered too important to be owned by an individual
● Other businesses, considered natural monopolies, are controlled by the
government.
● Reduces waste in an industry
● Rescue important businesses when they are failing through
nationalisation
● Provide essential services to people
Public corporation disadvantages● Motivation might not be as high because profit is not an objective
● Subsidies lead to inefficiency. It is also considered unfair for private
businesses
● There is normally no competition to public corporations, so there is no
incentive to improve
● Businesses could be run for government popularity.
2. Other public sector enterprises
Local government authorities or municipalities usually operate some trading activities.
Some of these services are free to the users and paid for out of local taxes, such as
street lighting and schools. Other services are charged for and expected to break even
at least. These services include street markets, swimming pools, theatre, etc. If they do
not cover the costs, a local government subsidy is provided.
MIND MAP
CHAPTER 5- business objectives and stakeholder objectives
BUSINESS OBJECTIVES
Business objectives are the aims or targets that a business works towards.
Benefits of business objectives1. Increase motivation- gives workers and manager a clear target to work towards
2. Decision making- makes it easier and quicker to make decisions
3. Unites the business- helps to write all business activities towards the same goal and
tries to reduce conflicts.
4. Compare the business performance- managers can compare the business’
performance to its objectives and make any changes in its activities if required.
DIFFERENT BUSINESS OBJECTIVES
1. Survival- a newly set up business or a business running in a recession market only
focuses on survival.
2. Profits- profit is the total income if a business (revenue) less total costs. Profit is
required to pay a return to the owners, it is an internal source of finance. It is a reward for
taking risk and motivates the owner to work harder.
3. Returns to shareholders- the managers of companies will often set the objective of
‘increasing returns to shareholders’. This is to discourage shareholders from selling their
shares and helps managers keep their jobs.
Return of shareholders can be increased in two ways● Increasing profit
● Increasing share price
4. Growth- once a business has passed its survival stage it will aim for growth and
expansion. This is usually measured by value of sales or output. Aiming for business
growth can be very beneficial. A larger business can ensure greater job security and
salaries for their employees. The business can also benefit from higher market share
and economies of scale.
5. Market share- market share is the percentage of total market sales held by one brand or
business. Increasing market share can benefit the company by● Good publicity
● Increased influence over suppliers
● Increased influence over customers
6. Social enterprise- a social enterprise has social objectives as well as an aim to make a
profit to reinvest back into the business. A social enterprise is operated by a private
individual, they are in the private sector. They often set three objectives for their
business● Social- to provide jobs and support for disadvantaged groups in the society, such
as the disabled or homeless.
● Environmental- to protect environment
● Financial- to make profit to invest back into the social enterprise to expand the
social work that it performs
WHY BUSINESS’ OBJECTIVES CHANGE?
1. A business set up recently has survived for three years and the owner now aims to work
towards higher profit
2. A business has achieved higher market share and now has the objective of earning
higher returns for shareholders
3. A profit making business operates in a country facing a serious economic recession so
now has the short-term objective for survival.
PUBLIC SECTOR BUSINESSES
Government owned and controlled businesses do not have the same objectives as the
businesses in the private sector.
Objectives of businesses in public sector● Financial- although these businesses do not aim to maximize profits, they will have to
meet the profit target by the government. This is so that it can be reinvested into the
business for meeting the needs of the society.
● Service- the main aim of this organization is to provide a service to the community that
must meet the quality target set by the government.
● Social- most of these enterprises are set up in order to aid the community. This can be
providing income to citizens, providing good quality goods and services at an affordable
rate.
● They help the economy by contributing to GDP, decreasing unemployment rate and
raising living standards.
STAKEHOLDERS
A stakeholder is any person or group with a direct interest in the performance and activities of
a business. There are two types of stakeholders1. Internal
2. External
MIND MAP
SECTION 2- people in business
CHAPTER 6- motivating employees
MOTIVATION
Motivation is the act of giving somebody a reason or incentive to do something. It is the reason
why employees want to work hard and work efficiently for the business.
EMPLOYEES ARE THE FIRMS GREATEST ASSET!
Why do people work?
1. Have a better standard of living- by earning incomes that can satisfy their needs and
wants.
2. Be secure- having a job means they can always maintain or grow that standard of living.
3. Gain experience and status- work allows people to get better at the job they do and
earn a reputable status in the society.
4. Have job satisfaction- people also work for the satisfaction of having a job.
5. Money○ Make new friends
○ Job security
○ Sense of achievement
○ Sense of identity
○ Satisfying ambition
Benefits of a well-motivated workforce● High output per worker
● Willingness to accept change
● Two-way communication with management
● Low labor turnover - a loyal workforce
● Low rates of absentees
● Low rate of strike action
MOTIVATIONAL THEORIES
1. F.W. Taylor
Thinks that money is the main motivator for all employees.
Assumption- all individuals are motivational by personal gain.
Stated- paid more
- work more efficiently
2. Maslow
Hierarchy of needs
3. Herzberg
MOTIVATORS
HYGIENE FACTORS
●
Achievement
●
Companies policies and
administration
●
recognition
●
Supervision
●
Personal growth/ development
●
Working conditions
●
advantages/ promotion
●
salary
●
Work itself
●
Interpersonal relations
●
Status
●
Job security
METHODS OF MOTIVATION
FINANCIAL REWARDS1. Wages- is the payment for work, usually paid weekly.
There are two ways wages can be calculated● Time rate- is an amount paid to an employee depending on hours worked.
Although output may increase, it doesn’t mean that workers will work sincerely
and use the time to produce more- they may simply waste time on very few
output since their pay is based only on how long they work. The productive and
unproductive worker will get paid the same amount, irrespective of their output.
●
Piece rate- is an amount paid for each unit of output.
Same as time-rate, this doesn’t ensure that quality output is produced. Thus,
efficient workers may feel demotivated as they’re getting the same pay as
inefficient workers, despite their efficiency.
2. Salary- is a payment for work, usually paid monthly.
3. Commission- is payment relating to the number of sales made.
The higher the sales, the more the pay. Although this will encourage salespersons to sell
more products and increase profits, it can be very stressful for them because no sales
made means no pay at all.
4. Bonus- is an additional amount of payment above basic pay as a reward of hard work.
5. Profit sharing- is a system whereby proportion of the company’s profits is paid out to
employees. Workers will be more motivated as they will work hard to make profits and
can earn more.
NON- FINANCIAL REWARDS1. Fringe benefits- are non-financial rewards given to employees.
Examples● Company vehicle
● Discounts on businesses products
● Healthcare
● Children’s education
● Free accommodation
● Share options
● Generous expense accounts
● Pension paid by the business
● Free trips abroad/ holidays
2. Job rotation- involves workers swapping around and doing each specific task for only a
limited time and then changing around again.
3. Job satisfaction- is the employment derived from feeling that you have done a good
job.
4. Job enrichment- involves looking at jobs and adding tasks that require more skill and/or
responsibility.
5. Autonomous work groups or teamworking- involves using groups of workers and
allocating specific tasks and responsibilities to them.
6. Training- is the process of improving a worker’s skills
7. Promotion- is the advancement of an employee in an organisation.
CHAPTER 7 - organisation and management
ORGANISATIONAL STRUCTURE
Organisational structure refers to the levels of management and division of responsibilities
within an organisation.
This structure is often presented in the form of an organisational chart with several levels of
hierarchy.
Organisational chart refers to a diagram that outlines the internal management structure.
Hierarchy refers to the levels of management in an organisation, from the highest to the lowest.
Level of hierarchy refers to managers/ supervisors/ their employees who are given a similar
level of responsibility in an organisation.
Advantages of organisational structure1. All employees are aware of which communication channel is used to reach them with
messages.
2. Everyone knows their position in business. They know who they are accountable to
and to whom they are accountable for.
3. It shows the links and relationship between the different departments.
4. Gives everyone a sense of belonging as they appear on the organisational chart.
CHAIN OF COMMAND AND SPAN OF CONTROL
Chain of command is the structure in an organisation which allows instructions to be passed
down from senior management to lower levels of management.
Span of control is the number of subordinates working directly under a manager.
There is an important link between chain of command and span of control. The longer the
chain of command is, the taller will be the organisational structure and the narrower the
span of control.
When the chain of command is short, the organisation will have wider spans of control.
Advantages of short chains of command1. Communication is quicker and more accurate. Each message has fewer levels to
pass through before reaching the intended person.
2. Top managers are less remote from the lower level of the hierarchy. These
managers should be more in touch with people below them as there are fewer
management levels to get to know.
3. Spans of control will be wider. This means that each manager is responsible for more
subordinates. Why is this an advantage?
○ If superiors have more people to manage, it will encourage managers to delegate
more.
○ There will be less direct control of each worker and they will feel more trusted.
They will be able to make more decisions by themselves.
MANAGEMENT
Directors are senior managers who lead a particular department or division of a business.
Line managers have direct responsibility for people below them in the hierarchy of an
organisation.
Supervisors are junior managers who have direct control over the employees below them in
the organisational structure.
Staff managers are specialists who provide support, information and assistance to line
managers.
The role and functions of management
1. Planning- setting aims and targets for the organisations or departments. It will give the
department and its employees a clear sense of purpose and directions. Managers
should also plan for resources required to achieve these targets- no. of people required,
finance required, etc.
2. Organizing- managers should then organize the resources. This will include allocating
responsibilities to employees, possibly delegating.
3. Coordinating- managers should ensure that each department is coordinating with
each other to achieve organisation’s aims. This will include effective communication
between departments and managers and decision making.
4. Commanding- managers need to guide, lead and supervise their employees in the
tasks they do and make sure they are keeping to deadlines and achieving targets.
5. Controlling- managers must try to assess and evaluate the performance of each of
their employees. If some employees fail to achieve their target, the manager must see
why that occurred and what he can do to correct it- maybe some training will be required
or better equipment
Delegation
is giving a subordinate the authority to perform some tasks.
Advantages to managers● Managers cannot do all the work by themselves.
● Managers can measure the efficiency and effectiveness of their subordinates' work.
However, managers may be reluctant to delegate as they may lose their control over the work.
Advantages to subordinates● The work becomes more interesting and rewarding- increased job satisfaction
● Employees feel more important and trusted- increasing loyalty to firm
● Can act as a method of training and opportunities of promotion, if they do a good
job.
Leadership
Leadership styles are the different approaches to dealing with people and making decisions
when in a position of authority- autocratic, democratic or laissez- faire.
Styles of leadership1. Autocratic leadership- is where the manager expects to be incharge of the business
and have their orders followed. They keep themselves away from the employees.
Makes all the decisions and keeps it to himself. Tells the employees only what they
need to know. Communication is mostly one way.
Advantages● Quick decision making
Disadvantages● No opportunity for employee input into key decisions, which can be demotivating.
2. Democratic leadership- gets other employees involved in the decision-making
process. Information about the future plans is openly discussed before the final
decision is made, often by the leader. Communication is both downward or
top-down and upward or bottom-up.
Advantages● Better decision could result from consulting with employees and using their
experience and ideas - as well as a motivating factor.
Disadvantages● Unpopular decisions, such as making workers reluctant, could not effectively be
made using this style of leadership.
3. Laissez-faire leadership- makes the broad objectives of the business known to
employees, but then they are left to make their own decisions and organise their
work. Communication can be difficult as clear direction is not given. Leader has a
very limited role to play.
Advantage● Encourages employees to show creativity and responsibility.
Disadvantage● Unlikely to be appropriate in organisations where a consistent and clear decision
making structure is needed for eg. providing customer service.
TRADE UNION
Trade union is a group of employees who have joined together to ensure their interests are
protected. They negotiate with the employer (firm) for better conditions and treatment and can
threaten to take industrial action if their requests are denied. Industrial action could include
overtime ban, go slow, etc. Trade unions can also seek to put forward their views to the media
and influence government decisions relating to employment.
Benefits of worker joining trade union● Strength in number- sense of belonging and unity
● Improved conditions of employment- better pay, holidays
● Improved benefits for workers who are not working, ill/sick or reluctant
● Financial support if a member thinks that they have been unfairly dismissed or treated.
● Benefits that have been negotiated for union members.
Disadvantages of workers joining trade union● Costs money to be a member- a membership fee will be required.
● May be asked to take industrial action even if they don’t agree with the union- might not
be paid during a strike.
CHAPTER 8- recruitment, selection and training of employees
The role of H.R (Human Resources) department
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Recruitment and selection- attracting and selecting the best candidates for job posts
Wages and salaries- set wages and salaries that attract and retain employees as well
as motivate them.
Industrial relations- there must be effective communication between management and
workforce to solve complaints and disputes as well as discussing ideas and suggestions.
Training programmes- give employees training to increase their productivity and
efficiency.
Health and safety- all laws to health and safety conditions in the workplace should be
adhered to
Redundancy and dismissal- the managers should dismiss any
dissatisfactory/misbehaving employees and make them redundant if they are no longer
needed by the business.
RECRUITMENT
Recruitment- is the process from identifying that the business needs to employ someone up to
the point at which applications have arrived at the business.
Employee selection- is the process of evaluating candidates for a specific job and selecting an
individual for employment based on the needs of the organisation.
Job analysis, description and specificationA job analysis identifies and records the responsibilities and tasks relating to a job.
A job description outlines the responsibilities and duties to be carried out by someone
employed to do a specific job.
A job specification is a document which outlines the requirements, qualifications, expertise,
physical characteristics, etc., for a specified job.
ADVERTISING THE VACANCY
Posting someone by recruiting the vacancy of the organisation.
There are two types of recruitment1. Internal recruitment- is when vacancy is filled by someone who is an existing employee
of the business.
Advantages● Saves time and money- no need for advertising and interviewing.
● Person already known by the business
● Person knows the business’ ways of working
● Motivating for other employees to see their colleagues being promotedurging them to work hard
Disadvantages● No new skills and experience coming into the business
● Jealousy among the workers
2. External recruitment- is when a vacancy is filled by someone who is not an existing
employee and will be new to the business.
External recruitment needs to be advertised, unlike internal recruitment.
It can be advertised on:● Local and national newspapers
● Specialist magazines
● Online recruitment sites
● Recruitment agencies
● Centres run by the government
When drawing up a advertisement, the business will need to ask itself the
following questions● What should be included in the advert?
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Where should the advertisement be placed?
How much will the advertising cost and is it within the budget of the Human
Resources Department?
Methods of application
A job advertisement will require the applicant to apply in writing. This can be either filling
in an application form, or by writing a letter of application and enclosing a curriculum
vitae (CV) or resume.
A CV is a summary of a person’s qualification, experience and qualities, and is written in
a standard format.
These are used for the business to choose their best applicant which is the best match
for the job satisfaction.
The ones that get selected are then called up for an interview.
A curriculum vitae should be well laid out and clear. It should usually contain the
following details● Name
● Address
● Telephone number
● Email address
● Nationality
● Education and qualifications
● Work experience
● Position of responsibilities
● Interests
● Names and addresses of referees
The letter of application should outline briefly● Why the applicant wants the job
● Why the applicant feels he/ she would be suitable
METHODS OF SELECTION
The shortlisted people from the applications and CV are called up for an interview.
Interview is taken so the business could get to know their● Applicants ability to do the job
● Any personal qualities that are an advantage or disadvantage
● The general character and personality of the applicant - will they fit in?
Some businesses include tests in their selection process, for eg● Skills tests
● Aptitude tests
● Personality tests group situation tests
The final decision to employ depends on several factors
● Work experience
● Educational and qualification factors
● Age
When a successful candidate is selected the others must be sent a letter of rejection.
THE CONTRACT OF EMPLOYMENT- A legal agreement between the employer and
employee listing the rights and responsibilities of workers. This will include● Name of employer and employee
● Job title
● Date when employment will begin
● Hours of work
● Rate of pay and other benefits
● When payment is made
● Holiday entitlement
● The amount of notice to be given to terminate the employment that the
employer or employee must give to end the employment, etc.
THE RECRUITMENT AND SELECTION PROCESS
1. Analyse the exact nature of the job and duties to be undertaken
2. Design a job description
3. Design a job specification
4. Advertise the vacancy
5. Send out application forms to the applicants or read curriculum vitaes/resumes
and letters of application.
6. Produce a shortlist from the replies of those to interview and take up
references.
7. Hold interviews and selection tasks
8. Select suitable applicants and offer them the job. Reply to unsuccessful
applicants
PART-TIME AND FULL-TIME JOBS
Part-time
employment is often considered to be between 1 and 30-35 hours a week.
Advantages of part-time jobs● More flexible hours of work
● Easier to ask employees just to work at busy times
● Easier to extend business opening/operating hours by working evenings or weekends.
● Fits in with looking after children and therefore employee is willing to accept lower pay
● Reduces business costs compared to employing and paying full-time employee
● In some countries it is easier to make part-time workers redundant.
Disadvantages of part-time jobs● Less likely to seek training because the employees may see the jobs as temporary
● Takes longer to recruit two part-time workers than one full-time employee
● Part-time employees can be less committed to the business and may be more likely to
leave to get another job.
● Less likely to be promoted because they will not have gained the same skills and
experience as full-time employees
● More difficult to communicate with part-time employees when they are not at work.
Full-time
employees will usually work 35 hours or more in a week.
TRAINING
Training is important to a business as it will improve the worker’s skills and knowledge and help
the business to be more efficient and productive, especially when new processes and products
are introduced. It will improve the workers’ chances at getting promoted and raise their morale.
There are three types of training1. Induction training- an introduction given to a new employee, explaining the firm’s
activities, customs, procedures and introducing them to the fellow workers.
Advantages● Helps new employees to settle into their job quickly
● May be a legal requirement to give health and safety training before the start of
work
● Less likely to make mistakes
Disadvantages
● Time-consuming
● Wages still have to be paid during training, even though they aren’t working
● Delays the state of the employee starting the job
2. On-the-job training- occurs by watching a more experienced worker doing the job.
Advantages
● It ensures there is some production from worker whilst they are training
● It usually costs less than off-the-job training
● It is training to the specific needs of the business
Disadvantages
● The trainer will lose some production time as they are taking some time to teach
the new employee
● The trainer may have bad habits that can be passed onto the trainee
● It may not be necessarily recognised training qualifications outside the business
3. Off-the-job training- involves being trained away from the workplace, usually by
specialist trainers.
Advantages
● A broad range of skills can be taught using these techniques
● Employee may be taught a variety of skills and they may become multi-skilled
that can allow them to do various jobs in the company when the need arises
Disadvantages
● Costs are high
● It means wages are paid but no work is being done by the worker
● The additional qualifications means it is easier for the employee to leave and find
another job.
Working planning
Workforce planning is the establishing of the workforce needed by the business for the
foreseeable future in terms of the number and skills of employees required.
They may have to downsize (reduce the number of the employees) the workforce because of:
● Introduction to automation
● Falling demand for their products
● factory/shop/office closure
● Relocating factory abroad
● A business has merged or been taken over and some jobs are no longer needed
They can downsize the workforce in two ways:
1. Dismissal: where a worker is told to leave their job because their work or behaviour is
unsatisfactory
2. Redundancy: when an employee is no longer needed and so loses their work, through
not due to any faults of theirs. They may be given some money as compensation for the
redundancy.
Worker could also resign (they are leaving because they have found another job) and retire
(they are getting old and want to stop working)
Legal controls over employment issues
There are a lot of government laws that affect equal employment opportunities. These laws
require businesses to treat their employees equally in the workplace and when recruited and
selected- there should not be any descrimination based on age, gender, religion, race, etc.
Employees are protected in many areas including
● Against unfair descrimination
● Health and safety at work
● Against unfair dismissal
● Wage protection
● Legal minimum wage
Industrial tribunal
An industrial tribunal is a legal meeting which considers workers’ complaints of unfair
dismissal or discrimination at work. This will hear both sides of the case and may give the
worker compensation if the dismissal was unfair.
CHAPTER 9- internal and external communication
COMMUNICATION
Communication is the transferring of a message from the sender to the receiver, who
understands the message.
Internal communication is between two members of the same organisations.
External communications is between the organisation and other organisations or individuals.
Effective communication involves:
● A transmitter/sender of the message
● A medium of communication
● A receiver of the message
● A feedback/response from the receiver to confirm that the message has been received
and acknowledged.
One-way communication- involves a message which does not call for or require a response.
Two-way communication- is when the receiver gives a response to the message and there is
a discussion about it.
COMMUNICATION METHODS
1. Verbal- face-to-face conservation, telephone, video conferencing, meetings.
Advantages
● Quick and efficient
● There is an opportunity for immediate feedback
● Speaker can reinforce for the message- change his tone, body language to
influence his consumers
Disadvantages
● Can take long if there is feedback therefore, discussions
● In a meeting, it cannot be guaranteed that everybody is listening or has
understood the message
● No written evidence of the message can be kept for later reference
2. Written- letters, memos, text
Advantages
● There is evidence of the message for later reference
● Can include details
● Can be copied and sent to many people
● Quick and cheap
Disadvantages
● Direct feedback is always not possible
● Cannot ensure that message has been received and/or acknowledge
● Language could be difficult to understand (jargon)
● Long message may cause disinterest in receivers
● No opportunity for body language to be used to reinforce messages
3. Visual- diagrams, charts
Advantages
● Can present information in an appealing and attractive way
● Can be used along with written material
Disadvantages
● No feedback
● May not be understood/interpreted properly
Factors that affect the choice of an appropriate communication method:
● Speed
● Cost
● Message details
● Leadership styles
● The receiver
● Importance of a written record
● Importance of feedback
Formal communications is when messages are sent through established channels using
professional language.
Informal communication is when information is sent and received casually with the use of
everyday language.
Communication barriers
Section 3- marketing
CHAPTER 10- Marketing, competition and customer
MARKETING
Marketing is identifying customer wants and satisfying them profitability.
A customer is a person, business or other organisation which buys goods or services from a
business.
The role of marketing in a business:
● Identifying customer needs through market research
● Satisfying customer needs by producing and selling goods and services
● Maintaining customer loyalty building customer relationships through a variety of
methods that encourage customers to keep buying one firm’s products instead of their
rivals.
● Gain information on customers by understanding why customers but their products, a
firm can develop and sell better products in the future.
● Anticipate changes in customer needs by identifying new trends in customer demand
or gaps in the market so that business can produce goods or services which are not
currently available.
If business is successful in identifying customer needs, it should enable the business to:
● Raise customer awareness of a product or service of the business
● Increase revenue and profitability
● Increase or maintain market share
● Maintain or improve the image of products or a business
● Target a new market or market segment
● Enter new markets at home or abroad
● Develop new products or improve existing products
MARKET CHANGES
Why customer spending patterns may change:
● Change in their tastes and preferences
● Change in technology
● Change in income
● Aging population
Why some markets have become more competitive
● Globalization
● Improvement in transportation infrastructures
● internet/e-commerce
How business can responds to changing spending patterns and increased competitions
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Maintaining good customer relationships- it is often cheaper to keep existing customers
than gaining new one.
Keep improving its existing products
Introduce new products
Keep costs low
MASS AND NICHE MARKETING
Mass marketing Is where there is a very large number of sales of a product
Advantages
● Larger amount of sales compared to niche market
● Can benefit from economies of scale
● Risks are spread
● More chances of business to grow
Disadvantages
● They will have to face more competition
● Can’t charge higher price than competition because they’re all selling similar products
Niche marketing is a small, usually specialised, segment of a much larger market
Advantages
● Small firms can thrive in niche markets where large firms have not yet been
established
● Few competitors, so can sell products at high price
● Firms can focus on the needs of just one customer group
Disadvantages
● Lack of economies of scale
● Risk of over-dependence on a single product or market
● Likely to attract competition if successful
MARKET SEGMENTS
Market segment is an identifiable subgroup of a whole market in which consumers have similar
characteristics or preferences.
Market segmentation is the process of dividing a market of potential customers into groups, or
segments, based on different characteristics.
Advantages● Marketing expenditure Cost-effective
● Higher sales and profitability due to cost effective marketing
● Increased opportunities - identifying a market segment which is not having its
needs fulfilled
CHAPTER 11- Market Research
Market research is the process of gathering, analyzing and interpreting information about a
market.
The role of market research is to try to find out answers to these questions:● Would customers be willing to buy my product?
● What price would they be prepared to pay?
● Where would they most likely buy my product?
● What features of my product do customers most like or dislike?
● What type of customer would buy my product?
● What type of promotion would be effective with these types of customers?
● How strong is the competition and who are the main competing businesses?
Product-oriented business- is one whose main focus of activity is on the product itself. Such
firms first produce the product and then try to find a market for it. Their concentration is on
product- quality and price.
Market-oriented business- is one which carries out market research to find out consumer
wants before a product is developed and produced. Such firms will first conduct market
research to see what consumers want and then produce goods and services to satisfy them.
They will set a marketing budget and undertake the different methods of researching consumer
tastes and spending patterns, as well as the market conditions.
Why is market research important?
To ensure that the goods and services they are producing will sell successfully in the market
and generate profits
Market research data can be either quantitative or qualitative.
Quantitative information answers questions about the quantity of something. For eg.
percentage of teenagers in the city having internet access.
Qualitative information answers questions where an opinion or judgement is required. For eg.
What do customers like about a particular product?
Market research can be done in two ways:
1. Primary research
2. Secondary research
PRIMARY MARKET RESEARCH
Primary research is the collection and collation of original data via direct contact with potential
or existing customers. First hand data is collected by people who want to use the data.
Process of primary research1. What is the purpose of the market research?
2. Decide on the most suitable method of research
3. Decide on the size of sample needed and who is going to be asked
4. Carry out the research
5. Collate the data and analyse the results
6. Produce a report of the findings
Advantages of primary research
● It is up to date and relevant to the business undertaking it
● It is usually planned and carried out by the people who want to use the data; it is
first-hand
● It is most effective when it is used to gather information which will help business with a
specific problem.
● It is not available to other businesses
Disadvantages of primary research
● It can be expensive
● It is not available immediately- it takes time to collect and analyse.
Primary research can be conducted using several methods:1. Questionnaires- is a set of questions to be answered as a means of collecting data for
market research. Can be done face-to-face, telephone, etc. Online surveys can also be
done.
Advantages
● Detailed information can be collected
● Customer’s opinion about the product can be obtained
● Online surveys will be cheaper and easier to collate data and analyse them.
● Can be linked to prize draws and price draw websites to encourage customers to
fill out their surveys.
Disadvantages
● If questions are not clear or are misleading, then unreliable answers will be given
● Time-consuming and expensive to carry-out research, collate and analyse them.
2. Interviews- involve asking individuals a series of questions, usually face-to-face or over
the phone. Interviewer will have ready-made questions for the interviewee.
Advantages
● Interviewer is able to explain the questions to the interviewee and can also ask
follow-up questions.
● Can gather detailed responses and interpret body language, allowing
interviewers to come to accurate conclusions about the customer’s opinions.
Disadvantages
● The interviewer could lead and influence the interviewee to answer in a certain
way.
● Time-consuming and expensive to interview everyone in the sample.
3. Focus groups- is a group of people who are representative of the target market and
agree to provide information about a particular product or general spendings over time.
They can also test the company's products and give a review on them.
Advantages
● They can provide detailed information about the consumer’s opinion.
Disadvantages
● Time-consuming
● Expensive
● Opinions could be influenced by others in the group
4. Observation- take the form of recording or auditing
Advantages
● Inexpensive
Disadvantages
● Only gives basic figures. Does not tell the firm why consumers buy them.
SECONDARY MARKET RESEARCH
Secondary research uses information that has already been collected and is available for use
by others. Second-hand data about consumers and markets collected form already published
sources.
Internal sources of information
● Sales department’s sales record, pricing data, customer records, sales report
● Opinions of distributors and public relation officers
● Finance departments
● Customer service departments
External sources of information
● Government statistics
● Newspapers
● Trade associations
● Market research agencies
● Internet
Advantages● Cheap
● Quickly available
● Help access the total size of a market
Disadvantages● Outdated
● Available to competitors
● May not be relevant for the the business
THE MARKETING MIX
The marketing mix is a term which is used to describe all the activities which go into marketing
a product or service. These activities are often summarised as the 4P’s.
The 4P’s are:1. Product
2. Price
3. Place
4. Promotion
CHAPTER 12- Product
Product is the goods or services produced and sold in the market. This includes all the
features of the product as well as its final packaging.
Types of product include
● Consumer goods
● Consumer services
● Producer goods
● Producer services
What makes a successful product?
● It satisfies existing needs and wants of the customers
● It is able to stimulate new wants from the customers
● Its design- performance, reliability, quality, etc. should be consistent with the products
brand image
● It is distinctive from the competitors and stands out.
● It is not too expensive to produce, and the price will be able to cover the costs.
New product development: development of a new product by the business.
The process:1. Generate ideas- customer suggestions, competitors’ products, employees, research
and development.
2. Select the best ideas for further research- need to decide which ideas to abandon
and which ideas to further research upon.
3. Decide if the firm will be able to sell enough units for the product to be a successassess how large it thinks the sales would be and the likely size of the market share and
break even analysis.
4. Develop a prototype- how a product could be manufactured, foresee any problems with
the manufacturing process.
5. Test launch- launch to one small part of the market, allows the company to see how well
the product sells without committing large amount of money for a national launch, if it
does not sell it can be altered or scrapped without causing too much harm to the
company.
6. Full launch of the product- launch onto the main marke- t probably the national market
to begin with later it could be exported.
Advantages of launching new product development● Can create a unique selling point (USP)- USP is special feature of a product that
differentiates it from the products of the competitors
● Charging higher prices for new products
● Increase potential sales, revenue and profits
● Helps spread risks- diversification for the business
Disadvantages of launching new product development● Market research is expensive and time-consuming
● Investment can be very expensive- cost of trial products including cost of wasted
material
● Lack of sales if target market is wrong
● Loss of company image if new product fails to meet customer needs
Why is brand image important?
Brand image is an image or identity given to a product which gives it a personality of its own
and distinguishes it from its competitors’ brands.
Brand name is the unique name of a product that distinguishes it from other brands.
Brand loyalty is when consumers keep buying the same brand again and again instead of
choosing a competitors’ brand.
Brand image is important because● Consumers recognize the firm’s product more easily when looking at similar
products- helps differentiate the company’s product from another
● Their product can be charged higher than less well-known brands
● Easier to launch new products
Why is packaging important?
● It protects the product
● It provide information about the product
● To help consumers recognize the product
● It keeps the product fresh
Product life cycle (PLC)
The product life cycle refers to the stages a product goes through from its introduction to its
retirements in terms of sales.
1. Product is developed
2. It is introduced
3. Sales start to grow rapidly
4. Maturity- sales now increase only slowly. Competition becomes intense
5. Sales reach saturation- point which is the highest point. Profits start to fall as sales are
static and prices have reduced to be competitive.
6. Sales of the product decline- new products come along
Extending the product life-cycle
● Introduce new variations
● Sell into new markets
● Make small changes to product’s packaging
● Use a new advertising campaign
● Introduce a new, improved version of the old product
● Sell through additional, different retail outlets
CHAPTER 13- Price
Price is the amount of money producers are willing to sell or consumers are willing to buy the
product for.
A business can adopt new pricing strategies for several reasons, including:● To try to break into new market
● To try to increase its market share
● To try to increase its profits
● To make sure all its costs are covered and a target profit is earned
METHODS OF PRICING
1. Cost-plus pricing- is the cost of manufacturing the product plus a profit mark-up.
It involves● Estimating how many units of the product will be produced
● Calculating the total cost of producing this output
● Adding a percentage mark-up for profit
Advantages
● Method is easy to apply
● Different profit mark-ups could be used in different markets
● Each product earns a profit for the business
Disadvantages
● Business could lose sales if selling price is higher than competitors’ prices
● A total profit will only be made if sufficient units of the products are sold
● There is no incentive to reduce costs- any increase in costs is just passed on to the
customer as a higher price
2. Competitive pricing- is when the product is priced in line with or just below competitors’
prices to try to capture more of the market.
Advantages
● Business can compete on other matters such as service and quality
Disadvantages
●
Still need to find ways of competing to attract sales
3. Penetration pricing- is when the price is set lower than the competitors’ prices in order
to be able to enter a new market. In this, business sets a lower price than everyone to
attract more customers and by attracting them they can make them purchase more of
their products.
Advantages
● Attracts customers more quickly
● Can increase market share quickly
Disadvantages
● Low revenue due to low prices
● Cannot recover development costs quickly
4. Price skimming- is where a high price is set for a new product in the market. A new
product which is different and unique from others products.
Advantages
● Profit earned is very high
● Helps recover/compensate research and development costs
Disadvantages
● It may backfire if the competitors produce similar products at lower price
5. Promotional pricing- is when a product is sold at a very low price for a short period of
time.
Advantages
● Helps to sell off unwanted stock before it becomes out of date
● A good way of increasing short term sales and market share
Disadvantages
● Revenue on each item is low so profits may also be lower
Factors that affect what pricing method should be used:
● Is it a new or existing product?
● Is the product unique?
● Is there a lot of competition in the market?
● Does the business have a well-known brand image?
● What are the costs of producing and supplying the product?
● What are the marketing objectives of the business?
PRICE ELASTICITY
The PED of a product refers to the responsiveness of the quantity demanded for it to
change in its prices.
PED= % of change in quantity demanded / % of change in price
When the PED>1- elastic demand- higher % of change in demand in response to a change in
price.
If a product has an elastic demand, the producer can lower the prices to increase profitability.
(law of demand- fall in price will increase the demand)
When the PED<1- inelastic demand- lower % of change in demand in response to a change in
price.
If a product has an inelastic demand, the producer can raise prices to increase profitability.
CHAPTER 14- Place
Place refers to how the product is distributed from the producer to the final customer. There are
different distribution channels that a product can be sold through.
A distributional channel is the means by which a product is passed from the place of
production to the customer.
The 4 different types of distributional channels are:1. D.C.1- Direct to Consumers
Advantages
● Very simple
● Suitable for products like food products which are sold straight from farm
● Lower price if sold direct to customers
● Can be sold by mail order catalogue or via the internet
Disadvantages
● Usually impractical for most products because the consumers probably do not live near
to the factory and could not go there to buy the products
● Not be suitable for products which cannot easily be sent by post
● Can be very expensive
2. D.C.2- Producer to Retailer to Consumer
Advantages
● Producer sells large quantities to retailers
● Reduced distribution costs compared to selling directly to consumers
Disadvantages
● No direct contact with customers
● Price is often higher than direct selling and retailers have to cover costs and earn profits.
3. D.C.3- Producer to Wholesaler to Retailer to Consumer
Advantages
● Wholesaler saves storage space for small retailer and reduce storage costs
● Small retailers can purchase fresh products in small quantities from wholesaler
● Wholesaler may give credit to retail customers
● Wholesaler may deliver to the small retailer thus saving transportation costs
● Wholesaler can give advice to small retailers about what is selling well
Disadvantages
● May be more expensive
● May not have full range of products to sell
● Takes longer for fresh products to reach to shops
● Wholesaler may be a long way from the small retailers
● Consumer price is often high than direct consumer selling
4. D.C.4- Producer to Agent to Wholesaler to Retailer to Consumer
Advantages
● Manufacturer may not know the best way to sell the product in other markets
● Agents will be aware of the local conditions
Disadvantages
● Producer has less control over the way the product is sold to customers
CHAPTER 15- Promotion
Promotion is where marketing activities aim to raise customer awareness of a product or brand,
generating sales and helping to create brand loyalty.
Aims of promotion:
● Inform customers about a new product
● Persuade customers to buy the product
● Create a brand image
● Increase sales and market share
Types of promotion
1. Advertisements- paid for communication with potential customers about a product to
encourage them to buy it.
This involves ‘above the line’ promotion. ATL is targeted for a wider market through
the internet, radios, newspapers, etc.
There are two types of advertisements1. Informative advertising- is where the emphasis of advertising or sales promotion is to
give full information about the product.
2. Persuasive advertising- is advertising or promotion which is trying to persuade the
consumer that they really need the product and should buy it.
The advertising process
○ Set objectives
○ Decide the advertising budget
○ Create an advertising campaign
○ Select the media to use
○ Evaluate the effectiveness of the campaign
The target audience refers to people who are potential buyers of a product or a service.
2. Sales promotion- are incentives such as special offers or special deals aimed at
customers to achieve short-term increase in sales.
This involves ‘below the line’ promotion. BTL is the promotion that is not paid for
communication but uses incentives to encourage consumers to buy. Incentives include
coupons, sales, etc.
There are different types of sales promotion that can be used by a business:○ After-sale services- providing after sales services attracts the customers to buy
again.
○ Gifts- small gifts can be given to the customers
○ BOGOF- buy one get one free!
○ Price reductions- loyalty cards or money-off coupons for more sales
○ Competitions
○ Point-of-sale displays and demonstrations
○ Free samples- allow the customers to try the product before buying
○ Product placement
Advantages of sales promotion:○ Promote sales at times
○ Encourages new customers to try an existing product
○ Encourages customers to try a new product
○ Encourage existing customers to buy a product more often or in greater quantity,
increasing consumer loyalty
○ Encourages customers to buy your product instead of a competing brand.
A marketing budget is a financial plan for the marketing of a product or product range for a
specified period of time.
Importance of the marketing budget
○ Specifies how much money is available to market the product and range
○ If a business can’t afford large budget, it can limit the places where the business
can advertise
CHAPTER 16- Technology and the Marketing Mix
How technology influences the market?
● Presents new opportunities for businesses to market their products and services and it
means there are frequent changes to all four elements of the marketing mix.
● Businesses are using technology to promote their business or products on the internet
using social media marketing and viral marketing.
○ Social media marketing is a form of internet marketing that involves creating
and sharing content on social media networks in order to achieve marketing and
branding goals. It includes activities such as posting text and image updates,
videos, and other content that achieves audience engagement, as well as paid
social media advertising.
○ Viral marketing is when consumers are encouraged to share information online
about the products of a business.
● Allows to gather information about customers purchasing habits which means dynamic
pricing can be used to increase revenue by changing prices frequently depending on
the level of demand of the product on the internet.
++ 4P’s linked to the above question
● Product- may be changed to respond to new technology
● Promote○ Social media marketing
○ Viral marketing
● Price- can be changed by seeing the trend in the marketing through social media
● Place- created new opportunities for businesses to create their place and start their
business on social media.
Use of the internet and social media networks for promotion
● Targets specific demographic groups who will share product information through viral
marketing
● Target customers will see the advert when they go to the social media site
● Speed in response to market changes- information can be updated regularly
● Cheap to use- has low costs if just placing advertisements
● Reaches groups that are difficult to reach in other way
However,
● It can alienate customers if they find the adverts annoying
● Businesses have to pay for advertising if using pop-ups
● Potential customers may not use social media networks
● There is lack of control of advertising of used by others
●
Messages may be altered or used in a bad way and forwarded on to other users, giving
the business a bad publicity.
If a business advertises on their own website
Benefits● No extra cost if own website is set up
● Control of advertising as it is on your own site
● Can change adverts quickly and update picture/prices, and so on
● Interactive adverts can be more attractive than those in other forms of advertising media
such as magazine and posters
● Can provide more information in adverts and link to other pages with further information
and pictures
● Attracts funds/payments from companies that want to advertise or be associated or
linked with your website
However,
● Potential customers may not see the website as the page may come up in a long list of
results when using a search engine such as google
● Relies on customers finding the website
● Design costs of the website may be high
E-commerce
E-commerce is the online buying and selling of goods and services using computer systems
linked to the internet and apps on mobile cell phones
Opportunities of e-commerce to a business
● Low-cost production
● Global coverage
● Able to access many customers
● Shops might not be needed
● B2B easier- purchases from business to business
● Makes dynamic pricing easier- dynamic pricing is when businesses change product
prices, usually when selling online, depending on the level of demand.
Threats of e-commerce to a business
● Setting up/updating website costs
● No direct customer contact
● Competition from other websites
● Transport costs
Opportunities of e-commerce to consumers
● Convenience
● Easy to compare
● Easy to pay
● Wider choice
● Competitive prices
Threats of e-commerce to a consumer
● Internet access required
●
●
●
●
Cannot see/feel products
Identity theft
Technical problems
No personal contact
CHAPTER 17- Marketing Strategy
A marketing strategy is a plan to combine the right combination of the four elements of the
marketing mix for a product or service to achieve a particular marketing objectives.
Marketing objectives
could include:
● Increasing sales of an existing product/service by selling into new markets or by selling
more
● Increasing sales of a product/service by improving
● Achieving a target market share with a newly launched product
● Increasing market share
● Maintaining market share if competition is increasing
● Increasing sales in a niche market
Legal controls on marketing
There are various laws that can affect the marketing decisions on quality, price, and the
contents of advertisements.
● Laws that protect consumers from being sold faulty and dangerous goods
● Laws that prevent the firms from using misleading information in advertising
● Laws that protect consumers from being exploited in industries where there is little or
no competition, known as monopolising
Entering New Markets
There are more opportunities for businesses to market their product in many different
countries.
● Markets in other countries might have much greater growth potential than existing
markets.
● Home markets might be saturated and these markets give the chance for higher sales
● Wider choice of location to produce products and this encourages businesses to sell as
well as produce in these countries.
● Trade barriers have been lowered in many parts of the world, making it easier and more
profitable now to enter these markets.
Problems of entering in foreign market:
● Difference in language and culture
● lack of market knowledge
● Economic differences
● High transport costs
● Social differences
● Difference in legal controls to protect consumers
How to overcome these problems:
1. Joint venture- an agreement between two or more businesses to work together on a
project.
Advantages and disadvantages given in chapter 4
2. Licensing- where business gives permission for another company in the new market
being entered to produce the branded or ‘patented’ products under license
Advantages● No need of transportation
● Saves time and transportation costs
Disadvantages● Quality problems
● License has information about how to make the product, business could make a
better version.
3. International franchising- the owner of the business grants a license to another person
to use their identity and products.
Advantages and disadvantages given in chapter 4
4. Localising existing brands- common brand image for the business but adapted to local
tastes and culture, therefore, increasing sales.
Main limitations● May be less successful
● Expensive to change packaging
SECTION 4- operations management
CHAPTER 18- Production of Goods and Services
Production is the effective management of resources in producing goods and services.
The operations department in a firm overlooks the production process. They must:
● Use the resources in a cost-effective and efficient manner
● Manage inventory effectively
● Produce the required output to meet customer demands
● Meet the quality standards expected by customers
Productivity
Productivity is a measure of the efficiency of inputs used in the production process over a
period of time. It is the output measured against the inputs used to produce it. The formula is:
Productivity = Quantity of output / Quantity of inputs
Businesses often measure the labour productivity to see how efficient their employees are in
producing output.
Labour productivity = Output(over a given period of time) / Number of employees
Businesses look to increase productivity, as the output will increase per employee and so the
average costs of the production will fall. This way, they will be able to sell more while also being
able to lower prices.
Ways to increase productivity:
● Improving labour skills by training
● Introducing automation- use of machines- so that production is faster and error-free.
● Improve employee motivation
● Improved quality control and assurance reduces waste
● Improve inventory control
● Motivate employees more effectively
Benefits of increasing efficiency/productivity:
● Reduced inputs needed for the same output level
● Lower costs per unit
● Fewer workers may be needed, possibly leading to lower wage costs
● Higher wages might now be paid to workers, which increases motivation
INVENTORY MANAGEMENT
Firms can hold inventory of raw materials, goods that are not completed yet and finished unsold
goods. Finished good stocks are kept so that any unexpected rise in demand is fulfilled.
● When inventory gets to a certain point (reorder level), they will be reordered by the firm
to bring the level of inventory back up to the maximum level again. The business has to
reorder inventory before they go too low since the reorder supply will take time to arrive
at the firm.
● The time it takes for the reorder supply to arrive is known as lead time.
● If too high inventory is held, the costs of holding and maintaining it will be very high.
●
The buffer inventory level is the level of inventory the business should hold at the very
minimum to satisfy customer demand at all times. During the lead time the inventory will
have hit the buffer level and as reorder arrives, it will shoot back up to the maximum
level.
Lean production
Lean production is a term for those techniques used by businesses to cut down on waste and
therefore increase efficiency/productivity.
Seven types of wastages that can occur in a firm:Overproduction- producing goods before
they have been ordered by customers. This results in too much output and so high inventory
costs.
● Waiting- when goods are not being moved or processed in any way, then waste is
occurring.
● Transportation- moving goods around unnecessarily is simply wasting time. They also
risk damage during movement.
● Unnecessary inventory- too much inventory takes up valuable space and incurs costs.
● Motion- unnecessary moving about my employees and operation of machinery is a
waste of time and cost respectively.
● Over-processing- using complex machinery and equipment to perform simple tasks
may be unnecessary and is waste of time, effort and money.
● Defects- any fault in equipment can halt production and waste valuable time. Goods can
also turn out to be faulty and need to be fixed- taking up more money and time.
Benefits of lean production● Less storage of raw materials and components
● Quicker production of goods and services
● No need to repair defects or provide a replacement service for a dissatisfied customer
● Better use of equipment
● Cutting out some processes, which speeds up production
● Less money tied up in inventories
● Improved health and safety, leading to less time off work due to injury.
Lean production can be implemented by:
1. Kaizen
2. Just-in-time inventory control
3. Cell production
Kaizen
It is a japanese term meaning ‘continuous improvement’ through the elimination of waste. It
aims to increase efficiency and reduce wastage by getting workers to get together in small
groups and discuss problems and suggests solutions.
Advantages● Increased productivity
● Reduced amount of space needed for the production process
● Work-in-progress is reduced
Just-in-time inventory control
It is a production method that involves reducing or virtually eliminating the need to hold
inventories of raw materials or unsold inventories of the finished goods.
Advantages● Reduces the cost
● Warehouse space not required
● Finished product is sold quickly, so cash flows in quickly
Cell-production
Is where the product line is divided into separate cells, self-contained units (cells), each making
an identifiable part of the finished product, instead of having a flow or mass production line.
Methods of production
1. Job production- is where a single product is made at a time.
Advantages● Most suitable for personal services
● Product meets exacts requirements of the customer
● Workers often have varied jobs
● More varied works, increases motivation of the workers, giving more job
satisfaction
● It is flexible and often used for high quality products, higher prices can be
charged
Disadvantages● Skill labour is needed, raises costs
● Costs are higher because it is often labour intensive
● Production often takes a longer time
● Products are specially made to order, any errors can be expensive to correct
● Materials may have to be specially purchased leading to higher cost
2. Batch production- is where a quantity of one product is made, then a quantity of
another of product will be produced. Similar products are made into batches, a certain
number of products are produced.
Advantages● Flexible way of working and production can be easily changed from one product
to another
● Gives variety to workers
● More variety means more consumer choice
● Even if one product’s machinery breaks down, other products can be still made
Disadvantages● Can be expensive since finished and semi-finished goods will need moving about
to the next production stage
● Machines have to be reset between production batches, which means there is a
delay in production and output is lost
●
Warehouse space will be needed for inventories and raw materials, components
and finished batches of goods, this is costly.
3. Flow production- this is when large quantities of products are produced in a continuous
process. Sometimes referred to as mass production because of the large production of a
standardised product.
Advantages● High output of standardised products
● Costs are low in the long run and so prices can be kept low
● Can benefit from economies of scale in purchasing
● Automated production lines can run 24*7
● Goods are produced quickly and cheaply
● Capital-intensive production, so reduced labour costs and increases efficiency
Disadvantages● Boring system for workers, leads to low job satisfaction
● Lots of raw materials and finished goods need to be held in inventory, expensive
● Capital cost of setting up the flow line is very high
● If one machinery breaks down, entire production will be affected
Factors that affect which production method to use● The nature of the product
● The size of the market
● The nature of the demand
● The size of the business
Technology and production
● Automation- equipment used in factory is controlled by a computer to carry out
mechanical processes
● Mechanization- production is done by machines but operated by people
● CAD (computer aided designing)- a computer system that draws items being designed
more quickly
● CAM (computer aided manufacturing)- when computer monitor the production
process and control machines
● CIM (computer integrated manufacturing)- is the total integration of computers aided
design. Directly linked to CAD and CAM.
● EPOS (electron point-of-sale)- this is used at checkout where the operator scans the
barcode of each item individually. The price and the description of the item is displayed
on the checkout monitor.
● EFTPOS (electronic funds transfer at point of sale)- this is where the electronic cash
registers are connected to the retailers main computer and also to banks over a wide
area of computer networks. When the customer swipes the debit card, information of the
bank details is read and the amount is debited from the customer bank account after
entering the security pin.
●
Contactless payment- easy and secure way to make purchases with your electronic
devices. Small amounts can be directly debited, large amounts require pins, fingerprints,
etc.
Advantages of technology in production● Greater productivity
● Greater job satisfaction
● Better quality products
● Quicker communication and less paperwork
● More accurate demand levels are forecast since computer monitor inventory levels
● New products can be introduced as new production methods are introduced
Disadvantages of technology in production● Unemployment rises as machines and computers takes place
● Expensive to set up
● New technology quickly becomes outdated
● Employees may take time to adjust to new technology or even resist it as their work
practices change.
CHAPTER 19- Costs, Scale of Production and Break-even Analysis
Costs
There are two types of costs1. Fixed costs- are costs which do not vary in the short-run with the number of items sold
or produced. They are incurred even when the output is 0 and will remain in the short
run. In the long run, they may change, they are called overhead costs.
2. Variable costs- are costs which vary directly with the number of items sold or produced.
Total cost = fixed costs + variable costs
Total cost = average cost per unit x output
Average cost = total cost / total output
Business costs
● Needed to be calculate profit and loss
● Fixed costs do not vary with changes in output
● Help managers to make decisions
● Average cost = total cost / total output
● Variable cost so vary directly with changes in output
● Total cost = fixed costs + variable costs
While a business starts to expand and increases its size it experiences economies of scale
and as they expand even more, at a point they start to experience diseconomies of scale.
ECONOMIES OF SCALE
Economies of scale are the factors that lead to a reduction in average costs as a business
increases in size.
There are 5 economies of scale1. Purchasing economies- for large output, a large amount of components have to be
bought. This will give them some bulk-buying discounts that reduce costs.
2. Marketing economies- larger businesses will be able to afford its own vehicles to
distribute goods and advertise on paper and TV. They can cut down on marketing labour
costs. The advertising rates costs also do not rise as much as the size of the
advertisement ordered by the business. Average costs will thus reduce.
3. Financial economies- bank managers will be more willing to lend money to large
businesses as they are more likely to be able to pay off the loan than small businesses.
Thus they will charge a low rate of interest on their borrowing, reducing average costs.
4. Managerial economies- large businesses may be able to afford to hire specialist
managers who are very efficient and can reduce the business costs.
5. Technical economies- large businesses can afford to buy large machinery such as flow
production lines that can produce a large output and reduce average costs.
DISECONOMIES OF SCALE
Diseconomies of scale are the factors that lead to an increase in average costs as a business
grows beyond a certain size. They are1. Poor communication- as business grows large, more departments and managers and
employees will be added and communication can get difficult. Messages may be
inaccurate and slow to receive, leading to lower efficiency and higher costs in the
business.
2. Low morale- when there are lots of workers in the business and they have non-contact
with their senior managers, the workers may feel unimportant and not valued by
management. This would lead to inefficiency and higher average costs.
3. Slow decision making- as a business grows larger, its chain of command will get
longer. Communication will get slow and so any decision making will also take time,
since all the employees and departments may need to be consulted with.
Businesses are now dividing themselves into small units so that they can control themselves
and communicate more effectively, to avoid any diseconomies from arising.
Break-even
Break even level of output is the quantity that must be produced/sold for total revenue to
equal total costs. It indicates to the owner or manager of the business the minimum level of
output that must be sold so that total costs are covered. Break even output is the output at
which revenue equals total costs.
A break-even chart is the graph which shows how costs and revenues of a business change
with sales. They show the level of sales the business must make in order to break even.
The revenue of a business is the income during a period of time from the sale of goods and
services
Total revenue = quantity sold x price
The break-even graph tells us the break-even point, it is where total costs and total revenue
cross. Below the point defines that businesses are running in losses, above that is the profits of
the business.
Advantages of break-even charts● Managers can look at the graph and find out the profit or loss at each level of output.
● Managers can change the costs and revenue and redraw the graph to see how that
would affect profit and loss.
● The break-even chart can also help calculate the safety-margin- the amount by which
sales exceed break-even point.
Margin of safety (units) = units being produced and sold -- break-even output
Limitations of break-even charts● They are constructed assuming that all units being produced are sold. In practice, there
is always inventory of finished goods. Not everything produced is sold off.
● Fixed costs may not always be fixed if the scale of production changes. If more output
is to be produced, an additional factory or machinery may be needed that increases
fixed costs.
● Break-even charts assume that costs can always be drawn using straight lines.
Costs may increase or decrease due to various reasons. If more output is produced,
workers may be given an overtime wage that increases the variable cost per unit and
causes the variable cost line to steep upwards.
Break-even can also be calculated without drawing a chart. A formula can be used:
Break-even level of production = total fixed costs / contribution per unit
Contribution = selling price -- variable cost per unit
CHAPTER 20- Achieving Quality Production
Quality means to produce a good or a service which meets customer expectations. The
products should be free of faults or defects. Quality is important because it:
● Establishes a brand image
● Build brand loyalty
● Maintains good reputation
● Increase sales
● Attract new customers
If there is no quality, the firm will:
● Lose customers to other brands
● Have to replace faulty products and repeat poor service, increasing costs
● Bad reputation leading to low sales and profits
There are three methods a business can implement to achieve quality:1. Quality control- is the checking for quality at the end of the production process, whether
it is the production of a good or a service. It uses quality inspectors as a way of finding
any faults.
Advantages● Eliminates the fault or defect before the customer receivers it, so better
customer satisfaction
● Not much training required for conducting this quality check
Disadvantages● Still expensive to hire employees to check for quality
● Quality control may find faults or errors but doesn’t find out why the fault has
occurred, so its difficult to solve the problem
● If product has to be replaced and reworked, then it is very expensive for the firm
2. Quality assurance- is the checking for quality throughout the production process of a
good or service.
Advantages● Eliminates the fault or defect before the customer receivers it, so better
customer satisfaction
● Since each stage of production is checked for quality, faults and errors can be
easily identified and solved
● Products don’t have to be scrapped or reworked as often, so less expensive
than quality control.
Disadvantages● Expensive to carry out
● How well will employees follow quality standards?
3. Total quality management (TQM)- is the continuous improvements of products and
processes by focusing on quality at each and every stage of production.
It also involves quality circles and like Kaizen, workers come together and discuss issues
and solutions, to reduce waste and ensure zero defects.
Advantages● Quality is built into every part of the production process and becomes central to
the workers principles
● Eliminates all faults before the product gets to the final customer
● No customer complaints and so improved brand image
● Products don’t have to be scrapped or reworked, so lesser costs
● Eliminates the fault or defect before the customer receivers it, so better
customer satisfaction
● Waste is removed and efficiency is improved
Disadvantages● Expensive to train all employees
● Relies on all employees following TQM- how well are they motivated to follow
the procedures?
How can customers be assured of the quality of a product or service?
They can look for a quality mark on the product like ISO. the business with these quality marks
would have followed certain quality procedures to keep the quality mark.
CHAPTER 21- Location decisions
Owners need to decide a location for their firm to operate in, at the time of setting up, when it
needs to expand operations, and when the current location proves unsatisfactory for some
reason. Location is important because it can affect a firm's costs, profits, efficiency and the
market base it reached out to.
Factors that affect the location decisions of a manufacturing firm● Production method- when job production is used, the business will operate on a small
scale, so the nearness to components/raw materials won’t be that important.
● Market- if the product is consumer good and perishable, the factories need to be close
to the markets to sell out quickly before it perishes.
● Raw materials/components- the factories may need to be located close to where raw
materials can be acquired, especially if the raw material is to be processed while still
fresh, like fruits.
● External economies- the business may locate near other firms that support the
business by providing services. Eg- install and maintain factory equipment
● Availability of labour- businesses will need to locate near areas where they can get
workers of the skills they need in the factory. If lots of unskilled workers are needed in
the factories firms locate in areas of high unemployment. Wage rates also vary by
location and firms will want to set up in locations where wage rates are low.
● Government influence- the government sometimes gives incentives and grants to firms
that set up in low-development, rural and high-unemployment areas. There may also be
government rules and restrictions in setting up.
● Transport and communication infrastructure- the factories need to be located near
areas where there are good road/rail/port/air transport systems. If goods are to be
exported, it needs to be set up near ports.
● Power and water supply- factories need water and power to operate and a reliable and
steady supply of both should be ensured by setting up in these areas where they both
are available.
● Climate- not the most important factor but can influence certain sectors eg- the dry
climate ins silicon valley aids the manufacturing of silicon chips
● Owner personal preference
Factors that affect the location decision of a service sector firm:
● Customers- service-sector businesses that have direct contact with customers need to
locate in customer-accessible and convenient places.
● Technology- today, with increasing use of IT to shop and make payments, customers do
not need direct access to services and proximity to the market/consumer is not a very
important factor in location decisions. They locate away from customers in places where
there are low rent and wage rates.
● Climate- tourism services need to be located in places of good climate
● Nearness to other businesses- some services serve the needs of large companies,
such as, firm equipment servicing and so they need to be very close to such businesses,
●
●
businesses may set up where close competitors are to watch them/ snatch away their
customers.
rent/taxes
Owners personal preference
Factors that affect the location decisions of a retailing firm● Shoppers
● Nearby shops- watch and snatch others customers
● Customer parking availability
● Availability of suitable vacant premises- there needs to be a vacant premise to set up
a business and can help the business to expand in future.
● rent/taxes
● Access to delivery vehicles
● Security
Why do businesses locate in different countries?
● New market overseas
● Cheaper or new raw materials available in another country
● Chear and/or skilled workers are available
● Rent or taxes are less
● Availability of government grants and other incentives
● Avoid trade barriers and tariffs, when exporting goods to other countries, there will be
some tariff, and regulations to get by. In order to get rid of this, firms start operating in
the country itself, since there is no exporting/importing involved now.
The role of legal controls on location decision
Government influence location decision:● To encourage businesses to set up and expand in the areas of low unemployment.
Grants and subsidies are given to businesses to set up in that area.
● To discourage firms from setting in areas that are overcrowded or renowned for
natural beauty. Planning restrictions can be put into place to do so.
SECTION 5- FInancial Information and Financial
Decisions
CHAPTER 22- Business finance: needs and sources
Finance is the money required in the business.
Finance is needed to:● Start a business
● Expand an existing business
● Additional working capital
What do finance departments do?
● Recording all financial transactions
● Preparing final accounts
● Producing accounting information for managers
● Forecasting cash flows
● Making important financial decisions
To start a new business, entrepreneurs purchase land and other items that are called fixed
assets which are important for the business. Also, they purchase some other items and labours
for the business known as current assets. All the finance required to start a business is called
start-up capital.
Start-up capital is the finance needed by a new business to pay for essential fixed assets and
current assets before it can start trading.
After setting up their business, the entrepreneur expands their business by the revenue
generated by the firm. The current and fixed assets are also increased in order to expand.
As businesses operate on a daily basis, they need finance for their day-to-day expenses, this
finance required is called working capital. It is described as the ‘life blood’ of a business.
Working capital is the finance needed by a business to pay its day-to-day costs.
Business needs finance to pay for either capital expenditure or revenue expenditure.
● Capital expenditure is money spent on non-current assets which will last for more than
one year.
● Revenue expenditure is the money spent on day-to-day expenses which do not involve
the purchase of a long-term asset, for example wage or rent.
Sources of finance
Internal finance- is obtained from within the business itself.
1. Retained profit- this is the profit kept in the business after the owners have taken their
share of the profits.
Advantages
● Does not have to be repaid
● No interest to pay
Disadvantages
● A new business will not have retained profit
● Profits may be too low to finance
● Keeping more profits to be used for capital may reduce owners profits and they
may resist the decision.
2. Sale of existing assets: assets that business doesn’t need anymore.
Advantages
● Makes a better use of the capitals tied up in a business
● Doesn’t make debt of the business like loans
Disadvantages
● Surplus assets will not be available with the business
● Takes time to sell the asset and may not receive the expected amount of the
asset
3. Sale of inventories: sale of finished goods or unwanted components in inventory.
Advantages
● Reduces cost of inventory holding
Disadvantages
● If not enough inventory is kept, unexpected increased demand from the customer
might not be fulfilled.
4. Owner’s savings: for a sole trader and partnership, since they are unincorporated
(owners and business are not separate), any finance the owner directly invests from his
savings will be internal finance.
Advantages
● Will be available for the firm quickly
● No interest is required to be paid
Disadvantages
● Increases the risk taken by the owners
External finance- is obtained from sources outside of and separate from the business.
1. Issues of shares- only for limited company.
Advantages
● A permanent source of capital, no need to repay the money to the shareholders
● No interest is to be paid
Disadvantages
● Dividends have to be paid to the shareholders
● If too many shares are bought, the ownership of the business will change hands.
(ownership is decided on the basis of who has the highest percentage of the
shares)
2. Bank loans- money borrowed from the bank
Advantages
● Quick to arrange a loan
● Can be for varying of time
● Large companies can get loans for a very low rate of interest
3.
4.
5.
6.
7.
Disadvantages
● Need to pay interest of the loan periodically
● It has to be repaid at a specific length of time
● Need to give bank collateral security (the bank will ask for some valued asset,
usually some part of business, as a security they can use when the business is
not able to repay the loan in future. For a sole trader, a house could be used as
collateral. Loans are a risk of losing highly valued assets.
Debenture issues: are long-term certificates issued by the companies. Like shares,
debenture will be issued, people will buy them and business will raise finance. But this
finance acts like a loan- it will have to be repaid after a specific period of time and
interest will have to be paid for it.
Advantages
● Can be used to raise long-term finance
Disadvantages
● Interest has to be paid and needs to be repaid
Debt factoring: a debtor is a customer who owes a business money for goods bought.
Debt factors are specialist agencies that ‘buy’ claims on debtors of businesses for
immediate cash.
Advantages
● Immediate cash is made available to the business
● The risk of collecting the debt becomes the factor’s and not the business’s.
Disadvantages
● Business doesn’t receive 100% of the value of its debts
Grants and subsidies: government agencies and external sources can give the
business grant or subsidy.
Advantages
● Do not have to be repaid, its free
Disadvantages
● There are usually certain conditions to fulfil to get a grant
Micro-finance: special institutes are set up in poor-developed countries where
financially-lacking people are looking to start or expand small businesses and can get
small sums of money. They provide all sorts of financial help.
It is basically providing financial services including small loans to the poor people who
are not served by traditional banks.
Crowdfunding- is finding a project or venture by raising money from a large number of
people who each contribute a relatively small amount, typically via the internet.
Advantages
● No initial fees. If finance is raised, the platform will charge a percentage of that.
● Allows public reaction to the new business venture.
● Can be a fast way to raise substantial (enough) sums.
● Often used by entrepreneurs when other traditional sources are not available.
Disadvantages
● Crowdfunding platforms may reject an entrepreneur’s proposal if it is not well
thought
● If the total amount is not raised, the finance that has been promised will have to
be repaid
● Media interest and publicity need to be generated to increase the chance of
success.
● Publication the new business ideal or product on the crowdfunding platform could
allow competitors to steal the idea and reach the market first with a similar
product.
SHORT-TERM FINANCE
This provides the working capital needed by businesses for day-to-day operations. Shortages of
cash in the short term can be overcome in three main ways:
1. Overdrafts- they are arranged by a bank
Advantages
● Business could use more amount than his bank balance
● Could use this finance for his expenses
● The overdraft will vary each month with the needs of the business, it is said to be
‘flexible’ form of borrowing.
● Interest will paid on the amount overdrawn
● Overdraft can be cheaper than short-term loans
Disadvantages
● Interest rates are variable
● Bank can ask for the overdraft to be repaid at a very short notice
2. Trade credit
This is when a business delays paying its suppliers, which leaves the business in a
better cash position.
Advantages
● Almost interest-free loan to business for length of the time that payment is
delayed
Disadvantages
● Supplier may refuse to give discounts or even deny to supply more goods if
payment is not made quickly
3. Factoring of debts
LONG-TERM FINANCE
This is the finance that is available for more than a year and some time for many years
1. Loans
2. Debentures
3. Issues of shares
4. Hire purchase: allows the business to buy a fixed asset over a long period of time with
monthly payments which include an interest charge. This is not a method to raise capital
but gives the business time to raise capital.
Advantages:
● Business does not have to find a large cash sum to purchase the asset.
Disadvantages
● A cash deposit is paid at the start of period
● Interest payments can be quite high
5. Leasing: it is an asset that allows the business to use the asset without having to
purchase it. Monthly leasing payments are made. The business could decide to
purchase the asset at the end of the leasing period. Some businesses decide to sell off
some fixed assets for cash and lease them back from a leasing company. This is called
sale and leaseback.
Advantages
● Business does not have to find a large cash sum to purchase the asset to start
with.
● The care and maintenance of the asset are carried out by the leasing company
Disadvantages
● The total cost of the leasing charges will be higher than purchasing the asset.
Factors that affect choice of source of finance
● Purpose
● Time period
● Amount needed
● Legal form and size
● Control
● Risk-gearing
Finance from banks and shareholders
Chances of a bank willing to lend a business finance is higher when:
● The cash flow forecast which shows why the finance is needed and how it will be used.
● An income statement for the last period- and a forecast one for the next
These should show the chances of the business making a profit in future.
● Details of existing loans and sources of finance being used
● Evidence that ‘security’ or collateral is available to reduce the bank’s risk if it lends.
● A business plan to explain clearly what the business hopes to achieve in the future and
why the finance is important to these plans.
Shareholders are more likely to buy additional shares when:
● The company’s share price has been increasing
● Dividends are high
● Other companies do not seem such a good investment
● The company has a good reputation and has plans for future growth.
CHAPTER 23- Cash flow forecasting and Working capital
Why is cash important to a business?
Will face cash flow problems. If a business has too little or runs out of cash then business will
face major problems, such as:● Being unable to pay workers, suppliers, etc
● Production of goods and services will stop as workers won’t be paid and supplier would
not be paid for goods
● The business may be forced into ‘liquidation’- selling up everything it owns to pay its
debts.
Cash flow
Cash flow of a business is the cash inflows and outflows over a period of time.
Net cash inflow is the difference, each month, between inflows and outflows
Closing cash balance is the amount of cash held by the business at the end of each month.
This becomes next month’s opening cash balance
Opening cash balance is the amount of cash held by the business at the start of the business
Cash inflows are the sums of money received by a business during a period of time.
How does cash inflow in a business?
● Sale of products for cash
● Payments made by debtor
● Borrowing money from external source
● Sale of assets of a business
● Investors
Cash outflows are the sums of money paid out by a business during a period of time.
How can cash outflow of a business?
● Purchasing goods and materials
● Paying wages, salaries and other expenses in cash
● Purchasing fixed assets
● Repaying loans
● By paying creditors of a business
Cash flow cycle
A cash flow cycle shows the stages between paying out cash for labour, materials, and so on,
and receiving cash from the sale of goods.
Cash flow is not the same as profit!
Profit is the surplus after total costs have been subtracted from the revenue.
Can profitable business run out of cash?
Yes, it is possible and this is called insolvency.
It is possible by:● Allowing customers too long credit period
● Purchasing too many fixed assets
● Expanding too quickly and keeping inventory levels high. This means cash is used to
pay for higher inventory levels. This is called overtrading.
The importance of cash flow forecasts
A cash flow forecast is an estimate of future cash inflows and outflows of a business, usually
on a month-by-month basis. This then shows the expected cash balance at the end of each
month.
A cash flow forecast can be used to tell the manager:● How much cash is available for paying bills, repaying loans or for buying fixed assets
● How much cash the bank might need to lend to the business in order to avoid insolvency
● Whether the business is holding too much cash which could be put to a more profitable
use
Uses of cash flow forecast
● Starting up a business
● Running an existing business
● Keeping the bank manager informed
● Managing cash flow
How can a short-term cash flow problem be overcomed?
There are several ways like● Increasing bank loans
Advantages
● Will inject more cash in business hence increasing cash inflows
Disadvantages
● Interest must be paid, will reduce profits
● Loans have to be repaid eventually hence increasing cash outflow
● Delaying payments to debtors
Advantages
○ Cash outflow will decrease in the short term
Disadvantages
○ Suppliers could refuse to supply
○ Suppliers could offer low discounts for late payments
● Asking debtors to pay more quickly - or insisting only cash sales
Advantages
● Cash inflows will increase in the short term
Disadvantages
○ Customers may purchase from another business that still offers them time to pay
● Delay or cancel purchases of capital equipment
Advantages
● Cash outflows for purchase of equipment will decrease
Disadvantages
● The long-term efficiency of the business could decrease without up-to-date
payment
● Attracting new investors
● Cutting costs and increasing efficiency
● Developing new products that will attract more customers
The concept and importance of working capital
The term working capital is the capital available to a business in the short term to pay for
day-to-day expenses.
Working capital = current assets - current liabilities
Working capital may be held in different forms:
● Cash is needed to pay day-to-day costs and buy inventories
● The value of firm’s debtors is related to volume of production and sales. To achieve
higher sales, there may be a need to offer additional credit facilities.
● The value of inventories is also a significant part of working capital. Not having enough
inventories may cause production to stop. On the other hand, a very high inventory
level may result in high opportunity costs.
CHAPTER 24- Income Statements
Accounts are the financial records of a firm’s transactions.
Accountants are the qualified people who have responsibility for keeping accurate accounts
and for producing the final accounts.
Final accounts are produced at the end of the financial year and give details of the profit or
loss made over the year and the worth of the business.
How a profit is made?
Profit is an objective for most businesses. It can be calculated by:PROFIT = Revenue - cost of making products
It introduces the idea that profit is a ‘surplus’ that remains after business costs have been
subtracted. If these costs exceed the revenue, then the business has made a loss. The profit
formula also suggests that this suggests that this is surplus can be increased by:
1. Increasing revenue by more than costs
2. Reducing the cost of making products
3. A combination of 1 and 2
Why profit is important to private sector businesses
● Reward for enterprise
● Reward for risk-taking
● Source of finance
● Indicator of success
An income statement is a financial statement that records the income of a business and all
costs incurred to earn that income over a period of time. It is also known as a profit and loss
account.
The revenue is the income to a business during a period of time from the sale of goods or
services.
The costs of sales is the cost of producing or buying in the goods actually sold by the business
during a time period.
A gross profit is made when revenue is greater than the cost of sales.
GROSS PROFIT = REVENUE - COST OF SALES
Note:
● Gross profit does not make any allowance for overhead costs or expenses
● Cost of sales is not necessarily the same as the total value of goods bought by the
business.
A trading account shows how the gross profit of a business is calculated
Net profit is the profit made by a business after all costs have been deducted from revenue. It is
calculated by subtracting overhead costs over time.
Profit after tax is= net profit - taxes
Depreciation is the fall in the value of a fixed asset over time.
Retained profit is the net profit reinvested back into a company, after deducting tax and
payments to owners, such as dividends.
CHAPTER 25- Statement of Financial position
The statement of financial position shows the value of a business’s assets and liabilities at a
particular time.
Assets
Assets are those items of value which are owned by the business. They may be fixed assets or
current assets.
● Fixed assets- owned by a business for more than one year
● Current assets- are owned by a business and used in a short period of time.
● Intangible- copyrights, patent
Liabilities
Liabilities are debts owed by the business. They may be non-current liabilities or current
liabilities.
● Non-current liabilities- are long term debts owed by the business, repaid over more
than one year.
● Current liabilities- are short term debts owed by the business, repaid in less than one
year.
WORKING CAPITAL = current assets - current liabilities
Shareholder’s equity is the total amount of money invested in the company by shareholders.
This will include both the share capital (invested directly by shareholders) and reserves
(retained earnings reserve, general reserve, etc)
Shareholders can see if their stake in the business has risen or fallen by looking at the total
equity figure on the balance sheet.
SHAREHOLDERS EQUITY = Total Assets - Total Liabilities
CAPITAL EMPLOYED = Shareholders funds + Non-current liabilities
This is because non-current liabilities like loans are also used for permanent investment in a
company.
Uses of statement of financial position
● When the current assets subtotal is compared to the current liabilities subtotal, investors
can estimate whether a firm has access to sufficient funds in the short-term to pay off its
short term obligations.
● One can compare the total amount of debt (liabilities) to the total amount of equity listed
on the balance sheet, to see if the resulting debt-equity ratio indicates a dangerously
high level of borrowing. This information is especially useful for lenders and creditors,
(especially banks) who want to know if the firm will be able to pay back its debt
● Investors like to examine the amount of cash on the balance sheet to see if there is
enough available to pay them a dividend
● Managers can examine its balance sheet to see if there are any assets that could
potentially be sold off without harming the underlying business. For example, they can
compare the reported inventory assets to the sales to derive an inventory turnover level,
which can indicate the presence of excess inventory, so they will sell off the excess
inventory to raise finance
CHAPTER 26- Analysis of Accounts
The data contained in the financial statements are used to make some useful observations
about the performance and financial strength of the business. This is the analysis of the
accounts of a business. To do so, ratio analysis is employed.
With analysis of accounts we get to know:● Performance compared to last year
● Performance compared to other businesses
Capital employed is shareholders’ equity plus non-current liabilities and is the total long-term
and permanent capital invested in a business.
Ratio analysis
● Profitability ratios- Profitability is the measurement of the profit made relative to either
the value of sales achieved or the capital invested in the business.
○ Return on capital employed (ROCE)
NET PROFIT / CAPITAL EMPLOYED X 100
○ Gross profit margin
GROSS PROFIT / REVENUE X 100
○ Net profit margin or profit margin
NET PROFIT / REVENUE X 100
● Liquidity ratios- Liquidity is the ability of a business to pay back its short-term debts.
Liquid means that assets are not easily convertible into cash.
○ Current ratio
CURRENT ASSETS / CURRENT LIABILITIES
○ Acid test ratio
CURRENT ASSETS - INVENTORIES / CURRENT LIABILITIES
NOT MUCH IMPORTANT- copy pasted
● Managers: they will use the accounts to help them keep control over the performance of
each product or each division since they can see which products are profitably
performing and which are not.
○ This will allow them to make better decisions. If for example, product A has a
good gross profit margin of 35% but its net profit margin is only 5%, this means
that the business has very high expenses that is causing the huge difference
between the two ratios. They will try to reduce expenses in the coming year. In
the case of liquidity, if both ratios are very low, they will try to pay off current
liabilities to improve the ratios.
○ Ratios can be compared with other firms in the industry/competitors and also with
previous years to see how they’re doing. Businesses will definitely want to
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perform better than their rivals to attract shareholders to invest in their business
and to stay competitive in the market. Businesses will also try to improve their
profitability and liquidity positions each year.
Shareholders: since they are the owners of a limited company, it is a legal requirement
that they be presented with the financial accounts of the company. From the income
statements and the profitability ratios, especially the ROCE, existing shareholders and
potential investors can see whether they should invest in the business by buying shares.
A higher profitability, the higher the chance of getting dividends. They will also compare
the ratios with other companies and with previous years to take the most profitable
decision. The balance sheet will tell shareholders whether the business was worth more
at the end of the year than at the beginning of the year, and the liquidity ratios will be
used to ascertain how risky it will be to invest in the company- they won’t want to invest
in businesses with serious liquidity problems.
Creditors: The balance sheet and liquidity ratios will tell creditors (suppliers) the cash
position and debts of the business. They will only be ready to supply to the business if
they will be able to pay them. If there are liquidity problems, they won’t supply the
business as it is risky for them.
Banks: Similar to how suppliers use accounts, they will look at how risky it is to lend to
the business. They will only lend to profitable and liquid firms.
Government: the government and tax officials will look at the profits of the company to fix
a tax rate and to see if the business is profitable and liquid enough to continue
operations and thus if the worker’s jobs will be protected.
Workers and trade unions: they will want to see if the business’ future is secure or not. If
the business is continuously running a loss and is in risk of insolvency (not being liquid),
it may shut down operations and workers will lose their jobs!
Other businesses: managers of competing companies may want to compare their
performance too or may want to take over the business and want to see if the takeover
will be beneficial.
Limitations of using accounts and ratio analysis
● Managers will have access to all accounts data- external users will only be able to
access published accounts.
● Ratios are based on past accounting data and may not indicate how a business will
perform in the future.
● Accounting will be affected by inflation by time
● Different companies may use slightly different accounting methods. These different
methods could lead to different ratio results, therefore making comparisons difficult.
Uses of business accounts
● Managers use them for taking decisions
● Managers use them for controlling the operations of a business
● Shareholders, creditors, government use them to check on company’s performance
● Other companies use them for comparing performance
SECTION 6- External Influence on Business
Issues
CHAPTER 27- Economic Issues
The main stages of business cycle
Economic growth cannot be achieved steadily every year, there are often years when the
economy does not grow at all or when the gross domestic product (GDP) actually falls.
A business cycle includes:● Growth
● Boom
● Recession
● Slump
A recession is when there is a period of falling GDP.
Impact on businesses of changes in employment levels, inflation and GDP
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Changes in employment levels will affect the ability of the business to recruit new
employees and also the incomes of customers. If unemployment goes up, then it may be
easier to recruit employees as there are more people to choose from.
Rising inflation may result in business costs increasing. Price of products may have to be
increased, leading to falling sales for the business
Increasing GDP means that the economy is growing. Generally businesses will benefit
from increasing sales as more people have jobs and have more income to spend buying
products.
Government economic objectives
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Low inflation- inflation is the increase in the average price level of goods and services
over time. Low inflation is an important objective. When prices rise rapidly it can be
serious for the whole country. Inflation will cause:○ Real incomes will fall
○ Jobs in the country will be lost
○ Living standards likely to fall
Low unemployment- unemployment exists when people who are willing and able to
work cannot find a job. Unemployment causes:○ Total level of output in the country will lower
○ Government pays unemployment benefits to those without jobs. A high level of
unemployment will cost the government a great deal of money.
Economic growth- is when a country’s GDP increases- more goods and services are
produced than in the previous year. When a country experiences economic growth, the
standard of living increases. No economic growth causes:○ Unemployment
○ Average standard of living
○
Businesses will not expand their business as people will have less money to
spend on the products they make.
● Balance of payments- it records the difference between a country’s exports and
imports. Imports are goods and services bought in by one country from other countries.
Exports are goods and services sold from one country to other countries. If a country's
imports are greater than the value of exports then it has a balance of payments
deficit. This could result in:○ Country could run out of foreign currencies and it may have to borrow from
abroad
○ Exchange rate will be likely to fall. This is called exchange rate depreciation.
Exchange rate is the price of the currency in terms of another.
Exchange rate depreciation is the fall in the value of a currency compared with other
countries.
Government economic policies
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Fiscal policy- taxes and government spending
Monetary policy- interest rates
Supply-side policies
FISCAL POLICY
Fiscal policy is any change by the government in tax rates or public sector spending. It is a
budgetary policy as it manages the government expenditure and revenue.
● Direct tax- are paid directly from incomes.
● Income tax- it is the tax on people’s incomes. Income tax is progressive. Income tax
reduces people’s disposable income.
● Corporation tax- tax on profits made by a business. This will cause:○ Lower profits of business
○ Lower profits for owners.
○ Share prices could fall
● Indirect taxes- such as VAT, are added to the prices of the products we buy. Increasing
the prices of the goods. Will cause:○ Price of goods will rise
○ Rise in prices, workers will demand more wages
● Import tariffs and quotas- import tariff is a tax on an imported good.. Imported quota
is a physical limit on the quantity of a product that can be imported. Reduction in import
tariffs will cause:○ Businesses will benefit if they are competing with imported goods
○ Businesses will have higher cost if they import raw materials or components for
their own factories.
○ Other countries could also take action and reduce import tariffs. This is called
retaliation.
● Changes in government spending- good decisions can have a great impact on certain
businesses. Eg merit goods and infrastructure
MONETARY POLICY
Monetary policy is the decisions on the money supply, the rate of interest and the exchange
rate taken to influence aggregate demand.
● Money supply
○ Printing notes
○ buying/selling of government bonds
○ Restrictions of lending loans
● Changes in rate of interest- rise in interest will decrease the spending power of the
consumers. Higher interest rate will cause:○ Firms need to pay more money as interest to banks
○ Managers thinking to borrow money to expand business might get delayed.
○ Expensive items’ demand will go down
○ Will encourage foreign banks to come in the country and so they could earn profit
from high interest rates
SUPPLY-SIDE POLICIES
Supply-side policies try to increase the competitiveness of industries in an economy against
those from other countries. Policies to make the economy more efficient.
● Improving education and training
● Lowering direct taxes and increasing incentives
● Deregulation
● Privatisation
● Labour market reforms
● Subsidies
CHAPTER 28- Environmental and Ethical issues
Business’ impact on environment
Social responsibility is when a business decision benefits stakeholders, for eg- protecting
environment
Environment is our natural world including air, water, etc
This is very important when coming to environmental issues. Businesses can pollute the air by
releasing smoke and poisonous gases, pollute water bodies around it by releasing waste and
chemicals into them, and damage the natural beauty of the place and so on. They cause global
warming. Global warming is a gradual increase in the overall temperature of the Earth’s
atmosphere, generally thought to be caused by increased levels of carbon dioxide, CFC’s, and
other pollutants in the atmosphere.
If a business damages the environment, then pressure groups could take action to harm the
business’s reputation and sales.
Pressure group is made up of people who want to change business decisions by taking action,
such as organising consumer boycotts.
EXTERNALITIES
A business decision and actions can have significant effects on stakeholders. These effects are
termed as externalities.
● Private costs- of an activity are the costs paid by a business or the consumer of the
product
● Private benefit- of an activity are the gains to a business or the consumer of the
product.
● External costs- are the costs paid for by the rest of society, other than the business, as
a result of business activity.
● External benefits- are the gains to the rest of society, other than the business, as a
result of business activity.
SOCIAL COST = external costs + private cost
SOCIAL BENEFIT = external benefits + private benefits
Sustainable development is development which does not put at risk the living standards of
future generations.
What can a business do?
● Use renewable energy
● Recycle waste
● Use fewer resources
● Develop environmentally friendly products and production methods
Environmental pressures
How and why a business might react to it?
● Consumers- bad publicity could be dangerous for a business. If a business is reported
for not protecting the environment, a large proportion of consumers will be against the
business. Will lead to fall in sales. To overcome, business needs to quickly change its
products and production methods.
● Pressure groups- are groups of people who act together to try to force businesses or
governments to adopt certain policies. They can take up action and harm businesses'
image and sales by consumer boycotting. A consumer boycott is when consumers
decide not to buy products from business that do not act in a socially responsible way.
Pressure group activity is likely to change business actions when:
○ Has popular public support and receives much media coverage
○ Consumer boycotts results in much reduced sales
○ Group is well organised and financed
Pressure group activity is unlikely to result in a change in business actions when:
○ When firm is doing unpopular but not illegal work
○ Cost to the business of changing its methods is more than possible costs of poor
image and lost sales
○ Business sells to other businesses rather than to consumers- public pressure will
be less
To overcome,
Government can make business activities illegal:
● Environmentally sensitive areas
● Dumping waste into river or sea
● Making products that cannot be easily recycled
Government can impose financial penalties on businesses, and can issue pollution permits,
wherein, there will be a limit to pollution by each business.
CHAPTER 29- Business and the International economy
GLOBALIZATION
Globalization is the term now widely used to describe increases in worldwide trade and
movement of people and capital between countries. The same goods and services are sold
across the globe, workers are finding it easier to find work by going abroad for work; money is
sent from and to countries anywhere.
Some reasons how globalization has occurred are:● Increasing number of free trade agreements
● Improved and cheaper transport
● Developing emerging countries
Advantages of globalisation
● Allows businesses to start selling in new foreign markets, increasing sales and profits
● Can open factories and other production units in other countries, which is possible
cheaper
● Import products from other countries and sell it to customers in domestic market- more
profitable and producing and selling products by themselves
Disadvantages of globalisation
● Increasing imports into the country from foreign competitors- now that foreign firms can
compete in other countries, it puts up competition for domestic firms. If these domestic
firms can’t compete with foreign goods’ cheap prices and high quality, they may be
forced down to close operations.
● Increasing investment by multinationals in home country- this could further add
competition in domestic market
● Employees may leave domestic firms if they don’t pay as well as foreign multinationals in
the country- businesses have to increase pay and conditions to recruit and retain
employees.
Looking from an economic point of view, globalisation brings consumers more choice and
lower price, they increase competition in the domestic market and encourage domestic firms to
be efficient.
Protectionism
It refers to when the government protects domestic firms from foreign competition using trade
barriers such as tariffs and quotas.
Imposing quota and tariffs will reduce the number of foreign goods in the domestic market and
will make them expensive to buy, respectively. This will reduce the competitiveness of the
foreign goods and make it easier for domestic firms to produce and sell their goods.
However, it reduces free trade and globalisation.
MULTINATIONAL COMPANIES (MNC’s)
Multinational businesses are firms with operations in more than 1 country.
Why do firms become multinational businesses?
● To produce goods with lower costs
● To extract raw materials for production
● To produce goods neared to the market to avoid transport costs
● To avoid trade barriers on imports
● To expand into different markets and spread their risks
● To remain competitive with rival firms
Advantages to country of MNCs setting up in their country
● More jobs created
● Increases GDP of the country
● Bring in new ideas and methods into the country
● As goods are produced in the country, imports will reduced and some products will be
exported
● MNCs will pay taxes, hence increasing government’s revenue
● More product choice for customers
Disadvantages to country of MNCs setting up in their country
● Jobs that are created are often for unskilled tasks
● Since MNCs benefit from EOS, local firms may be forced out of business, unable to
survive the competition
● Repatriation of profit can occur. The profit earned by MNCs could be sent back to the
home country and the government could not levy tax from them.
● As MNCs are large, they can influence the government and economy. Could threat the
government that if they don’t give grants, etc they will shut down their business and
unemploy everyone.
EXCHANGE RATES
It is the price of one currency in terms of another currency.
If the demand for currency 1 is greater than currency 2, then currency 1’s price will rise.
Depreciation of the exchange rate is when the exchange rate is worth less against other
currencies. Currency depreciation occurs when the value of a currency falls - it buys less of
another currency.
Cause:● Makes exports cheaper
● Imports become expensive
Appreciation of the exchange rate is when the exchange rate is worth more against other
currencies. Currency appreciation occurs when the value of a currency rises - it buys more of
another currency than before.
Cause:● Makes exports expensive
● Imports become cheaper
DEFINITIONS
UNIT 1
Ch-1 business activity
1. Need- A need is a good or service essential for living (example- water, food, shelter)
2. Want- A want is a good or service which people would like to have, but which is not
essential for living. People’s wants are unlimited.
3. Economic problem- The economic problem - there exist unlimited wants but limited
resources to produce the goods and services to satisfy those wants. This creates
scarcity.
4. Factors of production- Factors of production are the resources needed to produce
goods or services. There are four factors of production- land labour capital enterprise.
They are in limited supply.
5. Scarcity- Scarcity is the luck of sufficient products to fulfill the wants of the population.
6. Opportunity cost- Opportunity cost is the next best alternative given up by choosing
another item.
7. Specialisation- Specialisation occurs when people and businesses concentrate on what
they are best at.
8. Division of labour- Division of labour is when the production process is split up into
different parts and each worker performs one of these tasks. It is a form of specialisation.
9. Business- Businesses combine factors of production to make products (goods and
services) which satisfy people’s wants.
10. Added value- Added value is the difference between the selling price of a product and
the cost of bought-in materials and components.
Ch-2 Classification of businesses
1. Primary sector- The Primary sector of industry extracts and uses the natural resources
of Earth to produce raw materials used by other businesses.
2. Secondary sector- The secondary sector of industry manufactures goods using the raw
materials provided by the primary sector.
3. Tertiary sector- The tertiary sector of industry provides services to consumers and the
other sectors of industry.
4. De-industrialisation- De-industrialisation occurs when there is a decline in the
importance of the secondary, manufacturing sector of industry in a country.
5. Mixed economy- A mixed economy has both a private sector and a public (state) sector.
6. Capital- Capital is the money invested into a business by the owner
Ch-3 Enterprise, business growth and size
1. Entrepreneur- Entrepreneur is a person who organises, operates and takes the risk for
a new business venture.
2. Business plan- Business plan is a document containing the business objectives and
important details about the operations, finance and owners of the new business.
3. Capital employed- Capital employed is the total value of capital used in the business.
4. Internal growth- Internal growth occurs when a business expands its existing
operations.
5. External growth- External growth is when a business takes over or merges with another
business. It is often called integration as one business is integrated into another one.
6. Takeover- Takeover or acquisition is when one business buys out the owners of another
business, which then becomes part of the ‘predator’ business (the business which has
taken it over).
7. Merger- Merger is when owners of two businesses agree to join their businesses
together to make one business.
8. Horizontal integration- Horizontal integration is when one business merges with or
takes over another one in the same industry at the same stage of production.
9. Vertical integration- Vertical integration is when one business takes over or merges
with another one in the same industry but at a different stage of production. Vertical
integration can be forward or backward.
10. Conglomerate integration/diversification- It is when one business merges with or
takes over in a completely different industry.
Ch-4 types of business organisation
1. Sole trader- Sole trader is a business owned by one person
2. Limited liability- Limited liability means that the liability of shareholders in a company is
limited to only the amount they invested.
3. Unlimited liability- Unlimited liability means that the owners of a business can be held
responsible for the debts of the business they own. Their liability is not limited to the
investment they made in business.
4. Partnership- Partnership is a form of business in which two or more people agree to
jointly own a business.
5. Partnership agreement- A partnership agreement is the written and legal agreement
between business partners. It is not essential for partners to have such an agreement
but it is always recommended.
6. Unincorporated business- An unincorporated business is one that does not have a
separate legal identity. sole traders and partnerships are unincorporated businesses.
7. Incorporated business- Incorporated businesses are companies that have separate
legal status from their owners.
8. Shareholders- shareholders are the owners of a limited company. They buy shares
which represent part-ownership of the company.
9. Private limited companies- Private Limited companies are businesses owned by
shareholders but they cannot sell shares to the public.
10. Public limited companies- public limited companies are businesses owned by
shareholders but they can sell shares to the public and their shares are tradeable on the
stock exchange.
11. Annual general meeting- An Annual General Meeting is a legal requirement for all
companies. shareholders may attend and vote on who they want to be on the board of
directors for the coming year.
12. Dividends- evidence of payments made to shareholders from the profit ( after-tax ) of a
company. They are the return to shareholders for investing in the company.
13. Franchise- a franchise is a business based upon the use of the brand names,
promotional logos and trading methods of an existing successful business. the
franchisee buys the license to operate this business from the franchisor.
14. Joint venture- a joint venture is where two or more businesses start a new project
together, sharing capital, risks and profit.
15. Public corporation- a public corporation is a business in the public sector that is owned
and controlled by the government (state).
Ch-5 Business objectives and stakeholder objectives
1. Business objectives- Business objectives are the aims or targets that a business works
towards.
2. Profit- profit is total income of a business (revenue ) less total costs.
3. Market share- market share is the percentage of total market sales held by one brand
or business.
4. Social enterprise- a social enterprise has social objectives as well as aims to make a
profit to reinvest back into the business.
Unit- 2
Ch-6 Motivating employees
1. Motivation- Motivation is the reason why employees want to work hard and work
effectively for the business.
2. Wage- a wage is payment for work, usually paid weekly.
3. Time rate- time rate is the amount paid to an employee for one hour of work.
4. Piece rate- piece rate is an amount paid for each unit of output.
5. Salary- a salary is payment for work usually paid monthly
6. Bonus- a bonus is an additional amount of payment above basic pay as a
reward for good work.
7. Commission- commission is payment relating to the number of sales made.
8. Profit sharing- profit sharing is a system whereby a proportion of the company's
profit is paid out to employees.
9. Job satisfaction- job satisfaction is the enjoyment derived from feeling that you
have done a good job.
10. Job rotation- job rotation involves workers swapping around and doing each
specific task for only a limited time and then changing around again.
11. Job enrichment- job enrichment involves looking at jobs and adding tasks that
require more skill and/or responsibility.
12. Team Working- team working involves using groups of workers and allocating
specific tasks and responsibilities to them.
13. Training- training is the process of improving a worker’s skills.
14. Promotion- promotion is the advancement of an employee in an organization for
example to a higher job/managerial level.
Ch-7 organization and management
1. Organizational structure- organizational structure refers to the levels of Management
and division of responsibilities within an organization.
2. Organizational chart- organizational chart refers to a diagram that outlines the
internal management structure.
3. Hierarchy- hierarchy refers to the levels of management in any organization from the
highest to the lowest.
4. level of Hierarchy refers to managers/supervisors/other employees who are given a
similar level of Responsibility in an organization
5. Chain of command- chain of command is the structure in an organization which allows
instructions to be passed down from senior management to lower levels of Management.
6. Span of control- the span of control is the number of subordinates working directly
under a manager.
7. Directors- Directors are senior managers who lead a particular department or division of
a business.
8. Line managers- line managers have direct responsibility for people below them in the
hierarchy of an organization.
9. Supervisors- supervisors are junior managers who have direct control over the
employees below them in the organizational structure.
10. Staff managers- staff managers are Specialists who provide support information and
assistance to line managers.
11. Delegation- delegation means giving a subordinate the authority to perform particular
tasks.
12. Leadership style- leadership styles are the different approaches to dealing with people
and making decisions when in a position of authority autocratic democratic or laissezfaire.