Businesses can be classified into three sectors:
Primary sector: this involves the use/extraction of natural resources. Examples include
agricultural activities, mining, fishing, wood-cutting, oil drilling etc.
Secondary sector: this involves the manufacture of goods using the resources from the
primary sector. Examples include auto-mobile manufacturing, steel industries, cloth
production etc.
Tertiary sector: this consists of all the services provided in an economy. This includes
hotels, travel agencies, hair salons, banks etc.
Up until the mid 18th century, the primary sector was the largest sector in the world, as
agriculture was the main profession. After the industrial revolution, more countries
began to become more industrialized and urban, leading to a rapid increase in the
manufacturing sector (industrialization).
Nowadays, as countries are becoming more developed, the importance of the tertiary
sector is increasing, while the primary sector is diminishing. The secondary sector is also
slightly reducing in size (deindustrialization) compared to the growth of the tertiary
sector . This is due to the growing incomes of consumers which raises their demand for
more services like travel, hotels etc.
Private and Public Sector
Private sector: where private individuals own and run business ventures. Their aim is to
make a profit, and all costs and risks of the business are undertaken by the individual.
Examples: Nike, McDonald’s, Virgin Airlines etc.
Public sector: where the government owns and runs business ventures. Their aim is to
provide essential public goods and services (schools, hospitals, police etc.) in order to
increase the welfare of their citizens, they don’t work to earn a profit. It is funded by the
taxpayers' money, so they work in the interest of these citizens to provide them with
services.
Example: the Indian Railways is a public sector organization owned by the govt. of India.
In a mixed economy, both the public and private sector exist.
Business objectives
Business objectives are the aims and targets that a business works towards to help
it run successfully. Although the setting of these objectives does not always
guarantee business success, it has its benefits.
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Setting objectives increases motivation as employees and managers now
have clear targets to work towards.
Decision making will be easier and less time consuming as there are set
targets to base decisions on. i.e., decisions will be taken in order to achieve
business objectives.
Setting objectives reduces conflicts and helps unite the business towards
reaching the same goal.
Managers can compare the business’ performance to its objectives and make
any changes in its activities if required.
Objectives vary with different businesses due to size, sector and many other factors.
However, many businesses in the private sector aim to achieve the following
objectives.
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Survival: new or small firms usually have survival as a primary objective.
Firms in a highly competitive market will also be more concerned with
survival rather than any other objective. To achieve this, firms could decide to
lower prices, which would mean forsaking other objectives such as profit
maximization.
Profit: this is the income of a business from its activities after deducting total
costs. Private sector firms usually have profit making as a primary objective.
This is because profits are required for further investment into the business as
well as for the payment of return to the shareholders/owners of the business.
Growth: once a business has passed its survival stage it will aim for growth
and expansion. This is usually measured by the value of sales or output.
Aiming for business growth can be very beneficial. A larger business can
ensure greater job security and salaries for employees. The business can also
benefit from higher market share and economies of scale.
Market share: this can be defined as the proportion of total market sales
achieved by one business. Increased market share can bring about many
benefits to the business such as increased customer loyalty, setting up of
brand image, etc.
Service to the society: some operations in the private sectors such as social
enterprises do not aim for profits and prefer to set more economical
objectives. They aim to better the society by providing social, environmental
and financial aid. They help those in need, the underprivileged, the
unemployed, the economy and the government.
A business’ objectives do not remain the same forever. As market situations change
and as the business itself develops, its objectives will change to reflect its current
market and economic position. For example, a firm facing serious economic
recession could change its objective from profit maximization to short term survival.
Stakeholders
A stakeholder is any person or group that is interested in or directly affected by the
performance or activities of a business. These stakeholder groups can be external –
groups that are outside the business or they can be internal – those groups that
work for or own the business.
Internal stakeholders:
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Shareholder/ Owners: these are the risk takers of the business. They invest
capital into the business to set up and expand it. These shareholders are liable
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to a share of the profits made by the business.
Objectives:
● Shareholders are entitled to a rate of return on the capital they have
invested into the business and will therefore have profit
maximization as an objective.
● Business growth will also be an important objective as this will
ensure that the value of the shares will increase.
Workers: these are the people that are employed by the business and are
directly involved in its activities.
Objectives:
● Contract of employment that states all the rights and
responsibilities to and of the employees.
● Regular payment for the work done by the employees.
● Workers will want to benefit from job satisfaction as well as
motivation.
● The employees will want job security– the ability to be able to work
without the fear of being dismissed or made redundant.
Managers: they are also employees but managers control the work of others.
Managers are in charge of making key business decisions.
Objectives:
● Like regular employees, managers too will aim towards a secure job.
● Higher salaries due to their jobs requiring more skill and effort.
● Managers will also wish for business growth as a bigger business
means that managers can control a bigger and well known
business.
External Stakeholders:
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Customers: they are a very important part of every business. They purchase
and consume the goods and services that the business produces/ provides.
Successful businesses use market research to find out customer preferences
before producing their goods.
Objectives:
● Price that reflects the quality of the good.
● The products must be reliable and safe. i.e., there must not be any
false advertisement of the products.
● The products must be well designed and of a perceived quality.
Government: the role of the government is to protect the workers and
customers from the business’ activities and safeguard their interests.
Objectives:
● The government will want the business to grow and survive as they
will bring a lot of benefits to the economy. A successful business will
help increase the total output of the country, will improve
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employment as well as increase government revenue through
payment of taxes.
● They will expect the firms to stay within the rules and regulations
set by the government.
Banks: these banks provide financial help for the business’ operations’
Objectives:
● The banks will expect the business to be able to repay the amount
that has been lent along with the interest on it. The bank will thus
have business liquidity as its objective.
Community: this consists of all the stakeholder groups, especially the third
parties that are affected by the business’ activities.
Objectives:
● The business must offer jobs and employ local employees.
● The production process of the business must in no way harm the
environment.
● Products must be socially responsible and must not pose any
harmful effects from consumption.
Public- sector businesses
Government owned and controlled businesses do not have the same objectives as
those in the private sector.
Objectives:
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Financial: although these businesses do not aim to maximize profits, they will
have to meet the profit target set 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 social enterprises are set up in order to aid the
community. This can be by providing employment to citizens, providing good
quality goods and services at an affordable rate, etc.
They help the economy by contributing to GDP, decreasing unemployment
rate and raising living standards.
This is in total contrast to private sector aims like profit, growth, survival, market
share etc.
Conflicts of stakeholders’ objectives
As all stakeholders have their own aims they would like to achieve, it is natural that
conflicts of stakeholders’ interests could occur. Therefore, if a business tries to
satisfy the objectives of one stakeholder, it might mean that another stakeholders’
objectives could go unfulfilled.
For example, workers will aim towards earning higher salaries. Shareholders might
not want this to happen as paying higher salaries could mean that less profit will be
left over for payment of return to the shareholders.
Similarly, the business might want to grow by expanding operations to build new
factories. But this might conflict with the community’s want for clean and
pollution-free localities.
Motivation
People work for several reasons:
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Have a better standard of living: by earning incomes they can satisfy their
needs and wants
Be secure: having a job means they can always maintain or grow that
standard of living
Gain experience and status: work allows people to get better at the job they
do and earn a reputable status in society
Have job satisfaction: people also work for the satisfaction of having a job
Motivation is the reason why employees want to work hard and work effectively for
the business. Money is the main motivator, as explained above. Other factors that
may motivate a person to choose to do a particular job may include social needs
(need to communicate and work with others), esteem needs (to feel important,
worthwhile), job satisfaction (to enjoy good work), security (knowing that your job
and pay are secure- that you will not lose your job).
Why motivate workers? Why do firms go to the pain of making sure their workers
are motivated? When workers are well-motivated, they become highly productive
and effective in their work, become absent less often, and less likely to leave the job,
thus increasing the firm’s efficiency and output, leading to higher profits. For
example, in the service sector, if the employee is unhappy at his work, he may act
lazy and rude to customers, leading to low customer satisfaction, more complaints
and ultimately a bad reputation and low profits.
Motivation Theories
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F. W. Taylor: Taylor based his ideas on the assumption that workers were
motivated by personal gains, mainly money and that increasing pay would
increase productivity (amount of output produced). Therefore he proposed
the piece-rate system, whereby workers get paid for the number of output
they produce. So in order, to gain more money, workers would produce more.
He also suggested a scientific management in production organization, to
break down labor (essentially division of labor) to maximize output
However, this theory is not entirely true. There are various other motivators in
the modern workplace, some even more important than money. The piece
rate system is not very practical in situations where output cannot be
measured (service industries) and also will lead to (high) output that doesn’t
guarantee high quality.
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Maslow’s Hierarchy: Abraham Maslow’s hierarchy of needs shows that
employees are motivated by each level of the hierarchy going from bottom to
top. Managers can identify which level their workers are on and then take the
necessary action to advance them onto the next level.
One limitation of this theory is that it doesn’t apply to every worker. For some
employees, for example, social needs aren’t important but they would be
motivated by recognition and appreciation for their work from seniors.
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Herzberg’s Two-Factor Theory: Frederick Herzberg’s two-factor theory,
wherein he states that people have two sets of needs:
Basic animal needs called ‘hygiene factors’:
● status
● security
● work conditions
● company policies and administration
● relationship with superiors
● relationship with subordinates
● salary
Needs that allow the human being to grow psychologically, called the ‘motivators’:
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achievement
recognition
personal growth/development
promotion
work itself
According to Herzberg, the hygiene factors need to be satisfied, if not they will act
as de-motivators to the workers. However hygiene factors don’t act as motivators as
their effect quickly wears off. Motivators will truly motivate workers to work more
effectively.
Motivating Factors
Financial Motivators
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Wages: often paid weekly. They can be calculated in two ways:
● Time-Rate: pay based on the number of hours worked. Although
output may increase, it doesn’t mean that workers will sincerely use
the time to produce more- they may simply waste time on very little
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: pay based on the no. of output produced. 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.
Salary: paid monthly or annually.
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Commission: paid to salesperson, based on a percentage of sales they’ve
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.
Bonus: additional amount paid to workers for good work
Performance-related pay: paid based on performance. An appraisal (assessing
the effectiveness of an employee by senior management through interviews,
observations, comments from colleagues etc.) is used to measure this
performance and a pay is given based on this.
Profit-sharing: a scheme whereby a proportion of the company’s profits is
distributed to workers. Workers will be motivated to work better so that a
higher profit is made.
Share ownership: shares in the firm are given to employees so that they can
become part owners of the company. This will increase employees’ loyalty to
the company, as they feel a sense of belonging.
Non-Financial Motivators
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Fringe benefits are non-financial rewards given to employees
● Company vehicle/car
● Free healthcare
● Children’s education fees paid for
● Free accommodation
● Free holidays/trips
● Discounts on the firm’s products
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Job Satisfaction: the enjoyment derived from the feeling that you’ve done a
good job. Employees have different ideas about what motivates them- it could
be pay, promotional opportunities, team involvement, relationship with
superiors, level of responsibility, chances for training, the working hours,
status of the job etc. Responsibility, recognition and satisfaction are in
particular very important.
So, how can companies ensure that they’re workers are satisfied with the job, other
than the motivators mentioned above?
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Job Rotation: involves workers swapping around jobs and doing each specific
task for only a limited time and then changing round again. This increases the
variety in the work itself and will also make it easier for managers to move
around workers to do other jobs if somebody is ill or absent. The tasks
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themselves are not made more interesting, but the switching of tasks may
avoid boredom among workers. This is very common in factories with a huge
production line where workers will move from retrieving products from the
machine to labeling the products to packing the products to putting the
products into huge cartons.
Job Enlargement: where extra tasks of similar level of work are added to a
worker’s job description. These extra tasks will not add greater responsibility
or work for the employee, but make work more interesting. E.g.: a worker
hired to stock shelves will now, as a result of job enlargement, arrange stock
on shelves, label stock, fetch stock etc.
Job Enrichment: involves adding tasks that require more skill and
responsibility to a job. This gives employees a sense of trust from senior
management and motivates them to carry out the extra tasks effectively.
Some additional training may also be given to the employee to do so. E.g.: a
receptionist employed to welcome customers will now, as a result of job
enrichment, deal with telephone enquiries, word-process letters etc.
Team-working: a group of workers is given responsibility for a particular
process, product or development. They can decide as a team how to organize
and carry out the tasks. The workers take part in decision making and take
responsibility for the process. It gives them more control over their work and
thus a sense of commitment, increasing job satisfaction. Working as a group
will also add to morale, fulfill social needs and lead to job satisfaction.
Opportunities for training: providing training will make workers feel that their
work is being valued. Training also provides them opportunities for personal
growth and development, thereby attaining job satisfaction
Opportunities of promotion: providing opportunities for promotion will get
workers to work more efficiently and fill them with a sense of
self-actualisation and job satisfaction
Organizational Structure
Organizational structure refers to the levels of management and division of
responsibilities within a business. They can be represented on organizational charts
(left).
Advantages:
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All employees are aware of which communication channel is used to reach
them with messages
Everyone knows their position in the business. They know who they are
accountable to and who they are accountable for
It shows the links and relationship between the different departments
Gives everyone a sense of belonging as they appear on the organizational
chart
The span of control is the number of subordinates working directly under a manager
in the organizational structure. In the above figure, the managing director’s span of
control is four. The marketing director’s span of control is the number of marketing
managers working under him (it is not specified how many, in the figure).
The chain of command is the structure of an organization that allows instructions to
be passed on from senior managers to lower levels of management. In the above
figure, there is a short chain of command since there are only four levels of
management shown.
Now, if you look closely,there is a link between the span of control and chain of
command. The wider the span of control the shorter the chain of command since
more people will appear horizontally aligned on the chart than vertically. A short
span of control often leads to a long chain of command. (If you don’t understand, try
visualizing it on an organizational chart).
Advantages of a short chain of command (these are also the disadvantages of a long
chain of command):
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Communication is quicker and more accurate
Top managers are less remote from lower employees, so employees will be
more motivated and top managers can always stay in touch with the
employees
Spans of control will be wider, This means managers have more people to
control This is beneficial because it will encourage them to delegate
responsibility (give work to subordinates) and so the subordinates will be
more motivated and feel trusted. However there is the risk that managers
may lose control over the tasks.
Line Managers have authority over people directly below them in the organizational
structure. Traditional marketing/operations/sales managers are good examples.
Staff Managers are specialists who provide support, information and assistance to
line managers. The IT department managers in most organizations act as staff
managers.
Management
So, what role do managers really have in an organization? Here are their five primary
roles:
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Planning: setting aims and targets for the organizations/department to
achieve. It will give the department and its employees a clear sense of
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purpose and direction. Managers should also plan for resources required to
achieve these targets – the number of people required, the finance needed
etc.
Organizing: managers should then organize the resources. This will include
allocating responsibilities to employees, possibly delegating.
Coordinating: managers should ensure that each department is coordinating
with one another to achieve the organization’s aims. This will involve effective
communication between departments and managers and decision making.
For example, the sales department will need to tell the operations dept. how
much they should produce in order to reach the target sales level. The
operations dept. will in turn tell the finance dept. how much money they need
for production of those goods. They need to come together regularly and
make decisions that will help achieve each department’s aims as well as the
organization’s.
Commanding: managers need to guide, lead and supervise their employees in
the tasks they do and make sure they are keeping to their deadlines and
achieving targets.
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 it has occurred and what he can do to correct itmaybe some training will be required or better equipment.
Delegation is giving a subordinate the authority to perform some tasks.
Advantages to managers:
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managers cannot do all 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:
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the work becomes more interesting and rewarding- increased job satisfaction
employees feel more important and feel trusted– increasing loyalty to firm
can act as a method of training and opportunities for promotions, if they do a
good job.
Leadership Styles
Leadership styles refer to the different approaches used when dealing with people
when in a position of authority. There are mainly three styles you need to learn: the
autocratic, democratic and laissez-faire styles.
Autocratic style is where the managers expect to be in charge of the business and
have their orders followed. They do all the decision-making, not involving employees
at all. Communication is thus, mainly one way- from top to bottom. This is standard
in police and armed forces organizations.
Democratic style is where managers involve employees in the decision-making and
communication is two-way from top to bottom as well as bottom to top. Information
about future plans is openly communicated and discussed with employees and a
final decision is made by the manager.
Laissez-faire (French phrase for ‘leave to do') style makes the broad objectives of the
business known to employees and leaves them to do their own decision-making and
organize tasks. Communication is rather difficult since a clear direction is not given.
The manager has a very limited role to play.
Trade Unions
A trade union is a group of workers 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 can include an overtime ban (refusing to work
overtime), going slow (working at the slowest speed as is required by the
employment contract), strike (refusing to work at all and protesting instead) etc.
Trade unions can also seek to put forward their views to the media and influence
government decisions relating to employment.
Benefits to workers of joining a trade union:
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strength in number- a sense of belonging and unity
improved conditions of employment, for example, better pay, holidays, hours
of work etc
improved working conditions, for example, health and safety
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improved benefits for workers who are not working, because they’re sick,
retired or made redundant (dismissed not because of any fault of their own)
financial support if a member thinks he/she has been unfairly dismissed or
treated
benefits that have been negotiated for union members such as discounts on
firm’s products, provision of health services.
Disadvantages to workers of joining a trade unions:
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costs money to be member- a membership fee will be required
may be asked to take industrial action even if they don’t agree with the
union- they may not get paid during a strike, for example.
The Role of the H.R. (Human Resource) 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 on health and safety conditions in the workplace
should be adhered to
Redundancy and dismissal: the managers should dismiss any
unsatisfactory/misbehaving employees and make them redundant if they are
no longer needed by the business.
Recruitment
Job Analysis, Description and Specification
Recruitment is the process of identifying that the business needs to employ
someone up to the point where applications have arrived at the business.
A vacancy arises when an employee resigns from a job or is dismissed by the
management. When a vacancy arises, a job analysis has to be prepared. A job
analysis identifies and records the tasks and responsibilities relating to the job. It
will tell the managers what the job post is for.
Then a job description is
prepared that outlines the responsibilities and duties to be carried out by someone
employed to do the job. It will have information about the conditions of employment
(salary, working hours, and pension scheme), training offered, opportunities for
promotion etc. This is given to all prospective candidates so they know what exactly
they will be required and expected to do.
Once this has been done, the H.R. The department will draw up a job specification, a
document that outlines the requirements, qualifications, expertise, skills,
physical/personal characteristics etc. required by an employee to be able to take up
the job.
Advertising the vacancy
Internal recruitment is when a vacancy is filled by an existing employee of the
business.
Advantages:
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Saves time and money- no need for advertising and interviewing
Person already known to business
Person knows business’ ways of working
Motivating for other employees to see their colleagues being promotedurging them to work hard
Disadvantages:
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No new skills and experience coming into the business
Jealousy among workers
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. This can be done in local/national
newspapers, specialist magazines and journals, job centers run by the government
(where job vacancies are posted and given to interested people; usually for unskilled
or semi-skilled jobs) or even recruitment agencies (who will recruit and send along
candidates to the company when they request it).
When advertising a job, the business needs to decide what should be included in
the advertisement, where it should be advertised, how much it will cost and
whether it will be cost-effective.
When a person is interested in a job, they should apply for it by sending in a
curriculum vitae (CV) or resume, this will detail the person’s qualifications,
experience, qualities and skills.The business will use these to see which candidates
match the job specification. It will also include statements of why the candidate
wants the job and why he/she feels they would be suitable for the job.
Selection
Applicants who are shortlisted will be interviewed by the H.R. manager. They will
also call up the referee provided by the applicant (a referee could be the previous
employer or colleagues who can give a confidential opinion about the applicant’s
reliability, honesty and suitability for the job). Interviews will allow the manager to
assess:
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the applicant’s ability to do the job
personal qualities of the applicant
character and personality of applicant
In addition to interviews, firms can conduct certain tests to select the best
candidate. This could include skills tests (ability to do the job), aptitude tests
(candidate’s potential to gain additional skills), personality tests (what kind of a
personality the candidate has- will it be suitable for the job?), group situation tests
(how they manage and work in teams) etc.
When a successful candidate has been selected the others must be sent a letter of
rejection.
The contract of employment: a legal agreement between the employer and the
employee listing the rights and responsibilities of workers. It will include:
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the name of employer and employee
job title
date when employment will begin
hours to 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.
Employment contracts can be part-time or full-time. Part-time employment is often
considered to be between 1 and 30-35 hours a week whereas full-time employment
will usually work 35 hours or more a week.
Advantages to employer of part-time employment (disadvantages of full-time
employment to employer):
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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 at
weekends
works lesser hours so employee is willing to accept lower pay
less expensive than employing and paying full-time workers.
Disadvantages to employer of part-time employment (advantages of full-time
employment to employers)
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less likely to be trained because the workers see the job as temporary
takes longer to recruit two part-time workers than one full-time worker
can be less committed to the business/ more likely to leave and go get
another job
less likely to be promoted because they will not have gained the skills and
experience as full-time employees
more difficult to communicate with part-time workers when they are not in
work- all work at different times.
Training
Training is important to a business as it will improve the worker’s skills and
knowledge and help the business 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.
The three types of training are:
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Induction training: an introduction given to a new employee, explaining the
firm’s activities, customs and procedures and introducing them to their fellow
workers.
Advantages:
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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
On-the-job training: occurs by watching a more experienced worker doing the
job
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Advantages:
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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:
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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 necessarily be recognised training qualifications outside
the business
Off-the-job training: involves being trained away from the workplace, usually
by specialist trainers
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Advantages:
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A broad range of skills can be taught using these techniques
Employees 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:
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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
Workforce Planning
Workforce Planning: 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 no. of employees) the workforce because of:
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Introduction of 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:
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Dismissal: where a worker is told to leave their job because their work or
behavior is unsatisfactory.
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Redundancy: when an employee is no longer needed and so loses their work,
though not due to any fault of theirs. They may be given some money as
compensation for the redundancy.
Workers 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 being recruited and selected- there should be no discrimination based on age,
gender, religion, race etc.
Employees are protected in many areas including
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against unfair discrimination
health and safety at work (protection from dangerous machinery, safety
clothing and equipment, hygiene conditions, medical aid etc.)
against unfair dismissal
wage protection (through the contract of employment since it will have listed
the pay and conditions). Many countries have a legal minimum wage– the
minimum wage an employer has to pay its employee. This avoids employers
from exploiting its employees, and encourages more people to find work, but
since costs are rising for the business, they may make many workers
redundant- unemployment will rise.
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.
Costs
Fixed Costs are costs that do not vary with output produced or sold in the short run.
They are incurred even when the output is 0 and will remain the same in the short
run. In the long-run they may change. Also known as overhead costs.
E.g.: rent, even if production has not started, the firm still has to pay the rent.
Variable Costs are costs that directly vary with the output produced or sold. E.g.:
material costs and wage rates that are only paid according to the output produced.
TOTAL COST = TOTAL FIXED COSTS + TOTAL VARIABLE COSTS
TOTAL COST = AVERAGE COST * OUTPUT
AVERAGE COST (unit cost) = TOTAL COST/ TOTAL OUTPUT
A business can use these cost data to make different decisions. Some examples are:
setting prices (if the average cost of one unit is $3, then the price would be set at $4
to make a profit of $1 on each unit), deciding whether to stop production (if the total
cost exceeds the total revenue, a loss is being made, and so the production might be
stopped), deciding on the best location (locations with the cheaper costs will be
chosen) etc.
Scale of production
As output increases, a firm’s average cost decreases.
Economies of scale are the factors that lead to a reduction in average costs as a
business increases in size. The five economies of scale are:
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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
Marketing economies: Larger businesses will be able to afford their own
vehicles to distribute goods and advertise on paper and TV. They can cut
down on marketing labor 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.
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 be charged a low rate of interest on their
borrowings, reducing average costs.
Managerial economies: Large businesses may be able to afford to hire
specialist managers who are very efficient and can reduce the business’ costs.
Technical economies: Large businesses can afford to buy large machinery
such as a flow production line that can produce a large output and reduce
average costs.
Diseconomies of scale are the factors that lead to an increase in the average costs of
a business as it grows beyond a certain size. They are:
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Poor communication: as a 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 average costs in the business.
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.
Slow decision-making: As a business grows larger, its chain of command will
get longer. Communication will get very slow and so any decision-making will
also take time, since all employees and departments may need to be
consulted with.
Businesses are now dividing themselves into small units that can control themselves
and communicate more effectively, to avoid any diseconomies from arising.
Break-even
Break-even level of output is the output that needs to be produced and sold in order
to start making a profit. So, the break-even output is the output at which total
revenue equals total costs (neither a profit nor loss is made, all costs are covered).
A break-even chart can be drawn that shows the costs and revenues of a business
across different levels of output and the output needed to break even.
Example:
In the chart below, costs and revenues are being calculated over the output of 2000
units.
The fixed cost is 5000 across all output (since it is fixed!).
The variable cost is $3 per unit so it will be $0 at output 0 and $6000 at output 2000so you just draw a straight line from $0 to $6000.
The total costs will then start from the point where fixed cost starts and be parallel
to the variable costs (since T.C.= F.C.+V.C. You can manually calculate the total cost at
output 2000: ($6000+$5000=$11000).
The price per unit is $8 so the total revenue is $16000 at output 2000.
Now the break-even point can be calculated at the point where total revenue and
total cost equals– at an output of 1000. (In order to find the sales revenue at output
1000, just do $8*1000= $8000. The business needs to make $8000 in sales revenue to
start making a profit).
Advantages of break-even charts:
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Managers can look at the graph to find out the profit or loss at each level of
output
Managers can change the costs and revenues and redraw the graph to see
how that would affect profit and loss, for example, if the selling price is
increased or variable cost is reduced.
The break-even chart can also help calculate the safety margin- the amount
by which sales exceed break-even point. In the above graph, if the business
decided to sell 2000 units, their margin of safety would be 1000 units. In sales
terms, the margin of safety would be 1000*8 = $8000. They are $8000 safe
from making a loss.
Margin of Safety (units) = Units being produced and sold – Break-even output
Limitations of break-even charts:
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They are constructed assuming that all units being produced are sold. In
practice, there is always an 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 (this is the value
added/contributed to the product when sold)
In the above example, the contribution is $8 -$3 =$5, so the break-even level is:
$5000/$5 = 1000 units!
Quality means to produce a good or service which meets customer expectations.
The products should be free of faults or defects. Quality is important because it:
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establishes a brand image
builds brand loyalty
maintains good reputation
increase sales
attract new customers
If there is no quality, the firm will
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lose customers to other brands
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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: quality
control, quality assurance and total quality management.
Quality Control
Quality control is the checking for quality at the end of the production process,
whether a good or a service.
Advantages:
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Eliminates the fault or defect before the customer receives it, so better
customer satisfaction
Not much training required for conducting this quality check
Disadvantages:
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Still expensive to hire employees to check for quality
Quality control may find faults and errors but doesn’t find out why the fault
has occurred, so the it’s difficult to solve the problem
if product has to be replaced and reworked, then it is very expensive for the
firm
Quality Assurance
Quality assurance is the checking for quality throughout the production process of a
good or service.
Advantages:
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Eliminates the fault or defect before the customer receives 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:
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Expensive to carry out since quality checks have to be carried throughout the
entire process, which will require manpower and appropriate technology at
every stage.
How well will employees follow quality standards? The firm will have to
ensure that every employee follows quality standards consistently and
prudently, and knows how to address quality issues.
Total Quality Management (TQM)
Total Quality Management or TQM is the continuous improvement of products and
production processes by focusing on quality at each stage of production. There is
great emphasis on ensuring that customers are satisfied. In TQM, customers just
aren’t the consumers of the final product. It is every worker at each stage of
production. Workers at one stage have to ensure the quality standards are met for
the product in production at their stage before they are passed onto the next stage
and so on. Thus, quality is maintained throughout production and products are
error-free.
TQM also involves quality circles and like Kaizen, workers come together and discuss
issues and solutions, to reduce waste and ensure zero defects.
Advantages:
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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
waste is removed and efficiency is improved
Disadvantages:
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Expensive to train employees 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 (International Organization
for Standardization). The business with these quality marks would have followed
certain quality procedures to keep the quality mark. For services, a good reputation
and positive customer reviews are good indicators of the service’s quality.
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 the firm’s
costs, profits, efficiency and the market base it reaches out to.
Factors that affect the location decisions of a manufacturing firm:
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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. For flow production, on the other hand, production will be on a
large scale- there will be a huge amount of components and transport costs
will be high- so components need to be close by.
Market: if the product is a 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 for fruit juice.
External economies: the business may locate near other firms that support
the business by providing services- eg: business that install and maintain
factory equipment.
Availability of labor: 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 a government. rules and restrictions in setting up,
e.g.: in some areas of great natural beauty. The business needs to consider
these.
Transport & 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, they need 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 areas
where they are available.
Climate: not the most important factor but can influence certain sectors. Eg:
the dry climate in Silicon Valley aids the manufacturing of silicon chips.
Owner’s personal preferences
Factors that affect the location decisions of a service-sector firm:
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Customers: service-sector businesses that have direct contact with customers
need to locate in customer-accessible and convenient places. Eg; restaurants,
hairdressers, post offices etc.
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/customer is not a very important factor in location decisions. They
locate away from customers in places where there are low rent and wage
rates. Eg: banks
Availability of labor: if a large number of workers are required in the firm, then
it will need to locate close to residential areas. If they want certain types of
worker skills, they will need to locate in places where such skilled workers can
be found. However, with work-from-home and technology, this is not that big
of a factor nowadays.
Climate: tourism services need to be located in places of good climate.
Nearness to other business: 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 also set up where close competitors
are to watch them and snatch away their customers.
Rent/taxes
Owner’s personal preferences
Factors that affect the location decisions of a retailing firm:
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Shoppers: retailers need to be located in areas where shoppers frequent, like
malls, to attract as many customers as possible.
Nearby shops: being located to other shops that are visited regularly will also
attract attention of customers into the shop. Being near competitors also
helps keep an eye on competition and snatch away customers.
Customer parking availability: when parking is available nearby, more people
will find it convenient to shop in that area.
Availability of suitable vacant premises: Obviously, there needs to be a vacant
premise available to set up the business. Vacant premises can also help the
business expand their premises in the future.
Rent/taxes: rents and taxes on the locations need to be affordable.
Access to delivery vehicles: if the retailer has home delivery services, then
delivery vehicles will be required.
Security: high rates of crime and theft can happen in shops. Shopping
complexes with security guards will thus be preferred by firms.
Why do businesses locate in different countries?
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New markets overseas.
Cheaper or new raw materials available in other countries.
Cheaper and/or skilled workers are available overseas.
Rent/ taxes are lower..
Availability of government grants and other incentives
Avoid trade barriers and tariffs: when exporting goods to other countries,
there will be some tariffs, rules and regulations to get by. In order to avoid
this, firms start operating in the country itself, since there is no
exporting/importing involved now.
The role of legal controls on location decisions
Governments influence location decisions:
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to encourage businesses to set up and expand in areas of high unemployment
and under-development. Grants and subsidies can be given to businesses that
set up in such areas.
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.