Business Studies – 0450
1. Understanding Business Activity
1.1 – Business Activity
1.2 – Classification of Businesses
1.3 – Enterprise, Business Growth and Size
1.4 – Types of Business Organizations
1.5 – Business Objectives and Stakeholder Objectives
2. People in Business
2.1 – Motivating Workers
2.2 – Organisation and Management
2.3 – Recruitment, Selection and Training of Workers
2.4 – Internal and External Communication
3. Marketing
3.1 – Marketing, Competition and the Customer
3.2 – Market Research
3.3 – Marketing Mix
3.4 – Marketing Strategy
4. Operations Management
4.1 – Production of Goods and Services
4.2 – Costs, Scale of Production and Break-even Analysis
4.3 – Achieving Quality Production
4.4 – Location Decisions
5. Financial Information and Decisions
5.1 – Business Finance: Needs and Sources
5.2 – Cash Flow Forecasting and Working Capital
5.3 – Income Statements
5.4 – Statement of Financial Position
5.5 – Analysis of Accounts
6. External Influences on Business Activity
6.1 – Economic Issues
6.2 – Environmental and Ethical Issues
6.3 – Business and the International Economy
1.1 – Business Activity
1.2
The word ‘business’ is very familiar to us. We are surrounded by businesses and we could
not imagine our life without the products we buy from them. So what is a business, or what is
business studies? Here’s the very posh definition for it: “the study of economics and
management”
Not clear? Don’t worry, by the end of this chapter, you should be getting a clear picture of
what a business is.
The Economic Problem
Need:
a good or service essential for living. Examples include water and food and shelter.
Want:
a good or service that people would like to have, but is not required for living. Examples
include cars and watching movies.
Scarcity
is the basic economic problem. It is a situation that exists when
There are unlimited wants and limited resources to produce the goods and
services to satisfy those wants. For example, we have a limited amount of money but there
are a lot of things we would like to buy, using the money.
Opportunity cost
Opportunity cost is the next best alternative forgone by choosing another item. Due to
scarcity, people are often forced to make choices. When choices are made it leads to an
opportunity cost
SCARCITY → CHOICE → OPPORTUNITY COST
Example: the government has a limited amount of money (scarcity) and must decide on
whether to use it to build a road, or construct a hospital (choice). The government chooses to
construct the hospital instead of the road. The opportunity cost here are the benefits from the
road that they have sacrificed (opportunity cost).
Factors of Production
Factors of Production are resources required to produce goods or services. They are classified
into four categories.
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Land: the natural resources that can be obtained from nature. This includes minerals, forests, oil and
gas. The reward for land is rent.
Labour: the physical and mental efforts put in by the workers in the production process. The
reward for labour is wage/salary
Capital: the finance, machinery and equipment needed for the production of goods and services.
The reward for capital is interest received on the capital
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.
Specialization
Specialization occurs when a person or organisation concentrates on a task at which they
are best at. Instead of everyone doing every job, the tasks are divided among people who are
skilled and efficient at them.
Advantages:
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Workers are trained to do a particular task and specialise in this, thus increasing efficiency
Saves time and energy: production is faster by specialising
Quicker to train labourers: workers only concentrate on a task, they do not have to be trained in all
aspects of the production process
Skill development: workers can develop their skills as they do the same tasks repeatedly, mastering
it.
Disadvantages:
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It can get monotonous/boring for workers, doing the same tasks repeatedly
Higher labour turnover as the workers may demand for higher salaries and company is unable to
keep up with their demands
Over-dependency: if worker(s) responsible for a particular task is absent, the entire production
process may halt since nobody else may be able to do the task.
Purpose of Business Activity
So we’ve gone through factors of production, the problem of scarcity and specialization, but
what is business?
Business is any organization that uses all the factors of production (resources) to create
goods and services to satisfy human wants and needs.
Businesses attempt to solve the problem of scarcity, using scarce resources, to produce and
sell those goods and services that consumers need and want.
Added Value
Added value is the difference between the cost of materials bought in and the selling
price of the product.
Which is, the amount of value the business has added to the raw materials by turning it into
finished products. Every business wants to add value to their products so they may charge a
higher price for their products and gain more profits.
For example, logs of wood may not appeal to us as consumers and so we won’t buy it or
would pay a low price for it. But when a carpenter can use these logs to transform it into a
chair we can use, we will buy it at a higher cost because the carpenter has added value to
those logs of wood.
How to increase added value?
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Reducing the cost of production. Added value of a product is its price less the cost of production.
Reducing cost of production will increase the added value.
Raising prices. By increasing prices they can raise added value, in the same way as described above.
But there will be problems that rise from both these measures. To lower cost of production,
cheap labour, raw materials etc. may have to be employed, which will create poor quality
products and only lowers the value of the product. People may not buy it. And when prices
are raised, the high price may result in customer loss, as they will turn to cheaper products.
In a practical sense, you can add value by:
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Branding
Adding special features
Provide premium services etc.
In a practical example, how would you add value to a jewellery store?
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Design an attractive package to put the jewellery items in.
An attractive shop-window-display.
Well-dressed and knowledgeable shop assistants.
All of this will help the jewellery store to raise prices above the additional costs involved.
For detailed explanation on factors of production and opportunity cost, head over to our
Economics section on the same topic.
1.2 – Classification
of Businesses
Primary, Secondary and Tertiary Sector
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, electrical, chemical and energy etc.
Tertiary sector: this consist of all the services provided in an economy. This includes
hotels, travel agencies, hair salons, banks, cinemas, public health, mass media, insurance,
shops, restaurants and airlines 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 tertiary sector is
increasing, while the primary sector is diminishing. The secondary sector is also slightly
reducing in size (de-industrialization) 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.
De-industrialization: the growing importance of the tertiary sector and the reduced
importance of the secondary sector. The UK and the USA are good examples of this type of
economic activity.
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 is 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
taxpaying citizens’ 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 exists.
Cambridge IGCSE Business
Studies 1.2 – Classification of
businesses
1.2.1
Economic Sectors
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Primary Sector – Extracts and uses the natural resources from the earth. e.g. Fishing,
farming, forestry
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Secondary Sector – Manufacture goods using raw materials from primary sector. e.g.
Car manufacturers and other factories
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Tertiary Sector – Provides service to consumers and other sectors of the industry e.g.
Restaurants, car showroom, travel agent
Importance of economic sector
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The sector with the most workers is the most important in a country.
or
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The sector with most valuable goods/service is the most important in a country.
Changes in sector importance
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De-industrialisation – when manufacturing sector becomes less important in a country.
Why the importance of sectors changes?
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Primary sector resources get used up e.g. overfishing, deforestation.
Factory costs (usually wages) are too high e.g. wages in China/India are cheaper
People spend more on the tertiary sector as they become wealthier. e.g. more
restaurants, travel agents
1.2.2
Mixed Economy
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Private Sector – Businesses not owned by the government but by private individuals.
(Goal = Profit)
Advantages
High efficiency and lower costs
Competition is encouraged (prices will be lower)
Disadvantages
Some services may be closed (run out of money)
Workers may lose jobs to improve efficiency/cut cost (private sector business does
not care about employment rates in countries)
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Public Sector – Government/State owned businesses. (Goal = non-profit, service for all
citizens) e.g. Electricity, police, public transit
Advantages
Business is funded by government
Encourage more jobs
Disadvantages
Low efficiency
No competition between businesses
Cambridge IGCSE Business
Studies 1.3 – Enterprise, business
growth and size
1.3.1 – Enterprise and entrepreneurship
Entrepreneur – A person who organises, and operates a business.
Characteristics of successful entrepreneurs
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Hard working – Long hours of work are needed to become successful
Risk taker – Entrepreneurs never know if business idea will succeed
Creative – Business ideas different from competitors
Self-confident – Necessary to convince banks and investors.
Effective communicator – Talk clearly to banks, customers, employees about business.
Business Plan – Document with important information about your business e.g.
Business objective, operations, finance, owners
Business plan is needed to
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Apply for bank loans
Plan business to reduce risk of failure
Business plan includes
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Products and services that you will sell
Costs of your business
Location of the business
What do I need to operate my business e.g. Machines, employees
Governments supports new businesses because
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New businesses creates jobs (reduce unemployment)
Increased competition (Businesses competing with each other means prices may be
lowered)
Business may grow larger and contribute to the country
Government supports new businesses by
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Loans at low interest rates
Land to set up businesses at low costs
Grants (money) to train employees
Use research facilities at public universities
Business advice from experts
1.3.2 – Methods and problems of measuring business size
Methods of measuring size of a business
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Number of employees – Easy to calculate and compare with competitors. However, some
businesses can produce higher output with fewer employees. e.g. Some factories uses
machines.
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Value of output – Easy to calculate and compare with competitors. However, some
businesses may be very small but producing very expensive products such as brand
name clothing while a very large factory may be producing cheap clothing.
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Value of sales – Easy to calculate and compare with other businesses. However, value
may be different for businesses for example, a sports car dealer may sell 2 cars a day
while a normal car dealer e.g. Toyota may sell 20 cars a day.
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Value of capital employed – Simple to compare with other businesses. However, this
method is inaccurate because different factories will use different types of capital e.g. A
factory may use expensive machinery and another may depend on employees.
There is no perfect way to compare businesses. Every business is different.
1.3.3 – Why some businesses grow and other remain small
Why do businesses grow?
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Increased chances of higher profit
Better status and prestige of the owners and employees
Lower average cost (more negotiating power)
Increased control of the market
Ways businesses can grow
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Internal Growth – Business grows by itself (Business gets larger as profit increases e.g.
more customers)
External Growth – Take-over or merger with another business.
1. Horizontal integration – Firms in the same industry at the same stage of production
merges. e.g. 2 Bakeries merging to form a larger business
2. Vertical integration – Business expands by merging with another business in another
stage of production. There are 2 types of vertical integration. Backwards and fowards.
Backward vertial integration is when a business merges with another business in the
previous stage of production for example, Bakery merges with wheat farm. Foward is
when a business merges with a business in the next stage of production e.g. Sugar farm
merges with candy factory.
Advantage of vertical integration is to have more control over distribution of goods
and services.
Conglomerate merger – Two businesses in a completely different industry combine
to form a new business. e.g. Insurance company buys an advertising agency.
Joint Ventures – Two or more business agree to start a new project together.
Problems of business growth
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Large businesses are difficult to control. Solution – Operate in business in small parts.
Costs of expansion are high. Solution – Expand slowly
There can be poor communication in large businesses. Solution – use technology to
communicate e.g. email. Operate the business in small parts.
Why do some businesses remain small?
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Type of industry e.g. hair salons stay small because of the connection with their
customers, if they grow too large they won’t be able to offer personal service to their
regular customers.
Market size Some businesses such as stores in small towns are likely to remain small
due to the limited amount of customers. Businesses that produce specialised goods such
as brand name clothing or luxury cars are also likely to remain small.
Owner’s objective Some owners want to keep their businesses small to keep full control
and know all their employees and customers. Running a large business can become
stressful.
1.3.4 – Why some businesses fail
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Poor management – Many businesses fail due to poor management from lack of
experience by the managers.
Failure to plan for change – The business environment is constantly changing,
Businesses need to change to keep up with technology.
Poor financial management – Shortage of money means that the businesses cannot be
operated. Businesses needs to always make sure they have enough money
Over expansion – Some businesses expand too quickly and not have enough money to
operate.
Startup risk – Starting up a new business is always risky, entrepreneurs may lack
experience and not be able to compete with larger businesses.
Cambridge IGCSE Business
Studies 1.4 – Types of business
organisation
1.4.1 – Main features of different forms of business organisation
Unincorporated Business – A business that does not have a separate legal identity
from its owner(s) e.g. If the business is sued, the owner is responsible and may need
to cover the cost with their own personal money.
Incorporated Business – Business that has a separate legal identity from its
owner(s) e.g. If the business goes bankrupt, the owners won’t be held responsible
and only lose the money they invested.
Unlimited Liability – (Owners are held liable for the business. If the business goes
in debt, the owner needs to pay back with their own money.
Limited Liability – (Opposite of Unlimited liability, If a business fails, the owners
only lose what they invested)
Main forms of business organisations
Unincorporated Businesses
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Sole Trader – Owned and operated by one person.
Advantages
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Cheap and easy to start up
Full control of your own business
Disadvantages
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Unlimited Liability
If the owner dies, the business no longer exists
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Less money / difficult to expand business
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Partnership – Similar to a sole trader but there are 2 owners.
Advantages
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2 Owners mean that more money can be invested
Less work since tasks can be done by 2 owners.
Losses can be distributed among the 2 owners
Disadvantages
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Unlimited Liability
If one owner dies/quits, the business no longer legally exists.
There can be disagreement between the 2 owners.
Incorporated Businesses
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Private limited company (LTD) – Owned by shareholders.
Advantages
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Limited Liability to all shareholders
Capital can be invested by many shareholders
Cheaper to set up than public limited companies
Continuity of existence – If the business owner dies, the business still exists.
Disadvantages
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Slower to start up (many legal documents needs to be signed)
Shares can only be sold to family and friends
Other shareholders need to agree before shares can be sold
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Public limited company (PLC) – Similar to a private limited company but shares can be
sold to the public. Great for large companies.
Advantages
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Limited Liability
Shares can be sold to the general public without permission (Capital (Money) can be
raised quickly)
Continuity of existence
Company can grow and expand quickly
Disadvantages
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Complicated legal documents (Wastes money and time)
Expensive to start up
Company can grow large very quickly which will be difficult to control
Original owners of the business may lose control of the company
Shareholders may vote who manages the business in AGM (loss of control)
Annual General Meeting (AGM) – Meeting that must be held every year for
shareholders to vote for the company’s next directors.
Shareholders – Owners of a limited company, they buy shares which represent the
percentage they own of the company.
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Franchising
Franchisor – Company that owns the original business, Franchisors sell the
franchise to a franchisee
Advantages
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Make money from selling the business’ name to franchisee
Quick growth of the brand
Operation of the business is the franchisee’ responsibility
Disadvantages
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If one franchisee has a bad reputation, the entire franchise will be effected e.g. If one
Macdonalds store served bad food, all the other Macdonald stores will have a bad
reputation.
Profit from franchised stores are kept by the franchisee
Franchisee – Someone who buys a franchise from the franchisor to use the brand
name
Advantages
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Less chances of failure since the business is well known.
Most of the advertisements are paid by the franchisor
Less decision making is required from the franchisee e.g. food recipe is already planned
from franchisor
Staff training may be provided from franchisor
Disadvantages
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Franchisee won’t be able to make own decisions e.g. come up with own menu
Franchisee needs to pay the franchisor to use brand name
Joint Ventures – 2 or more businesses start a new project together.
Advantages
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Costs can be shared amongst the companies
Knowledge and skills from more than one company
Risks are shared (If the project fails)
Disadvantages
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Profit is shared
Businesses may disagree with each other.
1.3 – Enterprise, Business
Growth and Size
1.4
Entrepreneurship
An entrepreneur is a person who organizes, operates and takes risks for a new business
venture. The entrepreneur brings together the various factors of production to produce goods
or services.
Check below to see whether you have what it takes to be a successful
entrepreneur!
ARE YOU A –
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Risk taker
Creative
Optimistic
Self-confident
Innovative
Independent
Effective communicator
Hard working
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.
It provides a complete description of a business and its plans for the first few years; explains
what the business does, who will buy the product or service and why; provides financial
forecasts demonstrating overall viability; indicates the finance available and explains the
financial requirements to start and operate the business.
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Some of the content of a regular business plan are:
Executive summary: brief summary of the key features of the business and the business plan
The owner: educational background and what any previous experience in doing previously
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The business: name and address of the business and detailed description of the product or
service being produced and sold; how and where it will be produced, who is likely to buy it, and in
what quantities
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The market: describe the market research that has been carried out, what it has revealed and
details of prospective customers and competitors
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Advertising and promotion: how the business will be advertised to potential customers
and details of estimated costs of marketing
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Premises and equipment: details of planning regulations, costs of premises and the need for
equipment and buildings
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Business organisation: whether the enterprise will take the form of sole trader, partnership,
company or cooperative
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Costs: indication of the cost of producing the product or service, the prices it proposes to charge for
the products
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Finance: how much of the capital will come from savings and how much will come from
borrowings
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Cash flow: forecast income (revenue) and outgoings (expenditures) over the first year
Expansion: brief explanation of future plans
Making a business plan before actually starting the business can be very helpful. By
documenting the various details about the business, the owners will find it much easier to run
it. There is a lesser chance of losing sight of the mission and vision of the business as the
objectives have been written down. Moreover, having the objectives of the business set down
clearly will help motivate the employees. A new entrepreneur will find it easier to get a
loan or overdraft from the bank if they have a business plan.
Government support for business startups
According to startup.com, “a startup is a company typically in the early stages of its
development. These entrepreneurial ventures are typically started by 1-3 founders who focus
on capitalizing upon a perceived market demand by developing a viable product, service, or
platform”.
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Why do governments want to help new start-ups?
They provide employment to a lot of people
They contribute to the growth of the economy
They can also, if they grow to be successful, contribute to the exports of the country
Start-ups often introduce fresh ideas and technologies into business and industry
How do governments support businesses?
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Organise advice: provide business advice to potential entrepreneurs, giving them information useful
in staring a venture, including legal and bureaucratic ones
Provide low cost premises: provide land at low cost or low rent for new firms
Provide loans at low interest rates
Give grants for capital: provide financial aid to new firms for investment
Give grants for training: provide financial aid for workforce training
Give tax breaks/ holidays: high taxes are a disincentive for new firms to set up. Governments can
thus withdraw or lower taxation for new firms for a certain period of time
Measuring business size
Businesses come in many sizes. They can be owned by a single individual or have up to 50
shareholders. They can employ thousands of workers or have a mere handful. But how can
we classify a business as big or small?
Business size can be measured in the following ways:
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Number of employees: larger firms have larger workforce employed
Value of output: larger firms are likely to produce more than smaller ones
Value of capital employed: larger businesses are likely to employ much more capital than smaller
ones
However, these methods have their limitations and are not always accurate. Example: When
using the ‘number of employees’ method to compare business size is not accurate as a capital
intensive firm ( one that employs a large amount of capital equipment) can produce large
output by employing very little labour (workers). Similarly, value of capital employed is not a
reliable measure when comparing a capital-intensive firm with a labour-intensive firm.
Output value is also unreliable because some different types of products are valued
differently, and the size of the firm doesn’t depend on this.
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 to them to new
markets.
There are two ways in which a business can grow- internally and externally.
Internal growth
This occurs when a business expands its existing operations. For example, when a fast food
chain opens a new branch in another country. This is a slow means of growth but easier to
manage than external growth.
External growth
This is when a 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 the owner of 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:
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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. For example, when a firm that
manufactures furniture merges with another firm that also manufacturers furniture.
Benefits:
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Reduces number of competitors in the market, since two firms become one.
Opportunities of economies of scale.
Merging will allow the businesses to have a bigger share of the total market.
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:
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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. For
example, when a firm that manufactures furniture merges with a firm that supplies wood for
manufacturing furniture
Benefits:
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Merger gives assured supply of essential components.
The profit margin of the supplying firm is now absorbed by the expanded firm.
The supplying firm can be prevented from supplying to competitors.
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 of the
‘predator’ firm. For example, when a firm that manufactures furniture merges with a
furniture retail store.
Benefits:
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Merger gives assured outlet for their product.
The profit margin of the retailer is now absorbed by the expanded firm.
The retailer can be prevented from selling the goods of competitors.
Conglomerate merger/integration: This is when one firm merges with or takes
over a firm in a completely different industry. This is also known as ‘diversification’. For example,
when a firm that manufactures furniture merges with a firm that produces clothing.
Benefits:
 Conglomerate integration allows businesses to have activities in more than one country. This
allows the firms to spread its risks.
 There could be a transfer of ideas between the two businesses even though they are in different
industries. This transfer o ideas could help improve the quality and demand for the two products.
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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, co-ordinate 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. This is explored more deeply in a later section.
Why businesses stay small
Not all businesses grow. Some stay small, employ a handful of workers and have little output.
Here are the reasons why.
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Type of industry: some firms remain small due to the industry they operate in. Examples of
these are hairdressers, car repairs, catering, etc, which give personal services and therefore cannot
grow.
Market size: if the firm operates in areas where the total number of customers is small, such as in
rural areas, there is no need for the firm to grow and thus stays small.
Owners’ objectives: not all owners want to increase the size of their firms and profits. Some of
them prefer keeping their businesses small and having a personal contact with all of their employees
and customers, having flexibility in controlling and running the business, having more control over
decision-making, and to keep it less stressful.
Why businesses fail
Not all businesses are successful. The main reasons why they fail are:
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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
Failure to plan for change: 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
Poor financial management: 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
Why new businesses are at a greater risk of failure

Less experience: a lack of experience in the market or in business gets a lot of firms easily
pushed out of the market

New to the market: they may still not understand the nuances and trends of the market, that

existing competitors will have mastered
Don’t a lot of sales yet: only by increasing sales, can new firms grow and find their foothold in
the market. At a stage when they’re not selling much, they are at a greater risk of failing

Don’t have a lot of money to support the business yet: financial issues
can quickly get the better of new firms if they aren’t very careful with their cash flows. It is only after
they make considerable sales and start making a profit, can they reinvest in the business and support it
1.4 – Types of
Business Organizations
Sole Trader/Sole Proprietorship
A business organization owned and controlled by one person. Sole traders can employ
other workers, but only he/she invests and owns the business.




Advantages:
Easy to set up: there are very few legal formalities involved in starting and running a sole
proprietorship. A less amount of capital is enough by sole traders to start the business. There is no
need to publish annual financial accounts.
Full control: the 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 profit: Since there is only one owner, he/she will receive all of the profits the
company generates.
Personal: since it is a small form of business, the owner can easily create and maintain contact with
customers, which will increase customer loyalty to the business and also let the owner know about
consumer wants and preferences.
Disadvantages:




Unlimited liability: if the business has bills/debts left unpaid, legal actions will be taken against the
investors, where their even personal property can be seized, if their investments don’t meet the unpaid
amount. This is because the business and the investors are the legally not separate (unincorporated).
Full responsibility: Since there is only 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 (though banks will be reluctant to lend to sole
traders since it is risky).
Lack of continuity: If the owner dies or retires, the business dies with him/her.
Partnerships
A partnership is a legal agreement between two or more (usually, up to twenty)people to own,
finance and run a business jointly and to share all profits.


Advantages:
Easy to set up: Similar to sole traders, very few legal formalities are required to start a 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: The 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 trade only by himself
could.
Disadvantages:




Conflicts: arguments may occur between partners while making decisions. This will delay decisionmaking.
Unlimited liability: similar to sole traders, partners too have unlimited liability- their personal items
are at risk if business goes bankrupt
Lack of capital: smaller capital investments as compared to large companies.
No continuity: if an owner retires or dies, the business also dies with them.
Joint-stock companies
These companies can sell shares, unlike partnerships and sole traders, to raise capital.
Other people can buy these shares (stocks) and become a shareholder (owner) of the
company.
Therefore they are jointly owned by the people who have bough it’s stocks.
These shareholders then receive dividends (part of the profit; a return on investment).
The shareholders in companies 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 cannot.
The companies have a separate legal identity from their owners, which is why the owners
have a limited liability.
These companies are incorporated.
(When they’re unincorporated, shareholders have unlimited liability and don’t have a
separate legal identity from their business).
Companies also enjoys continuity, unlike partnerships and sole traders.
That is, the business will continue even if one of it’s owners retire or die.
Shareholders will elect a board of directors to manage and run the company in it’s day-today activities.
In small companies, the shareholders with the highest percentage of shares invested are
directors, but directors don’t have to be shareholders.
The more shares a shareholder has, the more their voting power.
These are two types of companies:
Private Limited Companies: One or more owners who can sell its’ shares to only the people
known by the existing shareholders (family and friends). Example: Ikea.
Public Limited Companies: Two or more owners who can sell its’ shares to any
individual/organization in the general public through stock exchanges (see Economics:
topic 3.1 – Money and Banking).
Example: Verizon Communications.


Advantages:
Limited Liability: this is because, the company and the shareholders have separate legal identities.
Raise huge amounts of capital: selling shares to other people (especially in Public Ltd. Co.s), raises
a huge amount of capital, which is why companies are large.




Public Ltd. Companies can advertise their shares, in the form of a prospectus, which tells interested
individuals about the business, it’s activities, profits, board of directors, shares on sale, share prices
etc. This will attract investors.
Disadvantages:
Required to disclose financial information: Sometimes, private limited companies are required by
law to publish their financial statements annually, while for public limited companies, it is legally
compulsory to publish all accounts and reports. All the writing, printing and publishing of such details
can prove to be very expensive, and other competing companies could use it to learn the company
secrets.
Private Limited Companies cannot sell shares to the public. Their shares can only be sold to
people they know with the agreement of other shareholders. Transfer of shares is restricted here. This
will raise lesser capital than Public Ltd. Companies.
Public Ltd. Companies require a lot of legal documents and investigations before it can be
listed on the stock exchange.



Public and Private Limited Companies must also hold an Annual General Meeting
(AGM), where all shareholders are informed about the performance of the company and company
decisions, vote on strategic decisions and elect board of directors. This is very expensive to set up,
especially if there are thousands of shareholders.
Public Ltd. Companies may have managerial problems: since they are very large, they become
very difficult to manage. Communication problems may occur which will slow down decisionmaking.
In Public Ltd. Companies, there may be a divorce of ownership and control: The shareholders
can lose control of the company when other large shareholders outvote them or when board of
directors control company decisions.
A summary of everything learned until now, in this section, in case you’re getting confused:
Franchises
The owner of a business (the franchisor) grants a licence to another person or
business (the franchisee) to use their business idea – often in a specific geographical area.
Fast food companies such as McDonald’s and Subway operate around the globe through lots
of franchises in different countries.
ADVANTAGES
Rapid, low cost method of
business expansion
TO
FRANCHISOR
Gets and income from
franchisee in the form of
franchise fees and royalties
Franchisee will better
understand the local tastes
and so can advertise and
sell appropriately
Can access ideas and
suggestions from
franchisee
Franchisee will run the
operations
DISADVANTAGES
Profits from the franchise
needs to be shared with the
franchisee
Loss of control over
running of business
If one franchise fails, it can
affect the reputation of the
entire brand
Franchisee may not be as
skilled
Need to supply raw
material/product and
provide support and training
TO
FRANCHISEE
Cost of setting up business
An established brand and
trademark, so chance of
business failing is low
No full control over
business- need to strictly
follow franchisor’s
standards and rules
Franchisor will give
technical and managerial
support
Profits have to be shared
with franchisor
Franchisor will supply the
raw materials/products
Need to pay franchisor
franchise fees and royalties
Need to advertise and
promote the business in the
region themselves
Joint Ventures
Joint venture is an agreement between two or more businesses to work together on a
project. The foreign business will work with a domestic business in the same industry. Eg:
Google Earth is a joint venture/project between Google and NASA.




Advantages
Reduces risks and cuts costs
Each business brings different expertise to the joint venture
The market potential for all the businesses in the joint venture is increased
Market and product knowledge can be shared to the benefit of the businesses
Disadvantages


Any mistakes made will reflect on all parties in the joint venture, which may damage their reputations
The decision-making process may be ineffective due to different business culture or different styles of
leadership
Public Sector Corporations
Public sector corporations are businesses owned by the government and run by directors appointed
by the government. They usually provide essentials services like water, electricity, health services etc.
The government provides the capital to run these corporations in the form of subsidies (grants). The
UK’s National Health Service (NHS) is an example. Public corporations aim to:



To keep prices low so everybody can afford the service.
To keep people employed.
To offer a service to the public everywhere.
Advantages:





Some businesses are considered too important to be owned by an individual. (electricity, water,
airline)
Other businesses, considered natural monopolies, are controlled by the government. (electricity,
water)
Reduces waste in an industry. (e.g. two railway lines in one city)
Rescue important businesses when they are failing through nationalisation
Provide essential services to the people
Drawbacks:




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
1.5 – Business Objectives
and Stakeholder Objectives
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 the business
success, it has its benefits.




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 business in the private sector aim to achieve the following objectives.

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 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:

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 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 right 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:

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 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:
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.
2.1 – Motivating Workers
Motivation
People work for several reasons:




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

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 organisation, to break down labour (essentially
division of labour) to maximise 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.

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. Mangers can identify which
level their workers are on and then take the necessary action to advance them onto the next
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.

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’:





achievement
recognition
personal growth/development
promotion
work itself
According to Herzberg, the hygiene factors need to be satisfied, if not they will act as demotivators to the workers. However hygiene factors don’t act as motivators as their effect
quickly wear off. Motivators will truly motivate workers to work more effectively.
Motivating Factors
Financial Motivators







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 work sincerely 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: 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.
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

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

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?

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 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 labelling 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 motivate 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
2.2 – Organization
and Management
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:




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 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):



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 manager in most organisations act as staff managers.
Management
So,, what role do manager really have in an organization? Here are their five primary roles:

Planning: setting aims and targets for the organisations/department to achieve. It will give the
department and it’s employees a clear sense of 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 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 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 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
Leaderships 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 expects 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
manger has a very limited role to play.
Trade Unions
A trade union is a group of workers who have joined together to ensure their interest
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 overtime ban (refusing to work overtime), go 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
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 member 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.
2.3 – Recruitment, Selection
and Training of Workers
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 from 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. 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.
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Advantages:
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 promoted- urging 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 centres 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)
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
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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:

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:
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Time-consuming
Wages still have to be paid during training, even though they aren’t working
Delays the state of the employee starting the jo
On-the-job training: occurs by watching a more experienced worker doing the job
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
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 behaviour is unsatisfactory.
Redundancy: when an employee is no longer needed and so loses their work, through not due to any
fault 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 lot so 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 redundantunemployment 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.
2.4 – Internal and
External Communication
Effective 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. Example:
communication between departments, notices and circulars to workers, signboards and labels
inside factories and offices etc.
External communication is between the organisation and other organisations or individuals.
Example: orders of goods to suppliers, advertising of products, sending customers messages
about delivery, offers etc.
Effective communication involves:
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A transmitter/sender of the message
A medium of communication eg: letter, telephone conversation, text message
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 require a feedback. Example:
signs saying ‘no smoking’ or an instruction saying ‘deliver these goods to a customer’
Two-way communication is when the receiver gives a response to the message received.
Example: a letter from one manager to another about an important matter that needs to be
discussed. A two-way communication ensures that the person receiving the message
understands it and has acted up on it. It also makes the receiver feel more a part of the
process- could be a way of motivating employees.
Downward communication: messages from managers to subordinates i.e. from top to
bottom of an organization structure.
Upward communication: messages/feedback from subordinates to managers i.e. from
bottom to top of an organization structure
Horizontal communication occurs between people on the same level of an organization
structure.
Communication Methods
Verbal methods (eg: telephone conversation, face-to-face conversation, video conferencing,
meetings)
Advantages:
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Quick and efficient
There is an opportunity for immediate feedback
Speaker can reinforce the message- change his tone, body language etc. to influence the listeners.
Disadvantages:
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Can take long if there is feedback and therefore, discussions
In a meeting, it cannot be guaranteed that everybody is listening or has understood the message
No written record of the message can be kept for later reference.
Written methods (eg: letters, memos, text-messages, reports, e-mail, social media, faxes,
notices, signboards)
Advantages:
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There is evidence of the message for later reference.
Can include details
Can be copied and sent to many people, especially with e-mail
E-mail and fax is quick and cheap
Disadvantages:
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Direct feedback may not always be possible
Cannot ensure that message has been received and/or acknowledged
Language could be difficult to understand.
Long messages may cause disinterest in receivers
No opportunity for body language to be used to reinforce messages
Visual Methods (eg: diagrams, charts, videos, presentations, photographs, cartoons, posters)
Advantages:
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Can present information in an appealing and attractive way
Can be used along with written material (eg: reports with diagrams and charts)
Disadvantages:
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No feedback
May not be understood/ interpreted properly.
Factors that affect the choice of an appropriate
communication method:
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Speed: if the receiver has to get the information quickly, then a telephone call or text message has to
be sent. If speed isn’t important, a letter or e-mail will be more appropriate.
Cost: if the company wishes to keep costs down, it may choose to use letters or face-to-face meetings
as a medium of communication. Otherwise, telephone, posters etc. will be used.
Message details: if the message is very detailed, then written and visual methods will be used.
Leadership style: a democratic style would use two-way communication methods such as verbal
mediums. An autocratic one would use notices and announcements.
The receiver: if there is only receiver, then a personal face-to-face or telephone call will be more apt.
If all the staff is to be sent a message, a notice or e-mail will be sent.
Importance of a written record: if the message is one that needs to have a written record like a legal
document or receipts of new customer orders, then written methods will be used.
Importance of feedback: if feedback is important, like for a quick query, then a direct verbal or
written method will have to be used.
Formal communication is when messages are sent through established channels using
professional language. Eg: reports, emails, memos, official meetings.
Informal communication is when information is sent and received casually with the use of
everyday language. Eg: staff briefings. Managers can sometimes use the ‘grapevine’
(informal communication among employees- usually where rumours and gossips spread!) to
test out the reactions to new ideas (for example, a new shift system at a factory) before
officially deciding whether or not to make it official.
Communication Barriers
Communication barriers are factors that stop effective communication of messages.
3.1 – Marketing, Competition
and the Customer
HomeNotesBusiness Studies – 04503.1 – Marketing, Competition and the Customer
A market consists of all buyers and sellers of a particular good.
What is marketing?
By definition, marketing is the management process responsible for identifying, anticipating
and satisfying consumers’ requirements profitably.
The role of marketing in a business is as follows:
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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’. For example, loyalty
card schemes, discounts for continuous purchases, after-sales services, messages that inform past
customers of new products and offers etc.
Gain information on customers: by understanding why customers buy their products, a firm can
develop and sell better products in the future
Anticipate changes in customer needs: the business will need to keep looking for any changes in
customer spending patterns and see if they can produce goods that customers want that are not
currently available in the market.
Some objectives the marketing department in a firm may have:
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Raise awareness of their product(s)
Increase sales revenue and profits
Increase or maintain market share (this is the proportion of sales a company has in the overall market
sales. For example, if in a market, $1 million worth of toys were sold in a year and company A’s total
sales was $30,000 in that year, company A’s market share for the year is ($300,000/ $1000000) *100
= 30%)
Enter new markets at home or abroad
Develop new products or improve existing products.
Market Changes
Why customer spending patterns may change:
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change in their tastes and preferences
change in technology: as new technology becomes available, the old versions of products become
outdated and people want more sophisticated features on products
change in income: the higher the income, the more expensive goods consumers will buy and vice
versa
ageing population: in many countries, the proportion of older people is increasing and so demand for
products for seniors are increasing (such as anti-ageing creams, medical assistance etc.)
The power and importance of changing customer needs:
Firms need to always know what their consumers want (and they will need to undertake lots
of research and development to do so) in order to stay ahead of competitors and stay
profitable. If they don’t produce and sell what customers want, they will buy competitors’
products and the firm will fail to survive.
Why some markets have become more competitive:
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Globalization: products are being sold in markets all over the world, so there are more competitors in
the market
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Improvement in transportation infrastructures: better transport systems means that it is easier and
cheaper to distribute and sell products everywhere
Internet/E-Commerce: customers can now buy products over the internet form anywhere in the
world, making the market more competitive
How business can respond to changing spending patterns and increased competition:
A business has to ensure that it maintains its market share and remains competitive in the
market. It can ensure this by:
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maintaining good customer relationships: by ensuring that customers keep buying from their
business only, they can keep up their market share. By doing so, they can also get information about
their spending patterns and respond to their wants and needs to increase market share
keep improving its existing products, so that sales is maintained.
introduce new products to keep customers coming back, and drive them away from competitors’
products
keep costs low to maintain profitability: low costs means the firm can afford to charge low prices.
And low prices generally means more demand and sales, and thus market share.
Niche & Mass Marketing
Niche Marketing: identifying and exploiting a small segment of a larger market by
developing products to suit it. For example, Versace designs and Clique perfumes have niche
markets- the rich, high-status consumer group.
Advantages:
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Small firms can thrive in niche markets where large forms have not yet been established
If there are no or very few competitors, firms can sell products at a high price and gain high profit
margins because customers will be willing be willing to pay more for exclusive products
Firms can focus on the needs of just one customer group, thereby giving them an advantage over
large firms who only sell to the mass market
Limitations:
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Lack of economies of scale (can’t benefit from the lower costs that arise from a larger
operations/market)
Risk of over-dependence on a single product or market: if the demand for the product falls, the firm
won’t have a mass product they can fall back on
Likely to attract competition if successful
Mass Marketing: selling the same product to the whole market with no attempt to
target groups with in it. For example, the iPhone sold is the same everywhere, there are no
variations in design over location or income.
Advantages:
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Larger amount of sales when compared to a niche market
Can benefit from economies of scale: a large volume of products are produced and so the average
costs will be low when compared to a niche market
Risks are spread, unlike in a niche market. If the product isn’t successful in one market, it’s fine as
there are several other markets
More chances for the business to grow since there is a large market. In niche markets, this is difficult
as the product is only targeted towards a particular group.
Limitations:
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They will have to face more competition
Can’t charge a higher price than competition because they’re all selling similar products
Market Segmentation
A market segment is an identifiable sub-group of a larger market in which consumers have
similar characteristics and preferences
Market segmentation is the process of dividing a market of potential customers into
groups, or segments, based on different characteristics. For example, PepsiCo identified the
health-conscious market segment and targeted/marketed the Diet Coke towards them.
Markets can be segmented on the basis of socio-economic
groups (income), age, location, gender, lifestyle, use of the product (home/ work/ leisure/
business) etc.
Each segment will require different methods of promotion and distribution. For example,
products aimed towards kids would be distributed through popular retail stores and products
for businessmen would be advertised in exclusive business magazines.
Advantages:
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Makes marketing cost-effective, as it only targets a specific segment and meets their needs.
The above leads to higher sales and profitability
Increased opportunities to increase sales
3.2 – Market Research
Product-oriented business: such firms produce the product first and then tries to find a
market for it. Their concentration is on the product – its quality and price. Firms producing
electrical and digital goods such as refrigerators and computers are examples of productoriented businesses.
Market-oriented businesses: such firms will 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 market conditions. Example, mobile phone markets.
Market research is the process of collecting, analysing and interpreting information about a
product.
Why is market research important/needed?
Firms need to conduct market research in order to ensure that they are producing goods and
services that will sell successfully in the market and generate profits. If they don’t, they could
lose a lot of money and fail to survive. Market research will answer a lot of the business’s
questions prior to product development such as ‘will customers be willing to buy this
product?’, ‘what is the biggest factor that influences customers’ buying preferences- price or
quality?’, ‘what is the competition in the market like?’ and so on.
Market research data can be quantitative (numerical-what percentage of teenagers in the city
have internet access) or qualitative (opinion/ judgement- why do more women buy the
company’s product than men?)
Market research methods can be categorized into two: primary and secondary market
research.
Primary Market Research (Field Research)
The collection of original data. It involves directly collecting information from existing or
potential customers. First-hand data is collected by people who want to use the data (i.e. the
firm). Examples of primary market research methods include questionnaires, focus groups,
interviews, observation, and online surveys and so on.
The process of primary research:
1.
2.
3.
4.
5.
6.
Establish the purpose of the market research
Decide on the most suitable market research method
Decide the size of the sample (customers to conduct research on) and identify the sample
Carry out the research
Collate and analyse the data
Produce a report of the findings
Sample is a subset of a population that is used to represent the entire group as a whole. When
doing research, it is often impractical to survey every member of a particular population
because the number of people is simply too large. Selecting a sample is called sampling.
A random sampling occurs when people are selected at random for research, while quota
sampling is when people are selected on the basis of certain characteristics (age, gender,
location etc.) for research.
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Methods of primary research
Questionnaires: Can be done face-to-face, through telephone, post or the internet. Online
surveys can also be conducted whereby researchers will email the sample members to go onto a
particular website and fill out a questionnaire posted there. These questions need to be unbiased, clear
and easy to answer to ensure that reliable and accurate answers are logged in. (The first part of this
wikiHow article will give you the basic idea of how a questionnaire should be prepared.)
Advantages:
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Detailed information can be collected
Customer’s opinions about the product can be obtained
Online surveys will be cheaper and easier to collate and analyse
Can be linked to prize draws and prize draw websites to encourage customers to fill out surveys
Disadvantages:
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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.
Interviews: interviewer will have ready-made questions for the interviewee.
Advantages:
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Interviewer is able to explain questions that the interviewee doesn’t understand and can also ask
follow-up questions
Can gather detailed responses and interpret body-language, allowing interviewer to come to
accurate conclusions about the customer’s opinions.
Disadvantages:
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The interviewer could lead and influence the interviewee to answer a certain way. For example,
by rephrasing a question such as ‘Would you buy this product’ to ‘But, you would definitely buy
this product, right?’ to which the customer in order to appear polite would say yes when in
actuality they wouldn’t buy the product.
Time-consuming and expensive to interview everyone in the sample
Focus Groups: A group of people representative of the target market (a focus group) agree to provide
information about a particular product or general spending patterns over time. They can also test the
company’s products and give opinions on them.
Advantage:
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They can provide detailed information about the consumer’s opinions
Disadvantages:
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Time-consuming
Expensive
Opinions could be influenced by others in the group.
Observation: This can take the form of recording (eg: meters fitted to TV screens to see what
channels are being watched), watching (eg: counting how many people enter a shop), auditing (e.g.:
counting of stock in shops to see which products sold well).
Advantage:
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Inexpensive
Disadvantage:

Only gives basic figures. Does not tell the firm why consumer buys them.
Secondary Market Research (Desk Research)
The collection of information that has already been made available by others. Second-hand
data about consumers and markets is collected from already published sources.
Internal sources of information:
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Sales department’s sales records, pricing data, customer records, sales reports
Opinions of distributors and public relations officers
Finance department
Customer Services department
External sources of information:
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Government statistics: will have information about populations and age structures in the economy.
Newspapers: articles about economic conditions and forecast spending patterns.
Trade associations: if there is a trade association for a particular industry, it will have several reports
on that industry’s markets.
Market research agencies: these agencies carry out market research on behalf of the company and
provide detailed reports.
Internet: will have a wide range of articles about companies, government statistics, newspapers and
blogs.
Accuracy of Market Research Data
The reliability and accuracy of market research depends upon a large number of factors:
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How carefully the sample was drawn up, its size, the types of people selected etc.
How questions were phrased in questionnaires and surveys
Who carried out the research: secondary research is likely to be less reliable since it was drawn up by
others for different purpose at an earlier time.
Bias: newspaper articles are often biased and may leave out crucial information deliberately.

Age of information: researched data shouldn’t be too outdated. Customer tastes, fashions, economic
conditions, technology all move fast and the old data will be of no use now.
Presentation of Data from Market Research
Different data handling methods can be used to present data from market research. This will
include:

Tally Tables: used to record data in its original form. The tally table below shows the number and
type of vehicles passing by a shop at different times of the day:

Charts: show the total figures for each piece of data (bar/ column charts) or the proportion of each
piece of data in terms of the total number (pie charts). For example the above tally table data can be
recorded in a bar chart as shown below:
The pie chart above could show a company’s market share in different countries.

Graphs: used to show the relationship between two sets of data. For example how average
temperature varied across the year.
3.3 – Marketing Mix
Marketing mix refers to the different elements involved in the marketing of a good or
service- the 4 P’s- Product, Price, Promotion and Place.
Product
Product is the good or service being produced and sold in the market. This includes all the
features of the product as well as its final packaging.
Types of products include: consumer goods, consumer services, producer goods, producer
services.
What makes a successful product?
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It satisfies existing needs and wants of the customers
It is able to stimulate new wants from the consumers
Its design – performance, reliability, quality etc. should all be consistent with the product’s brand
image
It is distinctive from its 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 a business. The process:
1. Generate ideas: the firm brainstorms new product concepts, using customer suggestions,
competitors’ products, employees’ ideas, sales department data and the information provided by the
research and development department
2. Select the best ideas for further research: the firm decides which ideas to abandon and which to
research further. If the product is too costly or may not sell well, it will be abandoned
3. Decide if the firm will be able to sell enough units for the product to be a success: this research
includes looking into forecast sales, size of market share, cost-benefit analysis etc. for each product
idea, undertaken by the marketing department
4. Develop a prototype: by making a prototype of the new product, the operations department can see
how the product can be manufactured, any problems arising from it and how to fix them. Computer
simulations are usually used to produce 3D prototypes on screen
5. Test launch: the developed product is sold to one section of the market to see how well it sells,
before producing more, and to identify what changes need to be made to increase sales. Today a lot of
digital products like apps and software run beta versions, which is basically a market test
6. Full launch of the product: the product is launched to the entire market
Advantages:
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Can create a Unique Selling Point (USP) by developing a new innovative product for the first time in
the market. This USP can be used to charge a high price for the product as well as be used in
advertising.
Charge higher prices for new products (price skimming as explained later)
Increase potential sales, revenue and profit
Helps spreads risks because having more products mean that even if one fails, the other will keep
generating a profit for the company
Disadvantages:
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Market research is expensive and time consuming
Investment can be very expensive
Why is brand image important?
Brand image is an identity given to a product that differentiates it from competitors’ products.
Brand loyalty is the tendency of customers to keep buying the same brand continuously
instead of switching over to competitors’ products.
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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 – if there is an established high
brand image, then it is easier to charge high prices because customers will buy it nonetheless.
Easier to launch new products into the market if the brand image is already established. Apple is
one such company- their brand image is so reputed that new products that they launch now become an
immediate success.
Why is packaging important?
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It protects the product
It provide information about the product (its ingredients, price, manufacturing and expiry dates etc.)
To help consumers recognize the product (the brand name and logo on the packaging will help
identify what product it is)
It keeps the product fresh
Product Life Cycle (PLC)
The product life cycle refers to the stages a product goes through from it’s introduction to it’s
retirement in terms of sales.
At these different stages, the product will need different marketing decisions/strategies in
terms of the 4Ps.
Extension strategies: marketing techniques used to extend the maturity stage of a
product (to keep the product in the market):
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Finding new markets for the product
Finding new uses for the product
Redesigning the product or the packaging to improve its appeal to consumers
Increasing advertising and other promotional activities
The effect on the PLC of a product of a successful extension strategy:
Price
Price is the amount of money producers are willing to sell or consumer are willing to buy the
product for.
Different methods of pricing:
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Market skimming: Setting a high price for a new product that is unique or very different from other
products on the market.
Advantages:
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Profit earned is very high
Helps recover/compensate research and development costs
Disadvantage:
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It may backfire if competitors produce similar products at a lower price
Penetration pricing: Setting a very low price to attract customers to buy a new product
Advantages:
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Attracts customers more quickly
Can increase market share quickly
Disadvantages:
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Low revenue due to lower prices
Cannot recover development costs quickly
Competitive pricing: Setting a price similar to that of competitors’ products which are already
available in the market
Advantage:
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Business can compete on other matters such as service and quality
Disadvantage
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Still need to find ways of competing to attract sales.
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Cost plus pricing: Setting price by adding a fixed amount to the cost of making the product
Advantages:
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Quick and easy to work out the price
Makes sure that the price covers all of the costs
Disadvantage:
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Price might be set higher than competitors or more than customers are willing to pay, which reduces
sales and profits
Loss leader pricing/Promotional pricing: Setting the price of a few products at below cost to attract
customers into the shop in the hope that they will buy other products as well
Advantages:
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Helps to sell off unwanted stock before it becomes out of date
A good way of increasing short term sales and market share
Disadvantage:
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Revenue on each item is lower so profits may also be lower
Factors that affect what pricing method should be used:
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Is it a new or existing product?
If it’s new, then price skimming or penetration pricing will be most suitable. If it’s an existing
product, competitive pricing or promotional pricing will be appropriate.
Is the product unique?
If yes, then price skimming will be beneficial, otherwise competitive or promotional pricing.
Is there a lot of competition in the market?
If yes, competitive pricing will need to be used.
Does the business have a well-known brand image?
If yes, price skimming will be highly successful.
What are the costs of producing and supplying the product?
If there are high costs, costs plus pricing will be needed to cover the costs. If costs are low, market
penetration and promotional pricing will be appropriate.
What are the marketing objectives of the business?
If the business objective is to quickly gain a market share and customer base, then penetration pricing
could be used. If the objective is to simply maintain sales, competitive pricing will be appropriate.
Price Elasticity
The PED of a product refers to the responsiveness of the quantity demanded for it to
changes in its price.
PED (of a product) = % change in quantity demanded / % change in price
When the PED is >1, that is there is a higher % change in demand in response to a change in
price, the PED is said to be elastic.
When the PED is <1, that is there is a lower % change in demand in response to a change in
price, the PED is said to be inelastic.
Producers can calculate the PED of their product and take suitable action to make the product
more profitable.
If the product is found to have an elastic demand, the producer can lower prices to
increase profitability. The law of demand states that a fall in price increases the demand.
And since it is an elastic product (change in demand is higher than change in price), the
demand of the product will increase highly. The producers get more profit.
If the product is found to have an inelastic demand, the producer can raise prices to
increase profitability. Since quantity demanded wouldn’t fall much as it is inelastic, the high
prices will make way for higher revenue and thus higher profits.
For a detailed explanation about PED, click here
Place
Place refers to how the product is distributed from the producer to the final consumer. There
are different distribution channels that a product can be sold through.
Distribution
Channel
Manufacturer
to Consumer
Manufacturer
to Retailer
to Consumer
Explanation
The product is sold to the
consumer straight from the
manufacturer. A good example
is a factory outlet where
products directly arrive at their
own shop from the factory and
are sold to customers.
The manufacturer will sell its
products to a retailer (who will
have stocks of products from
other manufacturers as well)
who will then sell them to
customers who visit the shop.
For example, brands like Sony,
Canon and Panasonic sell their
products to various retailers.
Advantages
Disadvantages
– All of the profit is
earned by the producer
– The producer controls
all parts of the
marketing mix
– Quickest method of
getting the product to
the consumer
– Delivery costs
may be high if
there are
customers over a
wide area
– All storage costs
must be paid for
by the producer
– All promotional
activities must be
carried out and
financed by the
producer
– The cost of holding
inventories of the
product is paid by the
retailer
– The retailer will pay
for advertising and other
promotional activities
– Retailers are more
conveniently located for
consumers
– The retailer
takes some of the
profit away from
the producer
– The producer
loses some control
of the marketing
mix
– The producer
must pay for
delivery of
products to the
retailers
– Retailers usually
Distribution
Channel
Explanation
Advantages
Disadvantages
sell competitors’
products as well
Manufacturer
to Wholesaler
to Retailer
to Consumer
The manufacturer will sell
large volumes of its products to
a wholesaler (wholesalers will
have stocks from different
manufacturers). Retailer will
buy small quantities of the
product from the wholesaler
and sell it to the consumers.
One good example is the
distribution of medicinal drugs.
Manufacturer
to Agent
to Wholesaler
to Retailer
to Consumer
The manufacturer will sell their
products to an agent who has
specialized information about
the market and will know the
best wholesalers to sell them to.
This is common when firms are
exporting their products to a
foreign country. They will need
a knowledgeable agent to take
care of the products’
distribution in another country
– Wholesalers will
advertise and promote
the product to retailers
– Wholesalers pay for
transport and storage
costs
– Another
middleman is
added so more
profit is taken
away from the
producer
– The producer
loses even more
control of the
marketing mix
– The agent has
specialised knowledge
of the market
– Another
middleman is
added so even
more profit is
taken away from
the producer
What affects place decisions?
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The type of product it is: if it’s sold to producers of other goods, distribution would either be direct
(specialist machinery) or wholesaler (nuts, bolts, screws etc.).
The technicality of the product: as lots of technical information needs to be passed to the customer,
direct selling is usually preferred.
How often the product is purchased: if the product is bought on a daily basis, it should be sold
through retail stores that customers can easily access.
The price of the product: if the products is an expensive, luxury good, it would only be sold through
a few specialist, high-end outlets For example, luxury watches and jewellery.
The durability of the product: if it’s an easily perishable product like fruits, it will need to be sold
through a wide amount of retailers to be sold quickly.
Location of customers: the products should be easily accessible by its customers. If customers are
located over the world, e-commerce (explained below) will be required.
Where competitors sell their product: in order to directly compete with competitors, the products
need to be sold where competitors are selling too.
Promotion
Promotion: marketing activities used to communicate with customers and potential
customers to inform and persuade them to buy a business’s products.
Aims of promotion:
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Inform customers about a new product
Persuade customers to buy the product
Create a brand image
Increase sales and market share
Types of promotion
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Advertising: Paid-for communication with consumers which uses printed and visual media like
television, radio, newspapers, magazines, billboards, flyers, cinema etc. This can be informative
(create product awareness) or persuasive (persuade consumers to buy the product). The process of
advertising:
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Sales Promotion: using techniques such as ‘buy one get one free’, occasional price reductions, free
after-sales services, gifts, competitions, point-of–sale displays (a special display stand for a product in
a shop), free samples etc. to encourage sales.
Below-the-line promotion: promotion that is not paid for communication but uses incentives to
encourage consumers to buy. Incentives include money-off coupons or vouchers, loyalty reward
schemes, competitions and games with cash or other prizes.
Personal selling: sales staff communicate directly with consumer to achieve a sale and form a longterm relationship between the firm and consumer.
Direct mail: also known as mailshots, printed materials like flyers, newsletters and brochures which
are sent directly to the addresses of customers.
Sponsorship: payment by a business to have its name or products associated with a particular event.
For example Emirates is Spanish football club Real Madrid’s jersey sponsor- Emirates pays the club
to be its sponsor and gains a high customer awareness and brand image in return.
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What affects promotional decisions?
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Stage of product on the PLC: different stages of the PLC will require different promotional
strategies; see above.
The nature of the product: If it’s a consumer good, a firm could use persuasive advertising and use
billboards and TV commercials. Producer goods would have bulk-buy-discounts to encourage more
sales. The kind of product it is can affect the type of advertising, the media of advertising and the
method of sales promotion.
The nature of the target market: a local market would only need small amounts of advertising while
national markets will need TV and billboard advertising. If the product is sold to a mass market,
extensive advertising would be needed. But niche market products such as water skis would only need
advertising in special sports and lifestyle magazines.
Cost-effectiveness: the amount of money put into promotion (out of the total marketing budget)
should be not too much that it fails to bring in the sales revenue enough to cover those costs at least.
Promotional activities are highly dependent on the budget.
Technology and the Marketing Mix
It is also worth noting that the internet/ e-commerce is now widely used to distribute
products. E-Commerce is the use of the internet and other technologies used by businesses
to market and sell goods and services to customers. Examples of e-commerce include online
shopping, internet banking, online ticket-booking, online hotel reservations etc.
Websites like Amazon and e-Bay act as online retailers.
Online selling is favoured by producers because it is cheaper in the long-run and they
can sell products to a larger customer base/ market. However there will be increased
competition from lots of producers.
Consumers prefer online shopping because there are wider choices of detailed products that
are also cheaper and they can buy things at their own convenience 24×7. However, there
is no personal communication with the producer and online security issues may occur.
However, e-commerce means an entire new type of marketing strategy is also required –
online promotions, new channel of distribution, new pricing strategies (since price
competition in e-commerce is very high and demand is very price elastic). It requires a lot of
money to set up – online websites, promotions, web developers and technicians to run and
maintain the system etc.
The internet is also used for promotion and advertising of products in the form of paid social
media ads and sponsors, pop-ups, email newsletters etc. It helps reach target customers,
is relatively cheap and helps the firm respond to market changes quicker (since online
ads can be easily altered/updated rather than billboards and TV ads). But it can alienate and
chase customers away if they see it too frequently and find it annoying. There is also the risk
of the adverts being publicised negatively if it has annoying or offensive content that
customers quickly criticise (since content is more easily shareable online).
3.4 – Marketing Strategy
Marketing Strategy
A marketing strategy is a plan to combine the right combination of the four elements of the
marketing mix for a product to achieve its marketing objectives. Marketing objectives could
include maintaining market shares, increasing sales in a niche market, increasing sale of an
existing product by using extension strategies etc.
Factors that affect the marketing strategy:
Legal Controls on Marketing
There are various laws that can affect marketing decisions on quality, price and the contents of
advertisements.
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laws that protect consumers from being sold faulty and dangerous goods
laws that prevent the firms from using misleading information in advertising Example:
Volkswagen falsely advertised environmentally friendly diesel cars and were legally forced to pull all
cars from the market
laws that protect consumers from being exploited in industries where there is little or no
competition, known as monopolising.
Entering New Markets
Growing business in other countries can increase sales, revenue and profits. This is because
the business is now available to a wider group of people, which increases potential
customers. If the home markets have saturated (product is in maturity stage), firms take their
products to international markets. Trade barriers and restrictions have also reduced
significantly over the years, along with new transport infrastructures, so it is now cheaper
and easier to export products to other countries.
Problems of entering foreign markets:
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Difference in language and culture: It may be difficult to communicate with people in other
countries because of language barriers and as for culture, different images, colors and symbols have
different meanings and importance in different places. For example, McDonald’s had to make its
menu more vegetarian in Indian markets
Lack of market knowledge: The business won’t know much about the market it is entering and the
customers won’t be familiar with the new business brand, and so getting established in the market will
be difficult and expensive
Economic differences: The cost and prices may be lower or higher in different countries so
businesses may not be able to sell the product at the price which will give them a profit
High transport costs
Social differences: Different people will have different needs and wants from people in other
countries, and so the product may not be successful in all countries
Difference in legal controls to protect consumers: The business may have to spend more money on
producing the products in a way that complies with that country’s laws.
How to overcome such problems:

Joint venture: an agreement between two or more businesses to work together on a project. The
foreign business will work with a domestic business in the same industry. Eg: Japan’s Suzuki Motor
Corporation created a joint venture with India’s Maruti Udyog Limited to form Maruti Suzuki, a
highly successful car manufacturing project in India.
Advantages:
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Reduces risks and cuts costs
Each business brings different expertise to the joint venture
The market potential for all the businesses in the joint venture is increased
Market and product knowledge can be shared to the benefit of the businesses
Disadvantages:
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Any mistakes made will reflect on all parties in the joint venture, which may damage their
reputations
The decision-making process may be ineffective due to different business culture or different
styles of leadership
Franchise/License: the owner of a business (the franchisor) grants a licence to another person or
business (the franchisee) to use their business idea – often in a specific geographical area. Fast food
companies such as McDonald’s and Subway operate around the globe through lots of franchises in
different countries.
ADVANTAGES
TO
FRANCHISOR
Rapid, low cost method of
business expansion
Gets an income from
franchisee in the form of
franchise fees and royalties
Franchisee will better
understand the local tastes
and so can advertise and
sell appropriately
Can access ideas and
suggestions from
franchisee
TO
FRANCHISEE
DISADVANTAGES
Profits from the franchise
needs to be shared with the
franchisee
Loss of control over
running of business
If one franchise fails, it can
affect the reputation of the
entire brand
Franchisee may not be as
skilled
Franchisee will run the
operations
Need to supply raw
material/product and
provide support and training
Working with an established
brand means chance of
business failing is low
Cost of setting up business
Franchisor will give
technical and managerial
support
Franchisor will supply the
raw materials/products
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
Need to advertise and
promote the business in the
region themselves
4.1 – 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:
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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:
Businesses often measure the labour productivity to see how efficient their employees are in
producing output. The formula for it is:
Businesses look to increase productivity, as the output will increase per employee and so
the average costs of production will fall. This way, they will be able to sell more while
also being able to lower prices.
Ways to increase productivity:
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improving labour skills by training them so they work more productively and waste lesser resources
introducing automation (using machinery and IT equipment to control production) so that production
is faster and error-free
improve employee motivation so that they will be willing to produce more and efficiently so.
improved quality control and assurance systems to ensure that there are no wastage of resources
Inventory Management
Firms can hold inventory (stock) of raw materials, goods that are not completed yet (a.k.a
work-in-progress) and finished unsold goods. Finished good stocks are kept so that any
unexpected rise in demand is fulfilled.
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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 refers to the various techniques a firm can adopt to reduce wastage and
increase efficiency/productivity.
The seven types of wastage that can occur in a firm:
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
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 cost

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Motion-unnecessary moving about of 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 a 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
By avoiding such wastage, a firm can benefit in many ways
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less storage of raw materials, components and finished goods- less money and time tied up in
inventory
quicker production of goods and services
no need to repair faulty goods- leads to good customer satisfaction
ultimately, costs will lower, which helps reduce prices, making the business more competitive and
earn higher profits as well
Now, how to implement lean production? The different methods
are:

Kaizen: it’s a Japanese term meaning ‘continuous improvement’. It aims to increase efficiency and
reduce wastage by getting workers to get together in small groups and discuss problems and
suggest solutions. Since they’re the ones directly involved in production they will know best to
identify issues. When kaizen is implemented, the factory floor, for example, is rearranged by repositioning machinery and equipment so that production can flow smoothly through the factory
in the least possible time.
Benefits:

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
increased productivity
reduced amount of space needed for production
improved factory layout may allow some jobs to be combined, so freeing up employees to do
other jobs in the factory

Just-in-Time inventory control: this techniques eliminates the need to hold any kind of inventory by
ensuring that supplies arrive just in time they are needed for production. The making of any parts is
done just in time to be used in the next stage of production and finished goods are made just in time
they are needed for delivery to the customer/shop. The firm will need very reliable suppliers and an
efficient system for reordering supplies.
Benefits:
.

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
Reduces cost of holding inventory
Warehouse space is not needed any more, so more space is available for other uses
Finished goods are immediately sold off, so cash flows in quickly
Cell Production: the production line is divided into separate, self-contained units each making a
part of the finished good. This works because it improves worker morale when they are put into teams
and concentrate on one part alone.
Methods of Production

Job Production: products are made specifically to order, customized for each customer. Eg: wedding
cakes, made-to-measure suits, films etc.
Advantages:
.



Most suitable for one-off products and personal services
The product meets the exact requirement of the customer
Workers will have more varied jobs as each order is different, improving morale
very flexible method of production
Disadvantages:
. Skilled labour will often be required which is expensive
 Costs are higher for job production firms because they are usually labour-intensive
 Production often takes a long time
 Since they are made to order, any errors may be expensive to fix
 Materials may have to be specially purchased for different orders, which is expensive

Batch Production: similar products are made in batches or blocks. A small quantity of one product is
made, then a small quantity of another. Eg: cookies, building houses of the same design etc.
Advantages:Flexible way of working- production can be easily switched between products
 Gives some variety to workers
 More variety means more consumer choice
 Even if one product’s machinery breaks down, other products can still be made
Disadvantages:Can be expensive since finished and semi-finished goods will need moving about
 Machines have to be reset between production batches which delays production
 Lots of raw materials will be needed for different product batches, which can be expensive.

Flow Production: large quantities of products are produced in a continuous process on the production
line. Eg: a soft drinks factory.
Advantages:There is a high output of standardized (identical) 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:A very boring system for the workers, leads to low job satisfaction and motivation
 Lots of raw materials and finished goods need to be held in inventory- this is 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:

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

The nature of the product: Whether it is a personal, customized-to-order product, in which case job
production will be used. If it is a standard product, then flow production will be used
The size of the market: For a large market, flow production will be required. Small local and niche
markets may make use of batch and flow production. Goods that are highly demanded but not in very
large quantities, batch production is most suitable.
The nature of demand: If there is a fair and steady demand for the product, it would be more
suitable to run a production line for the product. For less frequent demand, batch and job will be
appropriate.
The size of the business: Small firms with little capital access will not produce using large automated
production lines, but will use batch and job production.
Technology and Production

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

Automation: equipment used in the factory is controlled by computers to carry out mechanical
processes, such as spray painting a car body.
Mechanization: production is done by machines but is operated by people
CAD (computer aided designing): a computer software that draws items being designed more quickly
and allows them to be rotated, zoomed in and viewed from all angles.
CAM (computer aided manufacturing): computers monitor the production process and controls
machines and robots-similar to automation
CIM (computer integrated manufacturing): the integration of CAD and CAM. The computers that
design the product using CAD is connected to the CAM software to directly produce the physical
design.
EPOS (electronic point-of-sale): used at checkouts/tills where operator scans the bar-code of each
item bought by the customer individually. The item details and price appear on screen and are printed
in the receipt. They can also automatically update and reorder stock as items are bought.
EFTPOS (electronic funds transfer at point-of-sale): the electronic cash register at the till will be
connected to the retailer’s main computer and different banks. When the customer swipes the debit
card at the till, information is read by the scanner and an amount is withdrawn from the customer’s
bank account (after the PIN is entered).
Advantages of technology in production
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Greater productivity
Greater job satisfaction among workers as boring, routine jobs are done by machines
Better quality products
Quicker communication and less paperwork
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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
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Unemployment rises as machines and computers replace human labour
Expensive to set up
New technology quickly becomes outdated and frequent updating of systems will be needed- this is
expensive and time-consuming.
Employees may take time to adjust to new technology or even resist it as their work practices change.
4.2 – Costs, Scale of
Production and Breakeven Analysis
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 longrun 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 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.
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.
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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 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 costs is 5000 across all output (since it is fixed!).
The variable cost is $3 per unit so will be $0 at output is 0 and $6000 at output 2000- so 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 are 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.
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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 cause 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!
4.3 – Achieving
Quality Production
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
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 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.
4.4 – 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 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 provide
services- eg: business that 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 govt. 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, 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 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 labour: if 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.
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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 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 underdevelopment. Grants and subsidies can be given to businesses that set up in such areas.
to discourage firms from setting in areas of that are overcrowded or renowned for natural
beauty. Planning restrictions can be put into place to do so.
5.1 – Business Finance:
Needs and Sources
Finance is the money required in the business. Finance is needed to set up the business,
expand it and increase working capital (the day-to-day running expenses).
Start-up capital is the initial capital used in the business to buy fixed and current assets
before it can start trading.
Working Capital finance needed by a business to pay its day-to-day running expenses
Capital expenditure is the money spent on fixed assets (assets that will last for more than a
year). Eg: vehicles, machinery, buildings etc. These are long-term capital needs.
Revenue Expenditure, similar to working capital, is the money spent on day-to-day
expenses which does not involve the purchase of long-term assets. Eg: wages, rent. These are
short-term capital needs.
Sources of Finance
Internal finance is obtained from within the business itself.
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Retained Profit: profit kept in the business after owners have been given their share of the profit.
Firms can invest this profit back in the businesses.
Advantages:
– Does not have to be repaid, unlike, a loan.
– No interest has to be paid
Disadvantages:
– A new business will not have retained profit
– Profits may be too low to finance
– Keeping more profits to be used as capital will reduce owner’s share of profit and they may resist
the decision.
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Sale of existing assets: assets that the business doesn’t need anymore, for example, unused
buildings or spare equipment can be sold to raise finance
Advantages:
– Makes better use of capital tied up in the business
– Does not become debt for the business, unlike a loan.
Disadvantages:
– Surplus assets will not be available with new businesses
– Takes time to sell the asset and the expected amount may not be gained for the asset
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Sale of inventories: sell of finished goods or unwanted components in inventory.
Advantage:
– Reduces costs of inventory holding
Disadvantage:
– If not enough inventory is kept, unexpected increase demand form customers cannot be fulfilled
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Owner’s savings: For a sole trader and partnership, since they’re unincorporated (owners and
business is not separate), any finance the owner directly invests from hos own saving will be internal
finance.
Advantages:
– Will be available to the firm quickly
– No interest has to be paid.
Disadvantages:
– Increases the risk taken by the owners.
External finance is obtained from sources outside of the business.
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Issue of share: only for limited companies.
Advantage:
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A permanent source of capital, no need to repay the money to shareholders
no interest has to be paid
Disadvantages:
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Dividends have to be paid to the shareholders
If many shares are bought, the ownership of the business will change hands. (The ownership is
decided by who has the highest percentage of shares in the company)
Bank loans: money borrowed from banks
Advantages:
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Quick to arrange a loan
Can be for varying lengths of time
Large companies can get very low rates of interest on their loans
Disadvantages:
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Need to pay interest on the loan periodically
It has to be repaid after a specified length of time
Need to give the bank a collateral security (the bank will ask for some valued asset, usually some
part of the business, as a security they can use if at all the business cannot repay the loan in the
future. For a sole trader, his house might be collateral. So there is a risk of losing highly valuable
assets)
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Debenture issues: debentures are long-term loan certificates issued by companies. Like
shares, debentures will be issued, people will buy them and the business can raise money. But this
finance acts as a loan- it will have to be repaid after a specified period of time and interest will have to
be paid for it as well.
Advantage:
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Can be used to raise very long-term finance, for example, 25 years
Disadvantage:
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Interest has to be paid and it has to be repaid
Debt factoring: a debtor is a person who owes the business money for the goods they have
bought from the business. Debt factors are specialist agents that can collect all the business’ debts
from debtors.
Advantages:
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Immediate cash is available to the business
Business doesn’t have to handle the debt collecting
Disadvantage:
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The debt factor will get a percent of the debts collected as reward. Thus, the business doesn’t get
all of their debts
Grants and subsidies: government agencies and other external sources can give the
business a grant or subsidy
Advantage:
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Do not have to be repaid, is free
Disadvantage:
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There are usually certain conditions to fulfil to get a grant. Example, to locate in a particular
under-developed area.
Micro-finance: special institutes are set up in poorly-developed countries where financiallylacking people looking to start or expand small businesses can get small sums of money. They provide
all sorts of financial services
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Crowdfunding: raises capital by asking small funds from a large pool of people, e.g. via
Kickstarter. These funds are voluntary ‘donations’ and don’t have to be return or paid a dividend.
Short-term finance
Provides the working capital a business needs for its day-to-day operations.

Overdrafts: similar to loans, the bank can arrange overdrafts by allowing businesses to spend
more than what is in their bank account. The overdraft will vary with each month, based on how much
extra money the business needs.
Advantages:
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Flexible form of borrowing since overdrawn amounts can be varied each month
Interest has to be paid only on the amount overdrawn
Overdrafts are generally cheaper than loans in the long-term
Disadvantages:
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Interest rates can vary periodically, unlike loans which have a fixed interest rate.
The bank can ask for the overdraft to be repaid at a short-notice.
Trade Credits: this is when a business delays paying suppliers for some time, improving their
cash position
Advantage:
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No interests, repayments involved
Disadvantage:
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If the payments are not made quickly, suppliers may refuse to give discounts in the future or
refuse to supply at all
Debt Factoring: (see above)
Long-term finance
Is the finance that is available for more than a year.
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Loans: from banks or private individuals.
Debentures
Issue of Shares
Hire Purchase: allows the business to buy a fixed asset and pay for it in monthly instalments that
include interest charges. This is not a method to raise capital but gives the business time to raise the
capital.
Advantage:
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The firms doesn’t need a large sum of cash to acquire the asset
Disadvantage:
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A cash deposit has to be paid in the beginning
Can carry large interest charges.
Leasing:
This allows a business to use an asset without purchasing it. Monthly leasing payments are instead
made to the owner of the asset. The business can decide to buy the asset at the end of the leasing
period. Some firms sell their assets for cash and then lease them back from a leasing company. This is
called sale and leaseback.
Advantages:
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The firm doesn’t need a large sum of money to use the asset
The care and maintenance of the asset is done by the leasing company
Disadvantage:
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The total costs of leasing the asset could finally end up being more than the cost of purchasing the
asset!
Factors that affect choice of source of finance
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Purpose: if a fixed asset is to be bought, hire purchase or leasing will be appropriate, but if finance is
needed to pay off rents and wages, debt factoring, overdrafts will be used.
Time-period: for long-term uses of finance, loans, debenture and share issues are used, but for a short
period, overdrafts are more suitable.
Amount needed: for large amounts, loans and share issues can be used. For smaller amounts,
overdrafts, sale of assets, debt factoring will be used.
Legal form and size: only a limited company can issue shares and debentures. Small firms have
limited sourced of finances available to choose from
Control: if limited companies issue too many shares, the current owners may lose control of the
business. They need to decide whether they would risk losing control for business expansion.
Risk- gearing: if business has existing loans, borrowing more capital can increase gearing- risk of the
business- as high interests have to be paid even when there is no profit, loans and debentures need to
be repaid etc. Banks and shareholders will be reluctant to invest in risky businesses.
Finance from banks and shareholders
Chances of a bank willing to lend a business finance is higher when:
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A cash flow forecast is presented detailing why finance is needed and how it will be used
An income statement from the last trading year and the forecast income statement for the next year, to
see how much profit the business makes and will make.
Details of existing loans and sources of finance being used
Evidence that a security/collateral is available with the business to reduce the bank’s risk of lending
A business plan is presented to explain clearly what the business hopes to achieve in the future and
why finance is important to these plans
Chances of a shareholder willing to invest in a business is higher when:
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the company’s share prices are increasing- this is a good indicator of improving performance
dividends and profits are high
the company has a good reputations and future growth plans
5.2 – Cash Flow Forecasting
and Working Capital
Why is cash important?
If a firm doesn’t have any cash to pay its workers, suppliers, landlord and government, the
business could go into liquidation– selling everything it owns to pay its debts. The business
needs to have an adequate amount of cash to be able to pay for all its short-term payments.
Cash Flow
The cash flow of a businesses is its cash inflows and cash outflows over a period of time.
Cash inflows are the sums of money received by the business over a period of time. E.g.:
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sales revenue from sale of products
payment from debtors– debtors are customers who have already purchased goods from the business
but didn’t pay for them at that time
money borrowed from external sources, like loans
the money from the sale of business assets
investors putting more money into the business
Cash outflows are the sums of money paid out by the business over a period of time. Eg:
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purchasing goods and materials for cash
paying wages, salaries and other expenses in cash
purchasing fixed assets
repaying loans (cash is going out of the business)
by paying creditors of the business- creditors are suppliers who supplied items to the business but
were not paid at the time of supply.
The cash flow cycle:
Cash flow is not the same as profit! Profit is the surplus amount after
total costs have been deducted from sales. It includes all income and payments incurred in the
year, whether already received or paid or to not yet received or paid respectfully. In a cash
flow, only those elements paid by cash are considered.
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. It can help tell the manager:
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how much cash is available for paying bills, purchasing fixed assets or repaying loans
how much cash the bank will need to lend to the business to avoid insolvency (running out of liquid
cash)
whether the business has too much cash that can be put to a profitable use in the business
Example of a cash flow forecast for the four months:
The cash inflows are listed first and then the cash outflows. The total inflows and outflows
have to be calculated after each section.
The opening cash/bank balance is the amount of cash held by the business at the start of the
month
Net Cash Flow = Total Cash Inflow – Total Cash Outflow
The net cash flow is added to opening cash balance to find the closing cash/bank balance–
the amount of cash held by the business at the end of the month. Remember, the closing
cash/bank balance for one month is the opening cash/bank balance for the next month!
The figures in bracket denote a negative balance, i.e., a net cash outflow (outflows > inflows)
Uses of cash flow forecasts:
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when setting up the business the manager needs to know how much cash is required to set up the
business. The cash flow forecast helps calculate the cash outflows such as rent, purchase of assets,
advertising etc.
A statement of cash flow forecast is required by bank managers when the business applies for a
loan. The bank manager will need to know how much to lend to the business for its operations, when
the loan is needed, for how long it is needed and when it can be repaid.
Managing cash flow– if the cash flow forecast gives a negative cash flow for a month(s), then the
business will need to plan ahead and apply for an overdraft so that the negative balance is avoided (as
cash come in and the inflow exceeds the outflow). If there is too much cash, the business may decide
to repay loans (so that interest payment in the future will be low) or pay off creditors/suppliers (to
maintain healthy relationship with suppliers).
How can cash flow problems be overcome?
When a negative cash flow is forecast (lack of cash) the following methods can be used to
correct it:
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Increase bank loans: bank loans will inject more cash into the business, but the firm will have to pay
regular interest payments on the loans and it will eventually have to be repaid, causing future cash
outflows
Delay payment to suppliers: asking for more time to pay suppliers will help decrease cash outflows
in the short-run. However, suppliers could refuse to supply on credit and may reduce discounts for
late payment
Ask debtors to pay more quickly: if debtors are asked to pay all the debts they have to the firm
quicker, the firm’s cash inflows would increase in the short-run. These debtors will include credit
customers, who can be asked to make cash sales as opposed to credit sales for purchases (cash will
have to be paid on the spot, credit will mean they can pay in the future, thus becoming debtors).
However, customers may move to other businesses that still offers them time to pay
Delay or cancel purchases of capital equipment: this will greatly help reduce cash outflows in the
short-run, but at the cost of the efficiency the firm loses out on not buying new technology and still
using old equipment.
In the long-term, to improve cash flow, the business will need to attract more investors, cut
costs by increasing efficiency, develop more products to attract customers and increase
inflows.
Working Capital
Working capital the capital required by the business to pay its short-term day-to-day
expenses. Working capital is all of the liquid assets of the business– the assets that can be
quickly converted to cash to pay off the business’ debts.
Working capital can be in the form of:


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cash needed to pay expenses
cash due from debtors – debtors/credit customers can be asked to quickly pay off what they owe to the
business in order for the business to raise cash
cash in the form of inventory – Inventory of finished goods can be quickly sold off to build cash
inflows. Too much inventory results in high costs, too low inventory may cause production to stop.
5.3 – Income Statements
Accounts are the financial records of a firm’s transactions.
Final Accounts are prepared at the end of the financial year and give details of the
profit or loss made as well as the worth of the business.
Profit
Profit = Sales Revenue – Total cost
When the total costs exceed the sales revenue, then a loss is made.
How to increase profit?


Increase sales revenue
Cut costs
Why is profit important to a business?

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It is a reward for enterprise: entrepreneurs start businesses to make a profit
It is a reward for risk-taking: entrepreneurs has to take considerable risks when they invest capital
in a venture, and profits are a compensation/reward to them for taking these risks (paid in the form of
profits or dividends)
It is a source of finance: after payments to owners, profits are reinvested back into the business for
further expansion (this is called retained earnings)
It is an indicator of success: more profits indicate to investors that the business/industry is worth
their time and money, and they will invest more either int he firm or new firms of their own, in the
hopes of gaining good returns on their investment
For social enterprises, profit is not one of their primary objectives, but welfare of the society
is. However, they will also strive to make some profit to reinvest it back into the business and
help it grow.
Profit is not the same as cash flow!
Profit is the surplus amount after total costs have been deducted from sales. It includes all
income and payments incurred in the year, whether already received or paid or to not yet
received or paid respectfully. In a cash flow, only those elements paid in cash immediately
are considered.
Income Statement
An income statement is a financial document of the business that records all
income generated by the business as well as the costs incurred by the business and thus
the profit or loss made over the financial year. Also known as profit and loss account.
A simple Income Statement
Sales Revenue = total sales
Cost of Sales = total variable cost of production + (opening inventory of finished goods
– closing inventory of finished goods)
Gross Profit = Sales Revenue – Cost of Sales
Expenses: all overheads/fixed costs
Net Profit = Gross Profit – Expenses
Profit after Tax = Net Profit – Tax
Dividends: share of profit given to shareholders; return on shares
Retained Profit for the year = Profit after Tax – Dividends. This retained earnings is then
kept aside for use in the business.
Only
a very small portion of the sales revenue ends up being the retained profit. All costs, taxes and
dividends have to be deducted from sales.
Uses of Income Statement
Income statements are used by managers to:


know the profit/loss made by the business
Compare their performance with that of previous years’ and with that of competitors’. If profit is
lower than that of last year’s why it is falling and what can they do to correct the issue? If it is lower
than that of competitors’ what can they do to be more profitable and be competitive in the market?
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
Know the profitability of individual products by preparing separate income statement for each
product. They may decide to stop production of products that are making losses.
Help decide what products to launch by preparing forecast income statement for the first few years.
Whichever product is forecast to have a higher profit, the business will choose to launch that product
5.4 – Statement of
Financial Position
The balance sheet, along with the income statement is prepared at the end of the
financial year. It shows the value of a business’ assets and liabilities at a particular time.
It is also known as ‘statement of financial position’.
Assets are those items of value owned by the business.
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Fixed/non-current assets (buildings, vehicles, equipment etc.) are assets that remain in the business
for more than a year – their values fall over time in a process called depreciation every year.
Short-term/current assets (inventory, trade receivables (debts from customers), cash etc) are owned
only for a very short time.
There can also intangible (cannot be touched or felt) non-current assets like copyrights and patents
that add value to the business.
Liabilities are the debts owed by the business to its creditors.
Long-term/non-current liabilities (loans, debentures etc.)- they do not have to be repaid within a
year.
Short-term/current liabilities (trade payables (to suppliers), overdraft etc.)- these need to be repaid
within a year.
CURRENT ASSETS – CURRENT LIABILITIES =
WORKING CAPITAL
This is because the liquid cash a company has with them will be the liquid (short-term) assets
they own less the short-term debts they have to pay.
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.
Check whether the equations on the right are satisfied in this balance sheet!
SHAREHOLDERS EQUITY = TOTAL ASSETS – TOTAL LIABILITIES
TOTAL ASSETS = TOTAL LIABILITIES + SHAREHOLDERS EQUITY
CAPITAL EMPLOYED = SHAREHOLDERS EQUITY + NON-CURRENT
LIABILITIES
This is because non-current liabilities like loans are also used for permanent investment in the
company.
Uses of a 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
i.e., whether it is liquid

One can also 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
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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
5.5 – 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
accounts of a business. To do so, ratio analysis is employed.
Ratio Analysis

Profitability Ratios: profitability is the ability of a company to use its resources to
generate revenues in excess of its expenses. These ratios are used to see how profitable the business
has been in the year ended.

Return on Capital Employed (ROCE): this calculates the return (net profit)
in terms of the capital invested in the business (shareholder’s equity + non-current liabilities) i.e.
the % of net profit earned on each unit of capital employed. The higher the ROCE the better the
profitability is.

The formula is:

Gross Profit Margin: this calculates the gross profit (sales – cost of production) in terms of
the sales, or in other words, the % of gross profit made on each unit of sales revenue. The higher
the GPM, the better. The formula is:

Net profit Margin: this calculates the net profit (gross profit-expenses) in terms of the sales,
i.e. the % of net profit generated on each unit of sales revenue. The higher the NPM, the better.
The formula is:

Liquidity Ratios:
Liquidity is the ability of the company to pay back its short-term debts. It if it doesn’t have the
necessary working capital to do so, it will go illiquid (forced to pay off its debts by selling assets). In
the previous topic, we said that working capital = current assets – current liabilities. So a business
needs current assets to be able to pay off its current liabilities. The two liquidity ratios shown below,
use this concept.

Current Ratio: this is the basic liquidity ratio that calculates how many current assets are
there in proportion to every current liability, so the higher the current ratio the better (a value
above 1 is favourable). the formula is:

this is very similar to current ratio but this ratio doesn’t
consider inventory to be a liquid asset, since it will take time for it to be sold and made into cash.
A high level of inventory in a business can thus cause a big difference between its current and
liquidity ratios. So there is a slight difference in the formula:
Liquid Ratio/ Acid Test Ratio:
Uses and users of accounts

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 take 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 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.
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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 wants to see if the takeover will be
beneficial.
Limitations of using accounts and ratio analysis
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Ratios are based on past accounting data and will not indicate how the business will perform in the
future
Managers will have all accounts, but the external users will only have those published accounts that
contain only the data required by law- they may not get the ‘full-picture’ about the business’
performance.
Comparing accounting data over the years can lead to misleading assumptions since the data will be
affected by inflation (rising prices)
Different companies may use different accounting methods and so will have different ratio results,
making comparisons between companies unreliable.
6.1 – Economic Issues
The Business/ Trade Cycle
An economy will not always go through an economic growth; there is usually a cycle, as
shown below.
Growth– when GDP is rising, unemployment is falling and there are higher living
standards in the country. Businesses will look to expand and produce more and will earn high
profits.
Boom– when GDP is at its highest and there is too much spending, causing inflation to
rapidly rise. Business costs will rise and firms will become worried about how they are going
to stay profitable in the near future.
Recession– when GDP starts to fall due of high prices, as demand and spending falls.
Firms will cut back production to stay profitable and unemployment may rise as a result.
Slump– when GDP is so low that prices start to fall (deflation) and unemployment will
reach very high levels. Many businesses will close down as they cannot survive the very low
demand level.
The economy will suffer.
(When the government takes measures to increase demand and spending in the economy to
take it from a slump to growth, it is called as the ‘recovery’ period). The cycle repeats.
Economic Objectives
Here, we’ll look at the different economic objectives a government might have and how their
absence/negligence will affect the economy as well as businesses.

Maintain economic growth: economic growth occurs when a country’s Gross Domestic
Product (GDP) increase i.e. more goods and services are produced than in the previous year. This will
increase the country’s incomes and achieve greater living standards.
Effects of reducing GDP (recession):
 As output falls, fewer workers will be needed by firms, so unemployment will rise
 As goods and services that can be consumed by the people falls, the standard of living in the
economy will also fall

Achieve price stability: inflation is the increase in average prices of goods and services over
time. (Note that, inflation, in the real world, always exists. It is natural for prices to increase as the
years go by. In the case there is a fall in the price level, it is called a deflation) Maintaining a low
inflation will help the economy to develop and grow better.
Effects of high inflation:
 As cost of living will have risen and peoples’ real incomes (the value of income) will have fallen
(when prices increase and incomes haven’t, the income will buy lesser goods and services- the
purchasing power will fall).
 Prices of domestic goods will rise as opposed to foreign goods in the market. The country’s
exports will become less competitive in the international market. Domestic workers may lose their
jobs if their products and firms don’t do well.
 When prices rise, demand will fall and all costs will rise (as wages, material costs, overheads will
all rise)- causing profits to fall. Thus, they will be unwilling to expand and produce more in the
future.
 The living standards (quality of life) in the country may fall when costs of living rise.

Reduce unemployment: unemployment exists when people who are willing and able to work
cannot find a job. A low unemployment means high output, incomes, living standards etc.
Effects of high unemployment:
 Unemployed people do not produce anything and so, the total output/GDP in the country will fall.
This will in turn, lead to a fall in economic growth.
 Unemployed people receive no incomes, thus income inequality can rise in the economy and
living standards will fall. It also means that businesses will face low demand due to low incomes.
 The government pays out unemployment benefits to the unemployed and this will rise during high
unemployment and government will not enough money left over to spend on other services like
education and health.

Maintain balance of payments stability: this records the difference between a
country’s exports (goods and services sold from the country to another) and imports (goods and
services bought in by the country from another country). The exports and imports needs to equal each
other, thus balanced.
Effect of a disequilibrium in the balance of payments:
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If the imports of a country exceed its exports, it will cause depreciation in the exchange rate–
the value of the country’s currency will fall against other foreign currencies (this will be
explained in detail here).
 If the exports exceed the imports it indicates that the country is selling more goods than it is
consuming- the country itself doesn’t benefit from any high output consumption.
Reduce income equality/achieve effective income redistribution: the difference/gap between the
incomes of rich and poor people should narrow down for income equality to improve. Improved
income equality will ensure better living standards and help the economy to grow faster and become
more developed.
Effects of poor income equality:
 Inequal distribution of goods and services- the poor cannot buy as many goods as the rich- poor
living standards will arise.
Government Economic Policies
Government can influence the economic conditions in a country by taking a variety of
policies.
Fiscal policy
Is a government policy which adjusts government spending and taxation to influence the
economy. It is the budgetary policy, because it manages the government expenditure and
revenue. Government aims for a balance budget and tries to achieve it using fiscal policy.
Increasing government spending and reducing taxes will
encourage more production and increase employment, driving up
GDP growth
This is because government spending creates employment and increases economic activity in
the economy and lower taxes means people have more money to consume and firms have to
pay lesser tax on their profits. On the other hand, reducing government spending and
increasing taxes will discourage production and consumption, and unemployment and GDP
will fall.
Monetary policy is a government policy that adjusts the interest rate and foreign exchange
rates to influence the demand and supply of money in the economy, and thus demand and
supply. It is usually conducted by the country’s central bank and usually used to maintain
price stability, low unemployment and economic growth.
Increasing interest rates will discourage investments and
consumption, causing employment and GDP to fall
(as the cost of borrowing-interest on loans – has increased, and people prefer to earn more
interest by saving rather than spend). Similarly, reducing interest rates will boost investment,
consumption, employment, and thus GDP.
Supply-side policies: both the fiscal and monetary policies directly affect demand, but
the policies that influence supply are very different.
It can include:
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Privatisation: selling government organizations to private individuals- this will increase
efficiency and productivity that increase supply as well encourage competitors to enter and further
increase supply.
Improve training and education: governments can spend more on schools, colleges and
training centres so that people in the economy can become better skilled and knowledgeable, helping
increasing productivity.
Increased competition: by acting against monopolies (firms that restrict competitors to enter
that industry/having full dominance in the market- refer xxx for more details) and reducing
government rules and regulations (often termed ‘deregulation’), the competitive environment can be
improved and thus become more productive.
For more details on government policies, check out our Economics notes.
*EXAM TIP: Remember that economic conditions and policies are all interconnected; one
change will lead to an effect which will lead to another effect and so on, like a chain reaction
in many different ways. In your exams, you should take care to explain those effects that are
relevant and appropriate to the business or economy in the question*
How might businesses react to policy changes? It will depend varying on how much impact
the policy change will have on the particular business/industry/economy. Here are a few
examples:
6.2 – Environmental and
Ethical Issues
Business’ Impact on the Environment
Social responsibility
Is when a business decision benefits stakeholders other than shareholders i.e. workers,
community, suppliers, banks 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 a
place and so on.
WHY BUSINESSES WANT TO BE
ENVIRONMENT- FRIENDLY
WHY BUSINESSES DO NOT WANT
TO BE ENVIRONMENT-FRIENDLY
Sense of social responsibility that comes
from the fact that their activities are
contributing to global warming and
pollution
It is expensive to reduce and recycle
waste for the business. It means that
expensive machinery and skilled labour
will be required by the business –
reducing profits.
Using up scarce non-renewable
resources (such as rainforest wood and
coal) will raise their prices in the future,
so businesses won’t use them now
Firms will have to increase prices to
compensate for the expensive
environment-friendly methods used in
production- higher prices mean lower
demand.
Consumers are becoming socially-aware
and are willing to buy only environment
friendly products.
High prices can make firms less
competitive in the market and they could
lose sales
Governments, environmental
organisations, even the community could
Businesses claim that it is the
government’s duty to clean up pollution
take action against the business if they
do serious damage to the environment
Externalities
A business’ decisions and actions can have significant effects on its stakeholders. These
effects are termed ‘externalities’. Externalities can be categorized into six groups given below
and we’ll take examples from a scenario where a business builds a new production factory.
Private Costs: costs paid for by the business for an activity.
Examples: costs of building the factory, hiring extra employees, purchasing new machinery,
running a production unit etc.
Private Benefits: gains for the business resulting from an activity.
Example: the extra money made from the sale of the produced goods etc.
External Costs: costs paid for by the rest of the society (other than the business) as a result
of the business’ activity.
Examples: machinery noise, air pollution that leads to health problems among near residents,
loss of land (it could have been a farm land before) etc.
External Benefits: gains enjoyed by the rest of the society as a result of a business activity.
Example: new jobs created for residents, government will get more tax from the business,
other firms may move into the area to support the firm-helping develop the region, new roads
might be built that can be enjoyed by residents etc.
Social Costs = Private Costs + External Costs
Social Benefits = Private Benefits + External Benefits
Governments use the cost-benefit-analysis (CBA) to decide whether to proceed with a
scheme or not and businesses have also adopted it. In CBA, the government weighs up all the
social costs and benefits that will arise if the scheme is put into effect and give them all
monetary values (this is not easy- what is the value of losing natural beauty?). They will only
allow the scheme to proceed if the social benefits exceed the social costs, if the costs exceed
the benefits, it is not allowed to proceed.
Sustainable Development
Sustainable development is development that does not put at risk the living standards of
future generations. It means trying to achieve economic growth in a way that does not harm
future generations.
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Few examples of a sustainable development are:
using renewable energy- so that resources are conserved for the future
recycle waste
use fewer resources
develop new environment-friendly products and processes- reduce health and climatic problems for
future generations
Environmental Pressures
Pressure groups are organisations/groups of people who change business (and
government) decisions. If a business is seen to behave in a socially irresponsible way, they
can conduct consumer boycotts (encourage consumers to stop buying their products) and take
other actions. They are often very powerful because they have public support and media
coverage and are well-financed and equipped by the public. If a pressure group is powerful it
can result in a bad reputation for the business that can affect it in future endeavours, so the
business will give in to the pressure groups’ demands.
Example: Greenpeace
The government can also pass laws that can restrict business decisions such as not
permitting factories to locate in places of natural beauty.
There can also be penalties set in place that will penalize firms that excessively
pollute. Pollution permits are licenses to pollute up to a certain limit. These are very
expensive to acquire, so firms will try to avoid buying the pollution permit and will have to
reduce pollution levels to do so. Firms that pollute less can sell their pollution permits to
more polluting firms to earn money. Taxes can also be levied on polluting goods and
services.
Ethical Decisions
Ethical decisions are based on a moral code. It means ‘doing the right thing’. Businesses
could be faced with decisions regarding, for example, employment of children, taking or
offering bribes, associate with people/organisations with a bad reputation etc. In these cases,
even if they are legal, they need to take a decision that they feel is right.
Taking ethical/’right’ decisions can make the business’ products popular among customers,
encourage the government to favour them in any future disputes/demands and avoid pressure
group threats. However, these can end up being expensive as the business will lose out on
using cheaper unethical opportunities.
6.3 – Business and the
International Economy
Globalization
Globalization is a term used to describe the 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 everywhere.
Some reasons how globalization has occurred are:
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Increasing number of free trade agreements– these are agreements between countries that allows
them to import and export goods and services with no tariffs or quotas.
Improved and cheaper transport (water, land, air) and communications (internet) infrastructure
Developing and emerging countries such as China and India are becoming rapidly industrialized and
so can export large volumes of goods and services. This has caused an increase in the output and
opportunities in international trade, allowing for globalisation
Advantages of globalisation
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Allows businesses to start selling in new foreign markets, increasing sales and profits
Can open factories and production units in other countries, possibly at a cheaper rate (cheaper
materials and labour can be available in other countries)
Import products from other countries and sell it to customers in the domestic market- this could be
more profitable and producing and selling the good themselves
Import materials and components for production from foreign countries at a cheaper rate.
Disadvantages of globalisation


Increasing imports into country from foreign competitors- now that foreign firms can compete in
other countries, it puts up much competition for domestic firms. If these domestic firms cannot
compete with the foreign goods’ cheap prices and high quality, they may be forced to close down
operations.
Increasing investment by multinationals in home country- this could further add to competition in the
domestic market (although small local firms can become suppliers to the large multinational firms)

Employees may leave domestic firms if they don’t pay as well as the foreign multinationals in the
country- businesses will have to increase pay and conditions to recruit and retain employees.
When looking at an economy’s point of view, globalisation brings consumers more choice
and lower prices and forces domestic firms to be more efficient (in order to remain
competitive). However, competition from foreign producers can force domestic firms to close
down and jobs will be lost.
Protectionism
Protectionism refers to when governments protect domestic firms from foreign
competition using trade barriers such as tariffs and quotas; i.e. the opposite of free trade.
Import quota is a restriction on the quantity of goods that can be imported into the country.
Tariffs are taxes on imports.
Imposing these two measures will reduce the number of foreign goods in the domestic
market and make them expensive to buy, respectively. This will reduce the
competitiveness of the foreign goods and make it easy for domestic firms to produce and sell
their goods. However, it reduces free trade and globalisation.
Free trade supporters say that it is better to allow consumers to buy imported goods and
domestic firms should produce and export goods and services that they have a competitive
advantage in. In this way, living standards across the globe will improve.
Multinational Companies (MNCs)
Multinational businesses are firms with operations (production/service) in more than one
country. Also known as transnational businesses. Examples: Shell, McDonald’s, Nissan etc.
Why do firms become multinationals?
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To produce goods with lower costs– cheaper material and labour may be available in other countries
To extract raw materials for production, available in a few other countries. For example: crude oil
in the Middle East
To produce goods nearer to the markets to avoid transport costs.
To avoid trade barriers on imports. If they produce the goods in foreign countries, the firms will
not have to pay import tariffs or be faced with a quota restriction
To expand into different markets and spread their risks
To remain competitive with rival firms which may also be expanding abroad
Advantages to a country of a multinational setting up in their
country:
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
More jobs created by multinationals
Increases GDP of the country
The technology that the multinational brings in can bring in new ideas and methods into the country
As more goods are being produced in the country, the imports will be reduced and some output
can even be exported


Multinationals will also pay taxes, thereby increasing the government’s tax revenue
More product choice for consumers
Disadvantages to a country of a multinational setting up in their
country:





The jobs created are often for unskilled tasks. The more skilled jobs will be done by workers that
come from the firm’s home country. The unskilled workers may also be exploited with very low
wages and unhygienic working conditions.
Since multinationals benefit from economies of scale, local firms may be forced out of business,
unable to survive the competition
Multinationals can use up the scarce, non-renewable resources in the country
Repatriation of profit can occur. The profits earned by the multinational could be sent back to their
home country and the government will not be able to levy tax on it.
As multinationals are large, they can influence the government and economy. They could threaten
the government that they will close down and make workers unemployed if they are not given
financial grants and so on.
Exchange Rates
The exchange rate is the price of one currency in terms of another currency.
For example, €1= $1.2. To buy one euro, you’ll need 1.2 dollars. The demand and supply of
the currencies determine their exchange rate. In the above example, if the €’s demand was
greater than the $’s, or if the supply of € reduced more than the $, then the €’s price in terms
of $ will increase. It could now be €1= $1.5. Each € now buys more $.
A currency appreciates when its value rises. The example above is an appreciation of the
Euro. A European exporting firm will find an appreciation disadvantageous as their American
consumers will now have to pay more $ to buy a €1 good (exports become expensive). Their
competitiveness has reduced. A European importing firm will find an appreciation of benefit.
They can buy American products for lesser Euros (imports become cheaper).
A currency depreciates when its value falls. In the example above, the Dollar depreciated.
An American exporting firm will find a depreciation advantageous as their European
consumers will now have to pay less € to buy a $1 good (exports become cheaper). Their
competitiveness has increased. An American importing firm will find a depreciation
disadvantageous. They will have to buy European products for more dollars (imports
become expensive).
In summary, an appreciations is good for importers, bad for exporters; a depreciation is
good for exporters, bad for importers; given that the goods are price elastic (if the price
didn’t matter much to consumers, sales and revenue would not be affected by price- so no
worries for producers).
Confused? Don’t worry, it is a confusing topic. Check out our more detailed Economics notes
on exchange rates.